CHAPTER ONE
INTRODUCTION
1.1 GENERAL
DESCRIPTION OF THE STUDY
The financial performance of firm is a subject that
has attracted a lot of attention, comments and interests from both financial
experts researchers, the general public and the management of corporate
entities. Liquidity refers to the ability of an organization to meet cash as
well as other obligations without incurring considerable losses. Liquidity
management is therefore the appropriate administration of an entity’s cash and
other assets to be able to meet its current liabilities. For this reason, it is
essential for all organization including manufacturing firms to have some form
of liquidity management strategy in place. Liquidity management will include
the analysis of financial ratios often used in accounting. By analyzing the
accounting ratios, business owners will get valuable insights into financial
aspects including cash available to spend or invest, amounts due from customers
and money tied up in movable and immovable assets. These figures might sound
obvious to locate but can sometimes be hidden in between financial jargon.
The impact of liquidity management in manufacturing
firms is very important and necessary if a firm must carry out its business
operation successfully. Effective liquidity management leads to efficiency,
profitability and solvency, with this, liquidity management means effective
allocation of fund and capital in other to achieve a targeted objectives. Therefore,
liquidity and profitability are the main goals of manufacturing firms.
Liquidity management requires maintaining liquidity in day to day operations to
ensure its smooth running and meet its obligations when they fall due (Eljelly,
2004). Efficient management of liquidity plays a key role in the successful
operation of a company. A company should ensure that it possess sufficient
liquidity to meet its short term obligations. Studying liquidity is important
to both the internal and the external analysts because of its close
relationship with day to day operations of a firm (Bhunia, 2010).
Liquidity is stressed such more strongly in relent
time than profitability. This growing emphasis on the impact of liquidity
management results from the role which liquidity plays in life and growth of
business organizations. It is very important that a firm must go by the
liquidity decision which stated that current assets of the firm should be
managed efficiently to prevent the firm from becoming insolvent. Investment in
current asset affect the risk, liquidity and profitability. If a firm does not
invest sufficient fund in current assets, it may likely become illiquid, it may
lose profitability if it has excess fund in current asset because idle current
asset would be achieved between profitability and liquidity. In other to ensure
that neither insufficient nor unnecessary funds are invested in current assets,
the financial manager should circulate a sound current assets management
technique.
According to Padachi (2006) a firm is required to
maintain a balance between liquidity and profitability while conducting its
daily activities. Profitability is directly affected by both inadequate and
surplus liquidity (Ogundipe, Idowu and Ogundipe, 2012). For instance when the
“necessary” level of liquid assets is exceeded, their surpluses when the market
risks remain stable, become a source of ineffective utilization of resources
which has an adverse effect on profitability.
1.2 HISTORY OF
CASE STUDY ORGANIZATION
Rokana Industry Nigeria Plc., is engaged in
manufacturing and marketing of toothbrush, spring water air fresheners etc. The
company was incorporated in Nigeria as a private limited liability company on
11th September, 1978 under the name Rokana Industry Nigeria Limited
Company (Plc) in 1992 and presently it is known as Rokana Industry Plc. Its
head office is located at No.4 Ajayi Street, off 52 Allen Avenue (Next door to
Lagos Hiltons Hotel) Ikeja, Lagos, while its factory is located at Plots
Mission Road, Umualum Nkede Owerri, Imo State. It also maintain ownership depot
in Kano and Aba and also operates four factories located at Nekede, Owerri and
Obowo all in Imo State and one in Lagos. The business started with the
production of tooth brush in the Nekede factory which was commissioned in the
1980s. An additional plant was installed in 1990, presently the company has
about seven product that it produces. These includes: Jordan tooth brush,
Rokana dry hair African Queen, No.1 insecticide, sparkle furniture polish, Natusan
dry skin lotion, Rokana dental stick and plague remover and Uzzi sping water.
The company has a staff strength of about 2,500
employees spread over its four factories in various branches throughout the
country.
1.3 STATEMENT OF
THE PROBLEM
Over the years, the manufacturing sector has been a
victim of high production costs which invariably reduces profitability. As
argued by Aknbuli (2006) poor management is the main reason for business
failure as many corporate organization went into liquidation because of poor
management. Pearler (2009) observed that most failed businesses were due to
cash flow problems. The importance of cash flow is particularly pertinent when
access to cash is difficult and expensive. According to Bosno and Dardac
(2014), the required liquidity for each company depends on the statement of
financial position situation of the company. To assess the liquidity state,
special importance is held by the way in which there are classified
organizational liabilities and assets (Bosno and Dardac, 2004).
