CHAPTER ONE
1.00
INTRODUCTION
1.01 GENERAL
DESCRIPTION OF THE STUDY
The concept of liquidity has been a source of worry
to the management of firms of the uncertainty of the future. The liquidity of
an asset means low quickly it can be transformed into cash. When referring to
company, liquidity, one usually means its ability to meet its current
liabilities and is usually measured by different financial ratios (www.unventorwords.com). The profitability
of a company can by described as its ability to generate income which
surpasses its liabilities. Profitability is usually measured by different
ratios such as ROA and ROE. (www.businessdictionary.comm). Efficient liquidity management involves planning
and controlling current assets and current liabilities in such a manner that
eliminates the risk of the inability to meet due short-term obligations, on one
hand, and avoids excessive investment in these assets, on the other. This is
due in part to the reduction of the profitability of running out of cash in the
presence of liquid assets. Liquidity is having enough money in form of cash, to
meet your financial obligations. Alternatively the case with assets can be
converted into cash. Profitability is measured of the amount by which a
company’s revenue exceeds its relevant expenses. Liquidity and profitability
are the two corners of a straight lines. If you are on the line and move
towards one you automatically move away from the other. In other words, there
is a trade-off between liquidity and profitability. (Puneet and Parmil, 2012).
According to (Bhumia, Khan and Mukhuti, 2012)
liquidity management is a concept that is receiving serious attention all over
the world especially with the current financial situations and the state of the
world economy. The concern of business owners and managers all over the world
is to devise a strategy of managing their day to day operations in order to
meet their obligations as they full due and increase. Profitability and
shareholders wealth.
According
to (Eijell, 2004), liquidity management, in most cases are considered from the
perspective of working capital management as most of the indice used for
measuring corporate liquidity are a function of the components of working
capital. The importance of liquidity management as it affects corporate
profitability in today’s business cannot be over emphasis the crucial part in
managing working capital is required maintaining its liquidity in day-to-day
operation to ensure its smooth running and meets its obligation liquidity
management is very important for every organization that mean tot pay current
obligations on business, the payment obligations that are short term but
maturing long term debt. Liquidity ratios are used for liquidity management in
every organization. That greatly effect on profitability of organization
According
to (Blunia, Khan and Mukhut, 2012), liquidity profitability relationship is
linked with the continuance of the appropriate intensity of working capitals.
This concept tries to strike a level of liquidity that offers a relaxed balance
of liquidity and profitability that is to says the investment of the company in
working capital must be sufficient. It may generally be assumed that there is
always a negative relationship between the two. But it is not true in all
cases. The existence of a linear relationship though not continuous, between
profitability and liquidity corresponding to the holding of content assets, at
least up to a certain level by firms, is not an impracticable proposition.
1.02 BRIEF HISTORY OF CASE STUDY ORGANIZATION
1.2.1 COCA-COLA BOTTLING COMPANY
Coca-cola Bottle Company is a world known producer
of soft drinks sold in more than 500 brands in over two hundred (200)
countries. Over one point six billion (1.6b) people across the globe consumes
the company product every day. From (audian, the North to Argentina,
Australian, Brazil and New Zealand in the South from China and the Germany etc
to Nigeria.
Coca-cola
first came into Nigeria in the year 1953 when Nigeria bottling company set-up
its first plant in Lagos. Today’s coca-cola bottling company, plc is in Nigeria, the number one producer soft
drink selling over the two hundred and ten million (210m) bottles per day. A
figure which is still growing with the opening of brand, new and expansion of
plants in various parts of the country.
Apart
from coke as a brand as a product of the company, there are other products or brand bottled by the company,
these includes sprite, fanta orange, fanta lemon, krest soda etc which they
produce and market in all the manufacturing plants in Ikeja plant etc.
