Abstract

The research aims to study the effect of working capital management on the financial performance of microfinance institutions in Buea Municipality, case of Lobe cooperative credit union. This was to understand the variable of working capital management that affects financial performance (return on equity) in Lobe cooperative credit union which are: cash management inventory management, account receivable management, and account payable management.

These variables help to show the influence of the working capital management on the financial performance (return on equity) in the Lobe cooperative credit union. Secondary data were collected from the annual report from a period of 16 years is from 2003 to 2018.

Furthermore, Stata 12 software for regression analysis was used to estimate the pair-wise correlation between variables and see if there exists Heteroscedasticity, Autocorrelation, or Serialcorrelation and Multicollinearity. Our finding shows that cash management inventory management, accounts receivable management, and account payable management were statistically significant at a 5% level of significance.

It was therefore recommended that Lobe cooperative credit union Cameroon not leaving out the Buea branch should take proper cognitions of the independent variables which affect financial performance as measure by net income and return on assets.

They should also predict the economic situation in a country and scrutinize loan policies in other to be on a balance between liquidity and profitability to the members. However, the coefficient of the adjusted R-squared and the overall model is attested to be statistically significant by the fact that the probability of the F-ratio is statically significant at 10% meaning that the results are reliable.

CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of the Study

For a long time research on corporate finance has traditionally revolved around long-term financial decisions with an emphasis on investments, dividend policies, capital structure, or firm valuation. Current assets and current liabilities have however proven to be crucial components of total assets and must therefore be carefully analyzed.

Management of working capital demands a careful investigation since it plays a fundamental part in the overall corporate strategy of creating value to the shareholder (Howarth and Westhead, 2003) The main components of working capital inventory, accounts payables and payments to be received from customers after-sales.

The success of a business depends heavily on the ability of the managers to effectively manage receivables, inventories, and payables (Filbeck and Krueger, 2005). Working capital needs for a firm dictates its liquidity and profitability, and consequently, affect its financing and investing decisions.

Working capital management refers to the administration of all aspects of current assets, namely cash, inventories, marketable securities and debtors, and current liabilities. In general, working capital management is a simple and straightforward concept of ensuring the ability of a firm to fund the difference between short-term assets and short-term liabilities (Harris, 2005).

Working capital is the most crucial factor for maintaining liquidity, survival, solvency, and profitability of a business (Mukhopadhyay, 2004). Every organization requires a necessary amount of working capital regardless of its size or nature of business.

Working capital management plays a key role in making comparisons between liquidity and profitability among firms (Eljely, 2004), providing a basis for financing decisions and the composition of current assets.

Working capital management enables companies to achieve an optimal balance between working capital components (Gill, 2011). Efficient management of working capital is fundamental to organizations as it plays a crucial role in creating shareholders’ value (Nazir and Afza, 2008). Most organizations, therefore, aim to establish an optimal level of working capital that enhances their value (Deloof, 2003).

The level of working capital and the efficiency in working capital management directly affect the growth of a firm. High levels of current assets may result in low returns from a firm’s investment; however, firms with very few current assets stand the risk of incurring shortages and difficulties in maintaining smooth operations (Horne and wachowicz, 2000). There are two very important terms to be noted while discussing working capital management, namely the gross working capital and net working capital.

Overall investment in current assets constitutes the gross working capital. A portion of the investment in working capital is financed by short-term financing (current liabilities). The difference between current assets and current liabilities constitutes the net working capital.

In a nutshell, working capital management is a very important element in the financial management decisions of a firm. Inventory is an important current asset that forms a major component of working capital. Inventories may constitute different things e.g. raw materials, work-in-progress or finished goods. A company must strive to maintain an optimum balance between sales and tied-up capital.

A larger inventory reduces the risk of stock-outs, and may also lead to higher sales. Low inventory levels may lead to loss of business in case of higher demand. A company accrues accounts receivable when it sells goods on credit. The company might receive cash on goods sold in weeks, or months depending on the payment agreement.

Sound credit management policies must therefore be developed by the company with respect to credit analysis, debt collection policy, and terms of sale. As much as an efficient collection policy significantly improves a company’s working capital position, an aggressive collection policy may sour the relations between the company and its debtors and thus may adversely affect its sales. Another component of working capital is the accounts payable.

Firms delay payments to their suppliers in order to evaluate the quality of their purchases. This practice can be viewed as a flexible and inexpensive source of financing for firms. But on the aspect where suppliers offer discounts for early settlement on their invoices, the practice may become rather costly for the firm.

Cash, just like inventories, is a very significant component of the working capital. Companies hold a reasonable amount of idle cash in order to improve their liquidity position. Holding too much cash at hand, however, impacts the cost of capital needed in financing maturing obligations.

It’s imperative that the firm attains an optimum balance between cash at hand and the amount to be invested in marketable securities since cash deficits will most likely result in transaction costs. The cash conversion cycle provides an important parameter for gauging the effectiveness of working capital management.

