Chapter One
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Osuagwu (2012) noted in the colonial administration, self-employment was the economic
and social way of life for most Nigerians. The businesses of the time were small and
operated in the handicraft, manufacturing, constructional activities, including personal,
commercial and professional services among others.
Before and after Nigeria’s independence, business climate was almost totally dominated
by the Europeans multinational Companies like UAC, CFAO, PZ, Leventisetc. among
others. The federal Government shared active participation in promoting small business
enterprises in Nigeria by setting up in 1961 the first industrial Development Centre in
Owerri. Various government policies and programmes have followed there after that
showed the interest of federal government in promoting and supporting small and
medium scale business, among which are:
The Nigerian Indigenization Decree
The First, Second, Third and Fourth National Development Plan which were
entrepreneurship oriented bent.
Establishment of Industrial Development Centers, Industrial Estates.
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Expansion of Small – Scale Industrial Credit Scheme and Provision of lending fund
to Small Scale Industrials through NERFUND, NDE, NBCF etc.
National Poverty Eradication Programme
Research institutes among others.
He noted further that Nigerians are not new to entrepreneurship and small business
enterprise. However, what may be new and not common the efficient and effective
management of entrepreneurship and small scale business enterprises in Nigeria. According
to Bello (2012) in Osuagwu 2012) there is the tendency for Nigeria small business
enterprises to continue crying for government assistance instead of finding ways and means
of helping themselves.
Also, Silver (2012) defined business as an organized effort by individuals or companies to
produce goods, services or ideas, to exchange these goods, services, and ideas with the relevant
market of interest and to get some rewards for this organized effort.
According to the Third Nigerian National Development Plan a manufacturing
establishment that employs less than 10 people and whose investment on machinery and
equipment do not exceed N600, 000 may be referred to as a small economics scale
businessenterprises. However, in 1995 the Central Bank of Nigeria in its credit guidelines
defined small business enterprise as any business organization with an annual turnover of
less than N500, 000.
There are divergent of opinions as to what constitutes a small and medium scale business,
though there is general agreement (in the literature) that a small or medium – sized
enterprise is not a scaled – down version of large – scale company. Rather, it could be
conveniently described in terms of shared features that such business possesses. According
of Osuagwu, these include:
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Few numbers of employees
Low amount of investment and annual business turnover
Small in size within the industries
Managers are also owners.
An additional requirement to be tagged a small business enterprises in Nigeria is that the
number of employees is not greater than 50 in any situation and the financial capital outlay
is not more than N150, 000.
Working capital and profitability of small and medium scale business
The trust of every business enterprise is to make adequate returns on capital invested. The
returns generated (in terms of profit) will depend on the efficiency and effectiveness with
which management makes use of its limited resources to achieve its set goals and
objectives.
Henri Fayol discovered that major managerial activities of a business organization could be
divided into six, which include:
Technical (production)
Commercial (buying, selling and exchange)
Security (of property and person)
Managerial (planning, control, command, co-ordination and organization)
The financial aspect and especially the working capital management of finance and its
impact on profitability of small and medium scale enterprise will be considered in this
study. Omotoso (2011) described working capital as a tool (distinct from fixed asset stated
in monetary terms which is required for day – to – day operations of a company towards
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the achievement of its objectives). It is used to finance current assets such as stock and
work – in – progress, debtors and prepayment, operational cash.
A company can only said to be operating efficiently when it has just right amount of
working capital (optimum level of working capital). This will, however depends on the
complexity and volatility of the operating cycle of a company, nature of business,
manufacturing cycle, production policy, company’s, credit policy, price level charges,
operating efficiency and so on.
Davies (2011) also noted that of the organization that falls in U.K 75 – 80 percent are
profits, table at the time they do so. The problem states the fact that the relationship
between cash – flow and profitability but also survival growth and expansion of the
business.
The job of managing and or maintaining adequate amount of working capital could be very
tasking. Omotoso (2011) gave the components of working capital management these
include:
Inventory control
Debtors and Creditors management
Management of cash and marketable securities
Financial decision making
Reporting for control
1.2 STATEMENT OF THE PROBLEM
The problem of the study is to analyze and rationalize the need for a methodical approach
in the management of working capital and to compare this with the rule of thumb method
whereby no scientific or systematical method has been applied. We shall look at this
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problem from the success or failure of most small and medium scale organization vis-à-vis
how prudent their working capital management approach has been.
1.3 OBJECTIVE OF THE STUDY
The objective of the study is to find out whether a deliberate and carefully planned working
capital management policy has an effect on the profitability and growth of small and
medium scale enterprise (Eko Supreme Agbara Ogun state). The other specific objectives
of this study include:
1. To ascertain if working capital will determine profitability of a SMEs.
2. To determine whether the failure of most SMEs in Nigeria is due to their ineffective
management of working capital.
3. To find out if there is any relationship between effective working capital management
and productivity of SMEs.
In essence, we would want to see the impact of the adoption or neglect of an effective
working capital management strategy in the development of small and medium scale
enterprises in Nigeria.
1.4 RESEARCH QUESTIONS
i. Will effectively working capital management determine the profitability of SMEs?
ii. Is the failure of management SMEs due to their ineffective most of working capital?
iii. Is there exist any relationship between effective on working capital management and
productivity of SMEs?
1.5 RESEARCH HYPOTHESIS
Ho: Effective working capital management will not determine profitability of a small and
medium scale enterprise.
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Hi: Effective working capital management will determine profitability of a small and
medium scale enterprise.
Ho: The failure of most small and medium scale enterprise in Nigeria is not due to their
ineffective management of working capital.
Hi: The failure of most small and medium scale enterprise in Nigeria is due to their
ineffective management of working capital.
Ho: There is no relationship between effective working capital management and
performance/productivity of small and medium scale business.
Hi: There is relationship between effective working capital management and productivity
of small and medium enterprises.
1.6 SIGNIFICANCE OF THE STUDY
The study is significant in the sense that the road to industrialization in Nigeria is through
the development of small and medium scale enterprise. However, this dream cannot be
realized except an aggressive and goal oriented approach of adopted in the management of
resources.
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