However,
the success of Coca-cola has brought with its development of number of
industries and indirectly to the growth of the economy. The Delta glass company
in Ughelli, which supplies the millions of bottles required by the company to
keep it functional and the crown cock product factory at Ijebuode and Kano
State which manufactures it. The Benin plastic Orentes used for packing the
bottles before and after producing the soft drinks. It is equally noted that
the company, the highest employer of labour in the beverages sector with a
magnified market-share.
1.2.2 7UP BOTTLING COMPANY PLC
7up bottling company plc was founded in United State
of America by a pharmacist known as Mr C.C Greagras. 7up was formulated out of
the six hundred (600) lemon, formular and ranked the 11th formular
that was tested.
However,
the name 7up came to be out of more nothing but was called this, because it was
not pronounce. The journey of 7up plc in Nigeria began as far back 1958 when a
lebanees as Mr Mohanjed Shalke Eikali brought the company to Nigeria and since
1989 Pepsi coca has been as subsidiary of 7up as it was called since the existence
of 7up bottling company plc, it has experienced a rapid growth in the country
before it was about twelve (12) plants located. Currently, due to modern
development, the 7up bottling plc is no, located nine (9) manufacturing plants
which are located in Ibadan cicut, Oyo town, Ogbomoso, Ile-ife and Abeokuta etc
with two hundred depots in the Eastern marketing region. Some of the depots are
located in Uyo, Enugu, Nsukka, Abakaliki, Onitsha, Calabar, Port-Harcourt,
Owerri and Aba.
Presently,
7up bottling company plc bottlers the following products – 7up, Mirinda tonic,
Mirinda orange, soda, team lemon, mountain dew, Pepsi coca etc.
7up
bottling company plc is one of the largest manufacturing companies in Nigeria.
They produce and distribute the favorites brand of soft drinks examples are:
Pepsi coca, Mirinda, 7up, mountain dew. These brands are popular and widely
located strategically across the country. 7up company has a well coordinated
distribution network of over two hundred (200) distribution centres across
Nigeria which they called depot.
1.03 PROBLEM ANALYSIS
One
of the major reasons that may cause liquidation is illiquidity, insolvency,
poor profitability, inefficiency and inability to make adequate profit. These
are some of the basic ingredient of measuring
the “going concern” of an establishment for these reasons companies are
developing various strategies which can be adopted within the firm to improve
liquidity and cashflows concern, the management of working capital, areas which
are usually neglected in times of favourable business conditions. The problems
to be addressed by this study are to evaluate the impact liquidity management,
on the profitability of manufacturing of companies of liquidity in the
company’s profitability and profitability of some listed manufacturing
companies.
The
following could be explained in details, thus
Illiquidity:
This occurs when the companies have difficulties converting assets account.
This is also called having cash flow problems. This problems of liquidity is
poor timing of account payable and account receivable. The company must pay
bills in today, but the customers are paying bills in 60days. Regardless of
demand for the company’s products, cash to keep the operating firm because the
company pay their bill faster.
Insolvency: This is way the companies because insolvent when
obligations to creditors and vendors exceed the company’s financial resources.
Such good example of this insolvency is when the company has required so much
debt that can no longer pay its bill.
The company may have popular.
Poor Profitability: This is situation where by companies give out a
product for free, they would not have any trouble finding people to buy their
product. It is otherwise called declining, profitability. However, they would
also lose money, since there are cost associated with it in making of the
products poor profitability can occur for several reasons such as ineffective
management.
Inefficiency:
This is a reflection on the quality of a company’s management. As long as the
company has strong liquidity insolvency, and profitability, inefficiency will
not cause problem in short-term
1.04 OBJECTIVE OF THE STUDY
The
main objective of the study is to find out the impact of liquidity management
in the profitability of manufacturing companies (coca cola and 7up bottling
companies)
The following sub objectives are considered for the
above purpose:
1.
To find out the
significant impact of liquidity management on the profitability of a
manufacturing companies.
2.
To find out the
relationship between liquidity management and profitability in a manufacturing
companies.
