WORKING CAPITAL MANAGEMENT AND PROFITABILITY OF LISTED PHARMACEUTICAL FIRMS IN NIGERIA

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

The chapter deals with the review of literature related to liqulity management and activities of cooperate organizations. This chapter focuses on the concept of cooperate, effect of working capital management on the activities of cooperates and the extent to which shareholders participate in working capital management of their cooperate society. Othersub-themes reviewed include modalities involved to ensure effective working capital management in cooperate organizations, problems affecting liquidity management in cooperates and of course the summary of the review.

1. The Concept of Cooperates

Cooperate refers to the coming together to work for the benefit of all. Dickson (1979) defines cooperate as an association of persons that deals with various aspects of the economy it ranges from agricultural distribution to consumer and from consumption to savings.

Furthermore Onuoha (1998) observes that cooperate is a form of organization where many people voluntarily associated together as human beings on the basis of quality for the promotion of their economic interest.

For Okonkwo (1989) further defines cooperates as a voluntary association of free and independent persons for the betterment of their economic condition in his point three (3) important words were emphasized.

1. The association is purely voluntary and compulsion of any types.
2. The shareholders join freely and
3. The organization is primarily an economic one.

Onuoha (1986) observes that from what it was in the days of lassier fairs philosophy, the reality of social classification and exploration of one class by another skill exists. Therefore, cooperate merely explores at the exclusion of masses from fair of wealth of the nation and its accumulation in the hands of a few. He further explained that cooperate provides the techniques for elevation of social and economic condition of masses and then direct participation in those funding of economy that infringe on their lives. He defines cooperates as business organization of patrons whose motive is to obtain goods and services, they requires at lower cost through joint undertaking.

According to I. C. A (1995) a cooperate is an autonomous association of persons united voluntarily to meet their economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.

The word, “cooperate” has to do with two or more persons agreeing to perform a function together for their benefit. This means something that cannot effectively do on individual basis. Cooperate implying to work together among a group of persons, originated from time immemorial. This could clearly distinguish between cooperates on the basis of time as short term/coincidental and long term/permanent as well as informal and formal, traditional and modern scientific, genuine/pure and pseudo cooperates or quasi cooperate ( Chukwu 1990).

Modern scientific cooperates originated on the benchmark of the industrial revolution in Europe spanning a century (1750-1850). As such, they are formal legal entities in business undertakings as a body corporate and adhering to the internationally acceptable principles. Cooperates are purely special type of business units from others, namely, the sole proprietorship, the partnership, joint stock companies and parastatals.

The peculiarity of cooperates has provided wider room to accommodate diverse views from persons and group of persons on the singular definition of the term cooperate. In 1995, an attempt was made by the international cooperate Alliance (ICA)to issue a new list of principles of cooperates from the beginning of the 21st century at Manchester congress. ICA made cooperate movement to show its face by bringing the most widely acceptable definition of cooperate movement.

It defined cooperate as an autonomous association ofpersons united voluntarily to meet their common economic, social and cultural needs and aspiration through a jointly owned and democratically control enterprise. This justifies that a cooperate is a business entity in social context (Berko 1989).

As such, Chukwu opines that cooperate is an economic system with a social context. It idealism penetrates both its economic and its social elements. The economic spheres covers business transaction expressed mainly in monetary terms while the social deals with direct link on the relationship, among the people that makes up the society, particularly, as it affects the shareholdership and personal relations. (Berko 1989).

2.3 The Meaning of Working Capital

From the prospective of Weton and Brigham (1972), working capital is a firm investment in short term assets, cash, short term securities account receivable and inventories. The definition of working capital given by these two writers is significant and relevant because they were able to deduce out the component of working capital management in any business enterprise. Working capital management is the life wire of any cooperate business enterprise. It is the assets held for current use within a business less the amount due to those awaiting settlement in the short term on what form.

