CHAPTER ONE INTRODUCTION

1.0 BACKGROUND OF THE STUDY Every organization or firm requires some level of financing. This applies to businesses already in operation and those planning to start new businesses. Financing is a major area to be considered by stakeholders (government, entrepreneurs, creditors etc among others).It has become a foundation which all forms of businesses and organizations such as banks thrive on for survival. Financing is generally categorized as either equity or debt, due to its nature; I was more interested in the type of equity capital called working capital. Working capital is the money or capital available for the day to day operations of the business. It is the money used to buy materials or goods for manufacturing or for resale. This is in direct contrast with fixed capital, which is the money used to buy fixed assets such as buildings, plants, motor vehicles etc. Working capital is usually defined as the net current assets consisting of stock, debtors and cash minus current liabilities mainly trade creditors. The main sources of working capital are the current assets as these are the short term finance that a firm can use to generate cash. However, firms also have some obligation to fulfill and as such, careful consideration must be given to working capital management. It is vital for a business to have sufficient working capital to meet all its requirements. Most businesses are not doing well as a result of poor working capital management. For businesses to grow, it needs to be careful with how they manage their finances, especially the working capital. Since an organization must have a sufficient amount of cash, debtors and stock, management must give attention to working capital management.

1.1 STATEMENT OF THE PROBLEM The main driving force behind this research is to establish the practicality of running a business or an organization with respect to the management of working capital of the
1

business or the organization. This research also seeks to enquire into how management professionally handles the issues of working capital management in business organizations in Ghana.

1.2 HYPOTHESIS It has been noted that the improper methods of bookkeeping have resulted in the folding up of many businesses in the Ghanaian economy. Effective management of working capital will mean that proper accounts will be kept by businesses or organizations which go a long way to have a positive impact on working capital. This will help sustain business organizations to achieve their organizational goals.

1.3 OBJECTIVES OF THE STUDY The study is aimed at identifying the effectiveness of the management of working capital in Ghana. The course of this study is to find ways to deal with proper working capital cycle within businesses in Ghana which will help organizational growth.

1.4 THE SCOPE AND LIMITATION OF THE STUDY The delicate nature of an organization working capital disclosure to Individual or group of people who may have less or no interest in the business organization made it difficult for many thriving businesses to release information that concern their working capital, so that I can form an opinion on their working capital and its operation. Due to this reluctance, we focused on businesses such as Banks and other Financial Institutions set up by individuals or group of people who were more willing to help me to carry out this research study on working capital. The study covered present methods of managing working capital and the probable problems associated with working capital in these organizations.

The limitations to this research include the limited time within which we were supposed to come up with a credible study. There was also a financial constraint in gathering data and in-depth audit of information given to ascertain its credibility. 1.5 SIGNIFICANCE OF THE STUDY The project will help improve the working capital management of businesses not even banks only but other financial institutions in Ghana by identifying the most suitable ways of managing working capital. The research will help to determine and maintain the appropriate level of working capital that maximizes profit by preventing excess or idle working capital and the shortage of working capital. This will go a long way to improve the financial position of businesses in Ghana and also to take proper management decisions. The project will also help individuals or group of people who will do research on working capital management in future.

1.6 METHODOLOGY There are different methods which were used in gathering the relevant information for the project. These include; Literature review and documentary research Personal interviews Submitted questionnaires

Published literature and financial reports was used for the study and background information as guidance. In addition, a careful study of published reports and magazines of businesses was reviewed for relevant information.

Other journals and brochures were obtained from the small scale businesses which were used as a case study. Apart from the above, some relevant information and facts from the financial magazines, journals, The National Board for Small Scale Industries and the Ghana Stock Exchange was consulted. Questionnaires were submitted to Adansi Rural Bank ltd and their

management. The facts gathered from documentary sources and responses received from interviews and submitted questionnaires were collected to form the basis of this project.