Studies were made in order to observe the
interaction between these two variables such as Lazaridis and Tryfonidis (2005)
who found a relationship between liquidity management efficiency and
profitability. Companies enjoy better pricing when they hold enough cash to
purchase from suppliers and thus they may enhance their profit. So having
enough liquidity also affects the profitability of thee firm.
The problem to be addressed by this study is to
evaluate liquidity measures and the relationship between liquidity and
profitability on the efficiency of manufacturing firms.
1.4 OBJECTIVES
OF THE STUDY
The objectives of the study are thus:
i.
To find out the
impact of liquidity management on the efficiency of manufacturing firms.
ii.
To identify the
relationship between liquidity and profitability.
1.5 RESEARCH
QUESTIONS
The study was guided by the following research
questions thus:
i.
What are the
impact of liquidity management on the efficiency of manufacturing firms?
ii.
What are the
relationship between liquidity and profitability?
1.6 SCOPE OF THE
STUDY
The area covered by this study is Rokana Industry
Nigeria Plc. And data used collected therein, thee researcher specifically will
concentrate on how liquidity management increases the efficiency of its assets
and liabilities.
The research covers the management crew and the
accountants of Rokana Industry Nigeria Plc., other departments and
organizations are not included since enough data will be gathered from the
management and accountants of the organization.
1.7 ASSUMPTIONS
It is assumed that the result obtained from the case
study will be the same in other manufacturing firms.
It is also assumed that liquidity management will
enhance, improve or increase the efficiency of not only Rokana Industry Nigeria
Plc,. but also other manufacturing firms.
1.8 SIGNIFICANCE OF THE STUDY
The findings of the study will benefit the following
constituents:
PONTENTIAL RESEARCHERS: The study will serve as a
frame work of reference to potential researchers who might want to conduct a
research on the same or similar topic.
MANUFACTURING FIRMS: The study will be of immense
important to all manufacturing firms because it will help them understand the
concept of liquidity management on the successful operation of every entity or
organization.
STUDENTS: The study will serve as a help tool to
students of Accountancy, Banking and Finance or other related discipline at the
cause of their studies.
GENERAL PUBLIC: The study will also be significant
to the general public who wish to engage on the activities of production or
manufacturing of goods so as to enable them know the importance of the impact
of liquidity management on the efficiency of manufacturing firms.
1.9 DEFINITIONS OF UNFAMILIAR TERMS
LIQUIDITY: This is the ability to meet expected and
unexpected demands for cash through ongoing cash flow or the sale of an asset
at fair market value (Barad, 2010).
LIQUIDITY MANAGEMENT: Liquidity
management has been defined as to involve managing the money of the firm in
order to attain maximum interest of the firm in order to attain maximum
interest income on idle funds (Johnson and Aggarwal, 2008).
PROFITABILITY: This is the capacity to make benefit from all the
business operations of an organization, company, firm or an enterprise. It shows
how efficiently the management can make profit by using all the resources
available in the market (Sandhar, 2013).
MANUFACUTRING FIRM: This refers to any
business that transforms raw materials into finished or semi-finished goods
using machines, tools and labour. Manufacturing sectors include production of
food, chemicals, textiles, machines and equipment (Laura, 2009).
EFFICIENCY: This is a measure of the
ability of an organization to produce and distribute its products in accounting
terms. It is quantified by a comparison of the standard hour allowed for a
given level of production.
SOLVENCY: This is the degree to which
the current assets of an individual or entity exceed thee current liabilities
of that individual or entity.
ASSETS: According to Ukpai on
International Financial Reporting Standard (IFRS), assets are resources
controlled by thee entity as a result of past event and from which future
economic benefits are expected to flow to the entity.
CURRENT ASSETS: A current asset is cash
and any other company asset that will b turning to cash within one year from
the date shown in the heading of the company’s statement of financial position.
IMPACT: This is the measure of the
tangible and intangible effects (consequences) of one thing or entity’s action
or influence upon another.