According to Umar (1998), working capital management is the implementation of the working capital polices and decisions on both current assets and current liabilities. He further explained that working capital management is the management of cash account receivable, inventories including stock and marketable securities. From the definitions, can be noted that all the four items mentioned can be group into what is known as current assets. With the present economic conditions in the developing countries, it is very significant to manage the components of working capital in cooperate enterprises as given by the preceding definition.

The management of working capital in any cooperate enterprise is one of the most important assets of the cooperate’s overall financial management. A cooperate society that cannot maintain a satisfactory level of working capital is likely to become insolvent and ultimately may be forced to repudiation. The cooperate enterprise’s current asset should be enough to cover its current inabilities in other to ensure a reasonable margin of financial safety. The major current assets of concern in this research are Cash Cooperate Enterprises.These questions are:

1. What proportion of the cooperate working capital should be financed by short term/long term loans?
2. What size of the cooperate investment should be allocated to working capital?
3. What proportion of the cooperate total assets should from current assets/fixed assets?

2.3.1 Determination of Working Capital

The amount of working capital required depends on several factors. Principally these includes the nature of the product, this nature of the industry in which the cooperate business operates and the size of the cooperate business activities. The main factors which determine the working capital need of cooperate business include:

1. Production and sale cycle.
2. Business actively level and
3. Marketing policies of cooperates.

2.4 Effects of Working Capital Management on Cooperate Efficiency

In accomplishing the society’s mission to promote quality cooperate teaching, mutuality, research and services required in the cooperate society administrative officials and other member must carefully manage the working capital in a prudent and cost effective manner in order to make the society very effective and well developed and financially efficient, there are certain components to be adhered to this involves:

1. Financial planning: This is the prediction of performance of the societies business in financial terms to give an over all measure of how the society is performing and to provide a basic finance by the shareholders.
2. Financial accounting: This classifies reward and interpreted in monetary terms transaction and event of financial nature of very member and the society as a whole.

Financial accounting will involve maintaining records of transactions (book keeping) and preparing annual audit reports. This is done to ensure a “true and fair view of the societies financial performance and position and doing this will surly bring a regular development into the society.

1. Financial analysis: This analysis that is the general performance of the cooperate business of the cooperate business in term of variance analysis, cost volume profit, analysis, this will make the shareholders understand the financial volume of the society and by so doing it will enhance and develop the society.

According to Onuoha (1996), some cooperate shareholders are quick to conclude that their problem is lack of capital. In most cases it is poor financial management and not lack of capital. That is so account receivable, inventories or stock and marketable securities. Every one of these must be mange effectively and efficiently in other to maintain the cooperate liquidity. Each of these short term sources of financing must be efficiently managed to ensure that they are obtained and used in the management of working capital in cooperate enterprises. There are some questions that will always come to mind when trying to efficiently manage working capital in cooperate enterprises and these are:

1. How much working capital should the cooperate business hold?
2. What promotion of the different form of current asset?
3. How should working capital be financial in cooperates?

From the preceding questions, it is of paramount importance for cooperate enterprises to know the amount of working capital they should use in commencing their business. They should also know the proportion of working capital to be allocated to the different form of current assets and finally know how they can be financed. To the above significant questions Enriquez (1988) said that are three basic questions which when adequately answered can form the basis for effective and efficient working capital management in because little becomes much when is properly managed. The fist thing is to have an accurate estimate of one’s financial requirements. An improper estimate of cooperate capital needs may be the first step to financial crisis. It is better to delay the people’s decision to start a cooperate business than to start with insufficient capital. The capital should be enough to finance the cooperate assets for both fixed and current assets for both prepare a balanced sheet which enables them assess their assets and liabilities.

Furthermore, Yahaya (2001) mentions that cooperate societies should have a cost of living budget which include how much will be needed of the cooperate up keep before the business starts to generate dividends. This could be divided into regular monthly expenses fro the cooperate business. These are two principal functions of working capital management and cooperate efficiency as noted Yahaya (2001). These include:

1. The sourcing or raising of funds in the most favorable conditions in term of cost and flexibility.
2. The allocation of funds in the most efficient manner so as to maximize returns.