1.7 ORGANIZATION OF THE STUDY The study is structured or organized into five main chapters. Chapter one is concerned with the introduction of the research, and it includes the background of the study, statement of the problem, hypothesis, and objectives of the study as well as the limitations and the methodology. Chapter two is devoted to reviewing past literature on earlier researches conducted by individuals or group of people on working capital management. Chapter three: In chapter three, the population in the business organization shall be sampled to obtain data based on the methodology being used which shall be analyzed to suit our research. Chapter four: This chapter is concerned with evaluating the data at hand. Chapter five: This is the stage where we draw our conclusion using the results obtained from these business organizations in survey, recommendation comparism with how theoretical the working capital of an organization needs to be managed to ascertain how professionally these businesses are managing their working capital.

CHAPTER TWO LITERATURE REVIEW

2.0

INTRODUCTION

The purpose of this literature review is to report on the previous work that others have done in the area of the study which also focuses on relevant articles, journals and other relevant materials.The review has been put under these sub headings: Management of stock Management of debtor Cash management Creditors control Management of bank overdraft

According to Artill and Maclanuey (1994), the size and composition of working capital varies between industries. For some businesses, the investment in working capital can be substantial, for example a manufacturing company as compared with a retail business.

2.1 OPERATING CYCLE

The operating cycle is the length of time between the company outlay of raw materials, wages and other expenditure and the inflow of cash from the sale of the goods. It is also known as the working capital cycle which is the length of time that elapses between a business paying for its raw materials and the business receiving payments from its customers for the goods made from the raw materials.

2.2 WORKING CAPITAL CYCLE OF A MANUFACTURER A firm buys raw materials on credit. The raw materials will be held for some time in stores before being issued to the production department and turned into finished products. The finished goods must be kept in a warehouse for sometime before they are sold to customers. By this time, the firm will have paid for the raw materials purchased. If customers buy goods on credit, it will take some time before the cash from the sale is realized. Each activity takes some time. The time taken by each activity is an element of working capital cycle.

2.3 MANAGEMENT OF STOCK A firm needs a continuous supply of materials to ensure that production and sale of goods goes on every day in order to maximize profit. Holding higher levels of stocks will enable the company to be more flexible in supplying customers, even when there is an abnormal demand. More customers will receive immediate delivery rather than waiting for new goods to be produced. There might be a smaller chance of sales being delayed through interruptions in production. On the other hand, keeping a high level of stocks brings in additional cost of financing in keeping stocks. Stock management may be defined as keeping the optimum or the appropriate level of stocks that will maximize the benefit of holding and minimize the cost of holding stock. It is also the process of determining and keeping the appropriate level which will minimize the cost of storing

and also ensure that the firm does not run out of stock in other to maximize profit. Keeping a minimum level of stock will release cash for future investment.

2.3.1 BUDGETS FOR FUTURE DEMAND The best way a business can ensure that there is stock available to meet future sales, is to prepare an appropriate budget. This budget should include each product that the business deals in. It is important to make every attempt to ensure the accuracy of those budgets as they will decide future ordering and production level. The budget may be driven in various ways. The budget may be developed using statistical techniques such as time series analysis or may be based on the judgment of the sales and the marketing staff.

2.3.2 FINANCIAL RATIOS The ratio that can be used to monitor stocks is the stock turnover period. This ratio is calculated as; Stock turnover period = Average stock 365 days Cost of sales This will provide the basis to know the average period for which stocks are held and can be useful as a basis for comparison. It is possible to calculate the stock turnover period for individual product lines as well as for stocks as a whole. Shorter stock turnover period indicates how effective management has worked hard to earn profit.

2.3.3 RECORDING AND REODERING SYSTEM The management of stock requires a sound system of recording stock movement. There must be a proper procedure for recording purchases. Periodic stock checks may be required to ensure
7

that the amount of physical stock held is consistent with the stock records. The authorization of both purchases and the issue of stocks should be confined to a few senior staff which will help reduce pilfering. To determine the point at which stock should be reordered, the information concerning the lead- time (time between the placing an order and the receipt of the goods) and the likely level of demand will be required.