The cash conversion cycle measures the time lag between purchases for raw materials and the time cash is collected from credit sales. The longer the time lag, the larger the investment in working capital. A longer cash conversion cycle will likely increase profitability due to higher sales, but may equally negatively impact corporate profitability if the cost of investing in large inventories outweighs the benefits of holding more inventory (Deloof, 2003).

The concept of performance of an organization has gained increasing attention in recent decades, being pervasive in almost all spheres of human activity. Performance is a subjective perception of reality, which explains the multitude of critical reflections on the concept and its measuring instruments.

The multitude of studies at the international level in the field of performance is also due to the financial crisis that swept the economy globally, which has led to a continuing need of improvement in the area of performance of entities. The concept of company performance is often used in the scholarly literature, but it is only rarely defined.

Due to the large number of concepts employed in defining performance, it is more and more discussed the existence of a confusion of this concept. Thus, organizational performance is confounded with notions such as productivity, efficiency, effectiveness, economy, earning capacity, profitability, competitiveness, etc.

For this reason, it is increasingly insisted on a clear and unambiguous definition of the concept of performance. The term performance emerged in the mid-nineteenth century and was first used in defining the results to a sporting contest. In the twentieth century, the concept has evolved and developed a series of definitions that were meant to encompass the widest sense of what is perceived through performance.

Currently, there is no performance independent of targeted objectives. Reaching the objectives translates to achieving the performance. Since the objectives of an organization cannot be defined precisely and are more and more numerous, the performance is more and more difficult to define, as it is a relative measure.

Furthermore, estimating the performance of the organization has always been of interest to management teams and researchers. In this regard, some researchers focused on determining definitions and how to measure organizational performance. The main objective of this study is to overview organizational performance index definition and performance measurement.

The history of performance is classified into six different subcategories. Various ideas and opinions on each of the performance subcategories are discussed. This review paper is an applicant for researchers and students to better to understand the definition and modeling of performance in organizational studies.

1.2.  Statement of the Problem

Working capital is an important part of an organization. It is a major determinant of the organization’s profitability and liquidity levels research indicates that a high number of US startup companies with an increased capital had dropped 744 in the 1990s to 526 in 2001-2011 (Mulcahy, Jobs, Zuckerberg and Brin, 2013).

Many businesses are finding it hard to manage their working capital, which is a major influence in the foreclosure of businesses. This is as reported by the security exchange commission, which published a report indicating that fifty percent of the businesses fail due to a lack of proper and effective working capital management strategies (United States Securities and Exchange Commission, 2013).

The overall problem is the lack of profitability and growth among organizations, which results to customers’ dissatisfaction, and the decreased sales of the company.

Working capital is the life wire of any enterprise which means that its management is quite crucial to the business. Cooperative societies of whatever type survive with efficient working capital management. The capital of the corporate enterprise has to be effectively managed for the benefit of the cooperative business so that stated objectives can be achieved. Given every stage and level of cooperative activities, finance tends to play a significant role in the efficiency of the enterprise. Alicia Tuovila and Amy Drury

The lobe cooperative credit union Ltd may have adequate finance but could lack proper efficient working capital management. It is disheartening to discover this cooperative credit union seems not to be performing up to expectation even in the light of apparent effective and efficient working capital management on cooperative’s efficiency or performance so that informed measures could be taken to facilitate efficient working capital management in this cooperative in such a way that the cooperative can effectively achieve stated objectives for the benefit of the members.

To this effect, this research seeks to know how working capital management affects the Lobe cooperative credit union’s efficiency or performance and the modalities that could ensure effective working capital management to promote cooperative business in Buea municipality.

Worthy of the fact that lobe cooperative credit union gets contributions from members monthly, as one of its components of current assets, and put more emphasis on the investment on real estate and government security. There is a problem of improper balance between liquidity objectives and profitability. Less attention is given to maintain sound liquidity position; several studies have been done on the effect of working capital. However, little is known on how working capital affects organizational pe (financial performance).

Despite the fact that working capital is the major source of organizational performance in lobe cooperative credit union specifically the Buea branch, empirical studies have also shown that working capital is faced by some problems which will then focus on current assets (loans) and current liabilities (deposits or savings). This therefore put forth the main research question and four specific research questions.

1.3Research Questions

1.3.1 Main Research Question

What is the effect of working capital management on the financial performance of Microfinance institutions in Buea Municipality, case of lobe cooperative credit union limited (LTD) in the Buea branch?

1.3.2 Specific Research Questions

1. What is the effect of cash management on the financial performance of Lobe cooperative union limited (LTD in the Buea branch)?
2. Does inventory management affect the financial performance of Lobe cooperative credit union ltd in the Buea branch?
3. How do account receivables affect the financial performance of Lobe cooperative credit union limited (LTD) in the Buea branch?
4. What is the effect of accounts payable on the financial performance of Lobe cooperative in the Buea branch?

Further Readings

THE EFFECTS OF WORKING CAPITAL MANAGEMENT ON THE FINANCIAL PERFORMANCE OF MIDEPECAM