INTRODUCTION
Background of the Study
Working capital management amongst Small and Medium Scale Enterprises (SMEs) appears to have been relatively neglected despite the fact that a high proportion of failures in businesses, is due to poor decisions concerning the working capital of enterprises (Tewolde, 2002).
Management of working capital is an important component of corporate financial management because it directly affects the profitability of the firms. But what could working capital and working capital management mean? According to Bhattacharya (2009), the concept of working capital was first evolved by Karl Marx in 1914, though in a somewhat different form, and the term he used was “variable capital”. Working capital is the capital required to finance a firm’s day-to-day operational activities. It can be defined as current (short-term) assets minus current (short-term) liabilities. Adequate working capital is vital in maintaining a firm’s liquidity. On the other hand, working capital management is concerned with the management of a firms short-term assets (stocks, debtors and cash), short-term liabilities (creditors and borrowing), and short-term cash flows (Park and Gladson, 2003). McMenamin (2005) noted that the goal of working capital management is to secure the optimum investment in working capital consistent with the overall financial goal of shareholder wealth maximization.
Working capital management is often denoted by its components. Hence, the Average Collection Period (ACP); the Inventory Conversion Period (ICP) and the Average Payment Period (APP) are various components of working capital management explained by Mathuwa (2009). According to him, the Average Collection Period (ACP) is the time taken to collect cash from customers. The Inventory Conversion Period (ICP) refers to the time taken to convert inventory held in the firm into sales, the Average Payment Period (APP), is the time taken to pay the firms suppliers. More explicitly, Planware (2011) outlined the components of working capital management to consist of: cash management; accounts payable management; accounts receivable management; investment management; inventory management, marketable security management; and cash equivalent management.
Small and Medium Scale Enterprises may have an optimal level of working capital that maximizes their value. Raheman & Nasr (2007) posited that large inventory and a generous trade credit policy may lead to high sales. Large inventory reduces the risk of stock out. The credit may stimulate sales because it allows customers to assess product quality before paying. Another component of working capital is account payables. Delaying payments to suppliers allows a firm to assess the quality of bought products, and can be an inexpensive and flexible source of financing for the firm. On the other hand, late payment of invoices can be very costly if the firm is offered discount for early payment. A popular measure of working capital management is the cash conversion cycle i.e. the time lag between the expenditure for the purchases of raw materials and the collection of sales of finished goods. The longer this time lag, the larger the investment in working capital (Deloof, 2003). A longer cash conversion cycle might increase profitability because it leads to higher sales.
However, corporate profitability might also decrease with the cash conversion cycle, if the costs of higher investment in working capital rise faster than the benefits of holding more inventories and/or granting more trade credit to customers.
Therefore, the management of these components of working capital management discussed above will in no doubt help the success of Small and Medium Scale Enterprises in generating value. Infact, efficiency in managing the working capital of SMEs determine their end results, since one of the major goal of a business is to maximize profits.
According to Akwa ibom state Directory in Anyia (2006), the structure of the Akwa ibom state Industrial sector is dualistic. It is characterized by a large numbers of small and medium scale enterprises and a few numbers of large scale firms. The structure of the industrial sector size, the small and medium scale businesses accounted for 65.5% and 32% respectively, while the large scale businesses accounted for only 2.5%. However, in terms of output the small scale businesses and the medium scale businesses accounted for 10% and 5% respectively, while the large scale businesses accounted for 85% of industrial output. The small scale businesses tend to be rural based, while the medium scale businesses produce in urban areas in competition with numerous micro-businesses. The geographical distribution of Small and Medium Scale Enterprises in Akwa ibom state show a heavy concentration of activities in South and North Senatorial districts of the state, probably due to availability of basic infrastructure that is relatively well developed.
On the variables mentioned in the preceding paragraph, researchers have approached working capital management in numerous ways while some studied the impact of proper or optimal inventory management; others studied the management of accounts receivables trying to postulate an optimal way policy that leads to profit maximization (Deloof, 2003; Mayasami, 2009; Gill, Biger & Mathur, 2010). Hence, this study carved out another niche by critically appraising the working capital management practice of small and medium scale enterprises in Akwa ibom state, with the view of establishing the focused components of working capital management’s (sources of financing working capital, cash management, account receivables management, inventory management, accounts payable management, and investment management) level of requirement as a practice by Small and Medium Scale Enterprises for effective operations (profitability, optimal resource utilization, retained earnings, and liquidity) in Akwa ibom state, Nigeria.