2.3.4 STOCK MANAGEMENT MODELS It is possible to use decision models to help manage stocks. The economic order quantity (EOQ) is concerned with answering the question, how much stocks should be ordered. In its simplest form, the EOQ models assumes that demand is constant so that stocks will be depleted evenly overtime and will be replenished just at the point that stocks runs out. The most used method of stock management is;
JUST IN TIME (JIT) STOCK MANAGEMENT

In recent years, some manufacturing industries have tried to eliminate the need to hold stock by adopting just in time stock management. This method was first used by the US defense industry during World War II and in more recent times. It has been widely used by the Japanese business men. The essence of JIT is, as the name suggests, to have suppliers delivered to a business just in time for them to be used in the production process. By adopting this approach, the stock holding problems rest with the suppliers rather than the business itself. For this approach to be successful, it is important that the business inform suppliers of its production plans and in turn deliver materials of the right quantity at the agreed time. Failure to do so could lead to a dislocation of production and could be very costly. Thus, a close relationship between a business and its suppliers is required. Though a business will not have to hold stock, there may be certain cost associated with JIT approach. Finally, the close relationship is necessary between the business and its suppliers may prevent the business from taking advantage of cheaper source of supply if they become available. The philosophy underlining this method is concerned with eliminating waste, and striving to deliver goods. There will be no expectation that the production process will operate at maximum efficiency. This

means that there will be no production breakdowns. Whiles these expectations may be impossible to achieve, they do help to create a management culture that is dedicated to quality service.

2.4 MANAGEMENT OF DEBTORS Debtors come about when an organization decides to sell goods on credit to customers. Selling goods on credit results in, cost accruing to the business in the form of bad debt, opportunity foregone in realizing cash promptly and others. When a business decides to sell goods and provides services on credit, it must have clear policies concerning; 1. Type of customers to sell goods on credit to. 2. Setting credit limit 3. Conditions attached to sales 4. Means of cash collection to be adopted. It is important to note that cash flow is very significant especially when collected at a faster rate. It is also important for every business to know their debtors, how much is involved and for how long it is standing in the books. 2.4.1 RELATIONSHIP BETWEEN PROFIT AND LATE RECEIPT OF CASH Late receipt of cash as a result of offering credit sales has a crippling effect of rendering a business cash trapped. This is much felt among industries whose sources of finance are not strong, thereby uncontrollably, allowing the business to be managed according to the inflow of cash as it occurs. In business finance, it is advisable to manage debtors of the business. The following measures could be adopted in dealing with trade debtors; 1. Set up credit limit for each customer. 2. Ensure that the credit sales are within the set limit. 3. Immediately after credit sales prepare a sales invoice.
9

4. Send a reminder at frequent intervals 5. Threaten difficult customers with court action 6. Take court action if persuasion fails 7. Factor the debt after invoicing Factoring as an alternative to debt retrieval, is the sale of debt or the amount owed by a debtor to a third party called the factor at a discount in return for prompt cash (immediate payment). In factoring, there can be a factor with a recourse where the supplier bears the risk of bad debt for debt not been paid or a factor without recourse in this case the factor or the third party bears the risk of bad debt.

2.4.2 DETERMINING RELIABLE CUSTOMERS An organization which cannot erode selling on credit must plan efficiently and effectively on how to retrieve monies owed from debtors. It is important to take the following factors into consideration;
CAPITAL STRUCTURE

When a business is considering proposals from a customer to sell on credit, it is important to access the capital base of this customer to be sure of how sound they are financially. It is advisable to access the profitability and liquidity of the customer. In addition any major financial commitments of the customer must be taken into consideration (standing orders, etc)
CAPACITY

The customer must have the capacity of paying their debt. Where possible, the credit record of the customers must be examined. If the customer is already in operation, looking at the physical and operational resources of the business will be relevant for forming a justifiable opinion about the business.
COLLATERAL

It is more relieving to have a form of security for goods supplied on credit. When this occurs, the business is convinced that the customer is reliable and as such goods can be sold on credit to customers without fear of being deprived of their money. It also gives the assurance of doing away with bad debt.
10

CREDIT WORTHINESS OF A CUSTOMER

It is important to access the credit worthiness of a customer with reference to past dealings of the customer with your organization or your competitors. Once the customer is considered to have a good record, then goods can be supplied to the customer without any fear.
CREDIT PERIOD

The business must determine the credit period it is prepared to offer to its customers. The duration of credit offered can vary significantly between businesses and is influenced by factors such as: 1. The degree of competition within the industry 2. The bargaining power of a particular customer 3. The risk of non- payment 4. The capacity of the business to offer credit, and others.