Ignorance and lack of concern in keeping financial records have caused the demise (death) of most cooperate businesses. Few cooperate business keep proper records of their income and expenditure. Financial accounting records serve as an indicator of a business performance. The knowledge of this records and the ability to interpret them are functions of working capital management.

2.5 Member’s Participation in Working Capital Management of their Cooperate Business

Participation means getting activities that are designed deliberately to promote the development of the cooperate enterprise. It means intensive society which is a compelling force, a motivating factor that preoperative society. It is know that cooperates afford the society. It is know that cooperates afford the socio-economically disadvantaged people in the society an alternative way of doing business. It follows naturally that the intention or motives for establishing a sole trade partnership or joint stock company are similar but at the same time establishing a cooperate society.

Onuoha (1996) notes that shareholders are expected to contribute equitably to business of their society and democratically control the capital of their society. Shareholders usually receive limited compensation on the capital subscribed for the purpose of developing their cooperate society benefiting shareholders and also to ad to their transactions within the cooperate society.

Shareholders also have an obligation to the capital formation of the society. It is not only initially when they join the society but also continually throughout the period of their shareholdership, which can period of their shareholdership, which can be done through regular saving, revolving capital plan and purchasing of additional shares, the society were there belong, is vested upon the shareholders regardless of how the capital was raised. Weather grants, loans, or equity, all are decisions about investment of their capital should rest upon the shareholders not the auditors.

One of the principles of cooperates as spelt out by the 1CA (1995) is principle of member economic participation. By this principle, it means shareholders contribute equitably to, and democratically control the total of cooperate. They usually receive limited compensation, if on capital subscribed as condition of shareholdership.

According to (2001), cooperate shareholders allocate surpluses for any of the following purposes namely developing their cooperate, benefiting shareholders in proportion to their transactions with the cooperates and supporting other activities as approved by the shareholders. This principle discusses the economic structure on cooperate activities are based. There are two aspects to the problem: first how to raise sufficient funds to meet the capital requirements of the cooperate society are second, how to allocate the surpluses created by the activities.

Since every cooperate society requires capital for its operations, it means that the shareholders have to participate fully in providing for this capital shareholders have an obligation on contribute to the capital of their society not continually throughout the period of their shareholdership. They do this through regular savings, reinvestment of their dividends, revolving capital plans and purchasing additional shares. It is the responsibility of the elected management committee to ensure that their cooperate is not under capitalized, both in the short-term and in the long-term.

Chukwu (1990) identifies essentially two ways by which shareholders can participate in the working capital of their cooperate. This include in the economic activity and the social activity. In relation to economic activity, the shareholders should get involved in monetary terms. So, the economic participation means decision taken by a prospective member to contribute meaningfully to the financial wellbeing of the cooperate venture and sharing in the financial risk of the cooperate business.

Social participation includes getting actively involved in social activities arranged by the cooperate society either for the benefit of one of the shareholders or the entire shareholders at large. If a member is marrying or engaging in any in any kind of social function for instance, all the other shareholders should rally round such member so that the function can be a success.

Onuoha (1998) notes that member economic participation is not just opening cooperates but contributing meaningfully to its success and willing to share in the financial risks that occur from time to time. Onuoha (1998) clarifies that in most cooperates it is a common feature to see some shareholders who do little or nothing for the capital success of their cooperates. This type of participation is disadvantageous to cooperate development. Participation of shareholders in cooperates should be such that such shareholders are ready and willing to obey cooperate laws, principles and practices especially when it comes to monetary obligations.

According to Iqwe (1996), shareholders’ participation describes to which extent cooperate shareholders are eager and willing to get involved in the activities of their cooperates especially in capital matters. Consequently, cooperate business practices should make allowance for cooperate growth and development where people will see in practical terms what the cooperate enterprise can do for them. This is one of the ways to ensure member participation in the working capital of their cooperate business.

