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PROJECT TOPIC: THE EFFECTIVENESS OF WORKING CAPITAL MANAGEMENT AND ITS IMPACTS ON THE PROFITABILITY OF DEPOSIT MONEY BANKS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 Background of study

The banking system is an important area for economic development in any country. Its practical importance is determined by the way in which payment and settlement functions in the national system. Commercial banks, operating in accordance with the national monetary policy, exert control over cash flow, which affects the rate of their turnover, including ready cash amounts in circulation. Banks play a vital role in every country’s economy, since growth can be achieved if the savings are effectively channeled for investments. In this context, failure to involve the banking system is often defined as the main weakness of the centralized planned economy (Abrahamson 2000).

Most firms therefore describe fund as working capital, which is the excess of current assets over currents liabilities. From the forgoing, working capital can simply be put as the cash available at hand for the day to day running of the firm. It is therefore important that firms should ensure sufficient working capital since shortage may undermine operations and on the other hand, excessive working capital may not result in optimal profitability. This therefore calls for efficient management of working capital so as to maintain a sound working capital position of a firm (Dauda, 2015).

Working capital means the firms holding of current or short term assets, such as cash, trade receivable, inventory, and marketable securities. Corporate executives devote a considerable amount of time and energy to management of working capital (Srinivasan & Murugan 2011).

Aminu (2003), Working capital management refers to management of the working capital or the management of current assets. Working capital also called net current assets, is the excess of current assets over current liabilities. All organization or deposit money banks have to carry working capital in one form or the other. Working capital refer to current assets, which may be defined as those assets which are convertible into cash within a period of a year, those which are required to meet day to day operations of business. Working capital is helpful at this point because of the preoccupation of management with the proper combination of assets and acquired funds.

Kaur (2010) describes Working Capital Management as all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. Kaur further asserts that, it is concerned with the most effective choice of working capital sources and the determination of appropriate levels of the current assets and their use. This clearly focuses attention to the managing of current assets, current liabilities and the relationships that exist between them.


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