CASH DISCOUNT AND INTEREST ON DEBT

The organization can decide to offer cash discount as a means of encouraging prompt payment from its customers. The amount of cash discount given can influence whether to purchase on credit or not, from the organizations point of view it is important to weigh the cost of offering discount against the likely benefit derived from financing debtors. Charging interest on overdue debts can also be a stringent measure to collect cash from debtors, but it is also important to note that, this is mostly possible when the organization sells a peculiar product in the area to avoid loss of customers 2.5 DEBT COLLECTION POLICY The organization offering credit must ensure that the amount owing is collected as quickly and efficiently as possible. An efficient collection policy requires an efficient accounting system. Management can monitor the effectiveness of cash collection policies in a number of ways. One method that is commonly used in most businesses is the determination of the debtors collection period. It is calculated as;

11

Debtors collection periods = Trade debtors 365days Credit sales This ratio is useful but not 100% reliable since it gives the average days within which debt will be realized useful in budgeting.

2.6 MANAGEMENT OF CASH Cash management is concerned with optimizing the amount of cash available to the entity or the company and maximizing the interest on any spare or idle funds not required immediately by the company. In other words cash management involves making sure that business always has enough cash on hand to meet its bills expenses and other day-to-day activities and also invest surplus cash for profit and interest. There are three motives of holding cash. These are; 2.6.1 TRANSACTIONARY MOTIVE To meet the day-to-day commitments, a business requires a certain amount of cash that will take care of their daily transactions. Cash has been described as the life blood upon which most businesses thrives on. 2.6.2 PRECAUTIONARY MOTIVE Future uncertainty of regular cash flow is a factor to consider in cash management. To curtail any incidental spending, it is advisable to hold a cash balance on hand as a precautionary measure. 2.6.3 SPECULATIVE MOTIVE A business may decide to hold cash in order to be in a position to exploit profitable opportunities as and when they arise, by holding cash a business may be able to enter into a new market that open up, which may require an immediate entry. Ray Powell (1989) 2.7 CONTROLLING CASH BALANCE Several models have been proposed to help control the cash balance of a business. One of such models proposed the use of upper and lower control limits for cash balances and the use of a
12

target cash balance. The model assumes that the business invest in businesses that can easily be turned into cash. The business proposes two limits thus the upper and the lower. If the business exceeds the outer limit then management decide whether the cash balance is likely to return over the following few days to a point within the inner control limit set. If this seems likely, then no action is required. If on the other hand this seems unlikely then management must change the cash position of the business by buying or selling marketable securities or simply by borrowing or lending.

80 Higher 60 (%) 40 Lower 20

13

outer limit

inner limit

The graph depicts a model for controlling the cash balance that relies on the use of inner and outer control limits. Where outer control limits are breached and there is no prospect of an early return to a point within these limits, management must take action. A breach of a higher limit will involve buying marketable securities (to ensure that cash is not lying idle) a breach of the lower limit will involve selling marketable securities to ensure there is sufficient cash to meet obligation.There are other models that do not rely on management judgment and we use quantitative techniques to determine an optimal cash balance. 2.7.1CASH BUDGET To manage cash effectively, it is important for business to prepare a cash budget. Cash budget is a statement which shows the expected cash to be received and paid as well as the expected cash balance for each day, month or in future. Cash budget is a very important cost control mechanism for both planning and control purposes. It is worth repeating the point that cash budget enable managers to see the expected outcome of planned events. The cash budget will identify periods when cash surpluses are expected.