1.05 RELEVANCE RESEARCH QUESTION
In the course of this study the researcher was
subjected with the following questions:
i.
What are the
significance impact of liquidity management on profitability of the a
manufacturing company.
ii.
What are the
relationship between liquidity management and profitability in a manufacturing
company?
1.06 RESEARCH QUESTION
The
researcher at this point would like to test the hypothesis using null
hypothesis (H0) and alternative hypothesis (Hi)
Ho: Liquidity management has no significance impact
on profitability.
Hi: Liquidity management has significance impact on
profitability.
Ho: Liquidity management has no close relationship
on the profitability of manufacturing company.
Hi: Liquidity management has a close relationship on
the profitability of manufacturing company.
Ho: liquidity management and profitability has no
significance correlation
Hi: liquidity management and profitability has
significance correlation.
1.07
DELIMITATION (SCOPE) OF THE STUDY
In the modern time of business endeavor, it is
obvious that liquidity management problem is a global one. The problem has
grown such that it affects both large and small scale business concern,
government however is not left out. In this study, the researcher has resorted
to limit it to a manageable scope. This is in attempt to ease coverage and to
enhance the objectivity of the work considering the constraint involved.
Based on the foregoing, the researcher decided tot
select coca-cola bottling company plc and 7up bottling company plc as his
research base. The areas to be covered because of time constraint and other
facilities include among others management of working capital. It should also
be note that the two companies selected as the research based are multinational
companies, this does not mean that the study shall be on global basis but is
restricted within the country.
Furthermore, the researcher wishes to study and get
relevant information from some managers especially those of the plants
department, financial accountants and the public relation officers of the two
companies.
The junior employees of the companies were excluded
in this study because of its nature. Only classified information and views of
the manager were necessary, thereby giving no 100m for individual opinions.
Hence, the researcher limits the scope of his study to the information firms
and class of personnel.
1.08 ASSUMPTION
From
the on-going study, the following assumptions were made:
a.
It was assumed
that liquidity management will help in the assessment of working capital of
manufacturing companies.
b.
It is assumed
that liquidity management will help to examine the adequacy of the working
capital or other wise.
c.
It is also
assumed that liquidity management will help to asses the profitability of
manufacturing companies.
d.
It is assumed
that liquidity management also help to management, the profit of manufacturing
companies.
e.
It is also
assumed the liquidity management will help to assess the effective cash
management in manufacturing companies.
1.09 SIGNIFICANCE OF THE STUDY
The
significance of the research work lies on the fact that is does not only limit
its scope to examination of liquidity management but also investigated and
clearly find out the effect liquidity management on the profitability of
manufacturing companies. This would not only be useful to the management of the
concern and academics.
The
primary objective of any going concern is to make profit, the always have this
objective in mind before going into business invariably, all business concern
work in consonance with the business philosophy of profit maximization.
Manager’s
business organization equally benefits enormously in this, then stewardship
would be aided by their study in that effective liquidity managements.
Moreover,
this is significant because of its reference to all scholars of business,
mostly accounting and management students because of their potentials as future
managers.
1.10 DEFINITION OF TERMS
In
order to understand this study clearly, it is necessary to define some of the
term used in this work.
Liquidity:
Liquidity is the state of owing things of value that can easily be changed for
cash.
Management:
This is the act of running and controlling a business.
Assets:
This is the economic benefit rights which has been acquired by the enterprise
as a result of some current or past transactions.
Manufacturing Companies: These are those companies that are involved in the
conversion of raw materials and other related materials into finished or
semi-finished good such goods of which are either ready for immediate
consumption or used for further production.
Company:
This is defined as “an artificial legal person, invisible intangible and
existing in the contemplation of the law”. Based on this a company could be an
incorporated limited liability entity under the relevance of Nigeria.
Cash Budget:
This is the most significant device which is applied in planning nd controlling
of cash receipts and payment.
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