2.6 Modalities in Ensuring Effective Working Capital Management in Cooperates.

The financial strength of any society is the hub around which the whole economic activity is revolved. In realizing this draw, the ultimate goal of the present cooperate society is to ensure a prudent financial management to moderate the usage of finances in the cooperate business.

Calvert (1959) said that the federal government has a role to play in the realization of adequate savings income. Marketing credit cooperate is the only investment available to boost surplus income in the country which will increase productivity. Some of the modalities are:

1. Ensure more effective cooperate education and regulation of cooperate affairs in the support by providing financial and material support to cooperate to do the same to similar units under jurisdictions.
2. Promote the creation of national cooperate financing agency to provide financial banking development of cooperate in the society.
3. Recognize and respect the autonomy and operational independence of the cooperate sector.
4. Proffer a concrete laid down financial regulation that focuses on products and meticulous management of its capital effectively.
5. To ensure that all cooperate registers under the law and effectively supervised and managed properly. They should demonstrate internal democracy, accountability and probity which are part of the recognized cooperate norms and ethnics.

2.7 Problems Affecting Working Capital Management in Cooperate Organizations

When a cooperate is passing through difficult times or is having difficulties, it could be the effects poor working capital management one of the problem, according to Calvert (1959) is that the accounting policies which a cooperate uses many act as a hill where they hide up some cracks in the finances of the cooperate society. Declining working capital can be made to look good through the use of account policy to doffer expenditure. Deferring expenditure simple means that the cooperate regards some expenses as capital and should be harmonize cover a period of one years furthermore, the differed expense is treated as prepayment and lumps in the sum of debtors.

A cooperate society passing through difficulties may show one or more of the following sign:

1. Declining surplus margin.
2. Increased operating cost.
3. Decline sale (if it is consumer cooperates).
4. Rising cost of sock valuation.

According to Amahalu (200), the following are the major problems, of liquidity management in cooperate organization.

1. Lack of good planning and budget is one of the major problems hindering liquidity management in cooperate societies especially in developing countries of the world.
2. No standard attainable planning and this include measurable goals for each member in which will help to interpret the overall planning and budgeting process.
3. Failure to look and identify the implementing and evaluating strategies to achieve the society’s goals.
4. Lack of adequate cash management practices that maximize the cash resources available in the cooperate society.
5. Failure to comply identifying and assessing organizational and business risks before embarking on certain activities.
6. Failure to understand the relationship between the mission of the cooperate society and the mission of the shareholders. This survey brings destruction and underdevelopment to the society.

2.8 The Effect of Working Capital Management on the Activities of Cooperate Business Enterprise.

Working Capital Management enhances the efficient operation of the cooperate enterprise this is so because the efficient management of any business venture depend on how well the working Capital is Management of any business capital is managed (Onuoha 2002). Similarly Egbe (2009) opined that the management of Working Capital of Cooperate is the priority of the management of such enterprise. So many enterprise have gone mombund as a result of poor quality management as such cooperate take seriously the management of its working capital. As such share capital of cooperate are plough into it working capital to boost it productivity and the management committee of most cooperate work closely with it employees to effectively manage it working capital.

This is the reason why Ebonyi (2006) opined that the importance of liquidity management in cooperate enterprise cannot be overemphasis due to it ability to aid the cooperate enterprise to realize it goals and objectives, he further opined that liquidity management is the life wire of cooperate enterprise that determine continues existence.

2.9 Summary of the Literature Review

Effective working capital management in cooperate plays an important role in the efficiency of the cooperate business. This means that effect or working capital management on the efficiency of cooperate organizations are quite crucial, since the purpose of the society is to assists cooperate shareholders through loans and savings, loans and credit to shareholders, thereby encouraging participation in cooperates. This calls for effective working capital management