2.7.2 THE OPERATING CYCLE When managing cash, it is important to be aware of the operating cash cycle of the business. This may be defined as the time period between the outlay of cash necessary for the purchase of stock and the ultimate receipt of cash from the sale of goods. The operating cash cycle of a business that purchase goods on credit for subsequent resale are shown diagrammatically: Purchase of goods on credit Payment for goods Sale of goods on credit Cash received from debtors

Stock holding period

14

Operating cash cycle The diagram shows that goods purchased on credit will be paid for at a later date and so no immediate cash outflow will occur. Similarly, credit sales will not lead to an immediate inflow of cash. The operating cash cycle is the period between the payments made to the supplier and the cash received from the customer. The operating cash cycle is important because it has a significant influence on the financial requirements of the business. The longer the cash cycle, the greater the financial requirements of the business and the greater the financial risk. For this reason, the business is likely to reduce the operating cash cycle to the minimum possible period. 2.7.3 MANAGEMENT OF TRADE CREDITORS Running an organization on credit terms has its own advantages and disadvantages. Trade credit is an important source of finance for most businesses. Buying on credit helps delay the payment of cash thereby allowing the organization to invest cash in other sectors of the economy to attract interest before paying out. In a situation where demand exceeds supply, trade creditors are given less attention as compared to those who pay prompt cash. In addition customers who buy goods on credit are less favored in terms of payment periods. Sometimes the goods or services may be more costly if credit is required. However, in most businesses trade credit is the norm and as a result, credit facilities are sometimes abused by customers leading to bad debts. 2.7.4 MANAGEMENT OF BANK OVERDRAFTS Bank overdraft is short term finance whereby the business is allowed to withdraw money more than what is in its bank account. It is a flexible form of borrowing and is cheap relative to other sources or finance. Although in theory, bank overdraft is a short term source of finance, in practice it can extend over a long period of time. This is because many businesses continually renew their overdraft facility with their banks. Though renewal may not be a problem there is always the danger that the bank will demand repayment at a short notice as it has the right to do so.If the business is highly dependent on bank overdraft, other alternative sources of short term finance, this could raise several problems. When considering whether to have a bank overdraft, the business should first consider the purpose of the borrowing. Overdraft is most suitable for
15

overcoming short term funding problems (for example increase in stockholding requirement owing to seasonal fluctuations). To determine the amount of overdraft facility, the business should produce a cash budget. There should also be regular reporting of cash flows overtime to ensure that the overdraft limit is not exceeded.

16

CHAPTER THREE METHODOLOGY AND COMPANY PROFILE 3.0 INTRODUCTION This chapter describes the method employed in the conduct of the research. It contains research framework, data collection instruments and methods of data analysis. The study was designed to investigate how small scale businesses manage their working capital. 3.1 RESEARCH FRAMEWORK The research was conducted using a case study approach. A case study is a type of research which gives an opportunity on one aspect of a problem to be studied in-depth. 3.2 DATA COLLECTION INSTRUMENT The research was conducted using a self constructed questionnaire in collecting the data needed for the study. The questionnaire was used because people were able to express their opinion objectively and the cost involved was low. It also allowed the respondents enough time to answer the questions. 3.3 DATA COLLECTION METHOD The questionnaire were collected back and compiled together for in-depth assessment. Attention was given to the organization of study to allow management suggests possible corrections that must be done to enable the provision of a credible report of the organization. Due to this, alternative questionnaire was design to meet the correct format needed to establish the true report attained from the answers. The questionnaire covers areas like the financial inflows and outflows of cash, how deficits are financed and how revenue is generated from excess funds. 3.4 METHODS OF DATA ANALYSIS

17

The researcher used descriptive statistics in analyzing the data collected. The responses were analyzed and presented mainly in narrative form. However, some quantitative tools such as percentages and averages were used in the analysis. The findings were illustrated by the use of tables and charts. 3.5 SAMPLING PROCEDURE A purposive sampling and snowballing was used and with a population size of sixty. The views concerning working capital management were sought and used in the analyses of the study. 3.6 PROFILE OF ADANSI RURAL BANK LTD Adansi Rural Bank LTD was incorporated in 5th April, 1982 and a certificate to commence business on 29th October, 1982.Their main aim is to be among the best ten (10) rural banks in Ghana. They serve banking products such as savings, susu, current, fixed deposit accounts and others.Adansi Rural Bank LTD has six(6) of its branches including the head office at Adansi Fomena ,other branches are located at Obuasi ,Akrokeri, Atonsu, Dunkirk, Kaase and Obuasi.

