Effect of Working Capital Management on the profitability of SMEs in Nigeria.

ABSTRACT

The need for effective working capital management within Small and Medium Enterprises (SMEs) remain pivotal to profitability of Small and Medium Enterprises (SMEs) in Lagos State. Most SMEs do not care about their working capital position, while only little have regard for their working capital position and most do not even have standard credit policy. In consonance with these, this study examined the effect of working capital management on the profitability of Small and Medium Enterprises (SMEs) in Lagos State. In this study, secondary source of data collection was adopted in sourcing for economic variables like Account Receivable Period (ARP), Account Payable Period (APP), Inventory Conversion Period (ICP), Cash Conversion Period (CCP), Net Profit Margin (NPM) and Acid-test Ratio (AR) and the research instrument was the unpublished statement of accounts of the selected SMEs (i.e. Afromedia and Naid Hotel) in Lagos State for the period ranging from 2007 to 2011. The data collected for this study were analyzed using descriptive and inferential statistics. The data analysis for this study included the use of presentation tools like tables, charts and statistics. Hence, analysis of the data was carried out by employing multiple regression analytical models which were used to evaluate the relationship between SMEs profitability and liquidity and the financial variables while conclusion was reached by testing the hypotheses using Fisher’s F test. The findings of this study showed that; there was no significant relationship between efficient working capital management and profitability of Small and Medium Enterprises (SMEs) in Lagos State but one of the variables could explain the profitability of SMEs individually. Furthermore, there was no significant relationship between efficient working capital management and the liquidity of Small and Medium Enterprises (SMEs) in Lagos State but one of the variables could explain the liquidity of SMEs individually. It was concluded that profitability and liquidity of Small and Medium Enterprises (SMEs) was affected either positively or negatively by the length of time to sell their product and receive cash and the policy adopted by the enterprise. Therefore, the study recommended among others that enterprises should hasten up the collection of cash from credit sales and strong credit policy system that would ensure that account receivables period is shorter than account payables period while the policy should be adopted by the management of SMEs.

Key Words: Liquidity, Profitability, Small and Medium Enterprises (SMEs), Working Capital Management.

Five Chapters