18

CHAPTER FOUR ASSESSING THE MANAGEMENT OF WORKING CAPITAL BY FINANCIAL INSTITUTIONS IN GHANA 4.0 INTRODUCTION

The study was designed to investigate how businesses manage their working capital. The research was conducted in the Ashanti Region of Ghana. A total number of sixty (60) respondents were interviewed. The purposive sampling and snowballing techniques were adopted to obtain responses. 4.1 BACKGROUND OF RESPONDENTS

4.1.1 Gender Table 4.0 Gender of Respondents

Frequency Male Female Total 39 21 60 Percentage 65 35 100

Source: Field Survey, 2012 Table 4.0 above depicts that there were more males interviewed than females. Out of the total sample size chosen (that is 60 respondents), 65% of the respondents were males with females taking up the remaining 35% .4.1.2 Age Range

19

Out the total respondents, thirty-six (36) were between the ages of 18-39, twenty-three (23) of them between the ages of 40-59 and the remaining one (1) above 60 years as evidenced in table 4.1 below. Table 4.1 Age Range of Respondents
Frequency 18-39 40-59 60 and above Total 36 23 1 60 Percentage 60 38.3 1.7 100

Source: Field Survey, 2012 4.1.3 Educational Background of Respondents Since education has now become a prerequisite for jobs, all of the respondents had some level of education. 30% of the respondents had a degree, 38.3% had HNDs, 20% of the respondents were SSS leavers, and 1.7% of the respondents had their masters degree. Table 4.2 Educational Backgrounds of Respondents
Frequency SSS HND Degree Masters not applicable Total 12 23 18 1 6 60 20 38.3 30 1.7 10 100 Percentage

Source: Field Survey, 2012

4.1.4 Occupational Breakdown of Respondents

20

Most of the respondents were in the following departments in their companies; management, finance and sales departments, twenty-four (24) of the respondents were found at the management level, twenty-one (21) respondents were in the finance department, and the

remaining fifteen (15) respondents were found in the sales department. The respondents were taken from different departments in other to have divergent views from the respondents.

Figure 4.0 Occupations of Respondents

Source: Field Survey, 2012 The respondents held various positions such as; managerial which made up 45% of the respondents whose main duties at their work places were administrative; 30% of the respondents were sales assistants tasked mainly with selling of their companies products and services; 15% were cashiers, who were mainly responsible for receiving and paying monies and the remaining 10% were accountants also assuming administrative and monitoring roles in their various departments as shown in table 4.3 below.

Table 4.3 Positions of Respondents In Their Organizations

Frequency Managerial sales assistant Accountant Cashier Total 27 18 6 9 60 45 30 10 15 100 Percentage

Source: Field Survey, 2012 All of the respondents claimed that, their institution have a finance department as evidenced in figure 4.1 below. This showed that almost all respondents worked in a well structured institution.

21

Figure 4.1 Presences of Finance Departments In Institution

Source: Field Survey, 2012

4.1.5 Respondents Views about Working Capital Management The respondents when asked how they would define working capital management came out with the following definitions; twentyseven (27) of respondents defined working capital management as managing invested capital to yield expected results; twenty-four (24) of the respondents defined it as proper management capital invested, debts incurred, and profit accrued; the remaining nine (9) respondents defined it as managing finances in the company. Source: Field Survey, 2012 Out of the total respondents, 70% were of the view that working capital management was necessary. The remaining 30% of the respondents were of the view that working capital management was not very necessary as shown in table 4.4 below. Table 4.4 Is Working Capital Management Necessary
Frequency Yes No Total 42 18 60 70 30 100 Percentage

Source: Field Survey, 2012

22

Some of the reasons given by the respondents for asserting that working capital management is necessary are; i. ii. iii. iv. v. It helps in selling the products faster and easier. Helps in ascertaining profit and loss in the business. It helps in managing stocks. It is the basis for growth of companies. It helps the company meet set objectives.

Out of the total respondents, 60% claimed that trade credit was the main form of financing that their organizations operated. They claimed that it was the simplest and easiest form of financing, 20% stated that their organizations operated on short-term securities whiles the remaining 20% asserted that their organization operated on long-term securities as evidenced in figure 4.3 below. Figure 4.4 Financing Options of organization

Source: Field Survey, 2012 Most of the respondents claimed that the means by which their organizations acquire assets was through real cash. 50 % of the respondents were of that view. The main reason they gave was that the company did not want to owe any other organization. 35% of the respondents claimed

23

that their organization acquired assets through credit, 10% of the respondents claimed their organization acquired assets through leasing as shown in Table 4.5 below.

Table 4.5 Means of Acquiring Assets

Frequency Credit Cash Hire purchase Leasing Total 21 30 3 6 60 35 50 5 10 100 Percentage

Source: Field Survey, 2012

Out of the total respondents, 75% of them claimed that their organizations sold on credit to their clients twenty-four (24) respondents claimed that when they sell on credit to customers, they are paid back within less than one (1) month; eighteen (18) of the respondents claimed that their debtors paid back between 1-3 months; three (3) respondents claimed that even given them the benefit of the doubt there is still non-payment from the customers as shown in figure 4.5 below. Figure 4.5 Length of Debtors Pay Back
30 25 20 15 10 5 0 less than 1 month 1-3 months non payments not applicable

24

Source: Field Survey, 2012 Out of the total respondents, 40% of the respondents claimed that the credit limit for their customer was eighteen months; 30% of the respondents claimed that the credit limit for their clients was between two-three months and the remaining 30% between four-six months as shown in table 4.6 below. Table 4.6 Customer Credit Limit

Frequency 18 months 2-3 months 4-6 months Total 24 18 18 60 40 30 30 100

Percentage

Source: Field Survey, 2012 All the respondents claimed that records of customers and creditors were kept in their organization. Out of the respondents, 75% asserted that their organizations permitted advance payment from the customers. 10% out of the 75% respondents stated that the advance payments received from the customers enabled their organizations have enough circulating funds which helps the company run better, the remaining 15% claimed that the advance payments they received from the customers helped made their business run easier.

The remaining 25% claimed that their organizations did not accept advance payments although no reason was given for that.

25

When asked about the means through which overdue debt was collected, 55% of the respondents claimed that the debtors were issued with a debit note from their organization stating the amount they owe and when they are to pay the amount, 15% claimed that their outfit wrote formal letters to their debtors indicating their debt, another 15% stated that they wrote to their debtors through their lawyers and the remaining 15% asserted that they gave their debtors enough time to come and pay their debt as indicated in figure 4.6 below. Figure 4.6 Mode of Collecting Overdue Debt

Source: Field Survey, 2012

Out of the total respondents, 100% claimed that their company was not listed on the stock market. Out of the 60 respondents, all of the respondents claimed that their institution had access to bank loans.

Source: Field Survey, 2012 Only 20% of the respondents asserted that their organizations disposed off assets for cash when they were really in dire need for money, whiles the remaining 80% claimed that their company did not dispose assets for cash as shown in figure 4.8 below.

26

Figure 4.8 Disposals of Fixed Assets

Source: Field Survey, 2012 In respect to organizations being able to meet their budget, only 5% of the respondents claimed that their company could not reach their budget. The remaining 95% of the respondents affirmed that their institution was able to meet their budget as shown in table 4.7 below. Table 4.7 Ability to Meet Budget

Frequency Yes No Total 57 3 60 95 5 100

Percentage

Source: Field Survey, 2012

27

The following reasons were given by the respondents for their companys ability to meet their budget; i) ii) The company is objective oriented. The institution has determined workers.

iii) Determination iv) The institution is customer oriented.

All sixty (60) respondents representing 100% asserted that their organization was able to generate profit from their respective business fields. 40% of the respondents claimed that their companies ploughed back into the business, 25% of the respondents asserted that their companies invested their profit in the stock market, 20% of the respondents claimed that their organization purchased fixed assets with their profit and the remaining 15% of the respondents declared that the profit from their organization are invested in other companies, as shown in table 4.8 below. Table 4.8 Management of Profit
Frequency Plough back profit Invested in other businesses Invest in stock market Purchase fixed assets Total 24 9 15 12 60 Percent 40 15 25 20 100

Source: Field Survey, 2012

Figure 4.9 Overdraft Limits of Organizations

28

30 25 20 15 10 5 0 5,000-19,000 Ghana cedis 30,000-39,000 Ghana cedis above 40,000 Ghana cedis not applicable

Source: Field Survey, 2012 When asked how the respondents companies financed deficits, it was revealed that; i) ii) Dividends received from investments were used to finance deficits. Some respondents claimed that their institutions took loans to help clear deficits.

iii) Bank overdrafts were identified as another method used by some institutions to clear their deficits. iv) Four of the respondents also claimed that in times of serious deficits, the owner of the company cleared the deficit through his own means.

29

CHAPTER FIVE CONCLUSION AND RECOMMENDATION 5.0 INTRODUCTION All business organizations face some level of financial problems. It is for this reason that these businesses must be more concerned about the management of their working capital. This chapter focuses on conclusion and recommendation on the working capital problems of Adansi Rural Bank Limited to know the path to take when managing their working capital.

5.1 CONCLUSION The management of working capital has been a major constraint to most business organizations in Ghana and Adansi Rural Bank is no exception. Most business has collapsed due to the misuse of working capital. Conclusions of this work were based on questionnaires, interviews and personal observations of all activities concerned with the management of working capital in Adansi Rural Bank. Although Adansi Rural Bank has qualified personnel who manage the activities of the company, investigations revealed the following areas which require much attention with respect to working capital management. Field survey (2012) page 27 of this work revealed that Adansi Rural Bank Limited bank borrowings of 20% exceed the companys personal savings of 10%. This explains the companys means of financing their deficit, which affect the working capital of the company. The over dependency on bank borrowings as a major source of finance for Adansi Rural Bank limited will affect their working capital management. The company does not save enough to attract interest for some period of time. The banks will be reluctant to grant them loans which must be paid with interest at some time to come or institute very stringent policies in acquiring loans by the company.

30

5.2 RECOMMENDATION Working capital represent a net investment in short term assets. These assets are continually flowing in and out of a business and are essential for the day-to-day operations. The various elements of working capital are interrelated and can be seen as a short-term cycle which is an essential part of a business short-term process. Management must decide how much of each element of the working capital should be held. Management must be aware of these costs in order to manage effectively. Management must also be aware that there may be other more profitable uses for the funds of the business. Hence, the potential benefit must be weighed against the likely cost in order to achieve the optimum investment. The working capital in a particular business is likely to change overtime because of changes in the commercial environment. This means that working capital decisions are rarely one-off decisions. Management must ensure that, the level of investment in working capital is appropriate. In conclusion, there is the need for commitment by the management of Adansi Rural Bank Limited in their approach to manage working capital effectively. Management Adansi Rural Bank Limited (especially the finance and administration department) must be willing to put in place measures that will help prevent loss of funds to the company. In line with this, these recommendations were provided by the researcher but not limited to the following:

Adansi Rural Bank Limited must separate its finance department from the administration. These two departments perform different tasks and must not be merged. The separation will help the departments to focus on matters of finance and administration respectively. Information relating to either finance or administration will not fall into the wrong hands.

Adansi Rural Bank Limited must endeavour to keep double entry records in the lower management level. Since the company has professionals at the middle level which lower level management report to, the middle management (particularly the finance department) must be willing to aid the lower management to keep double entry records.
31

REFERNCE Artill, Peter, Maclaneuy and Eddie; 1994. Management for Non-Specialist, 3rd Edition, Prentice Hall, Page 345. Nyarkoh K.O; Business Finance for students (in press). Powell R; 1989. Economics for Professional and business studies, 1st Edition. London: DP Publication Ltd.

32

APPENDIX QUESTIONNAIRE TOPIC: MANAGEMENT OF WORKING CAPITAL IN BUSINESS ORGANIZATIONS AND ITS IMPACT ON THE SOURCES OF FINANCE IN GHANA NOTE: This research is purely for academic purposes and information given will be treated with the necessary confidentiality. Please tick as applicable and provide relevant explanation where appropriate. 1. Sex male [ ] female [ ]

2. Age 18 39 [ ] 40 59 [ ] 60 and above [ ]

3. Level of qualification: SSS [ ] HND [ ] DEGREE [ ] MASTERS [ ]

If any other, please specify .

4.

What

department

do

you

work

under?

............................................................................................ ......

5. What is your current position in the organization? ..

6. What role do you play in your department? ......

33

7. Does your organization have a finance department? YES [ ] NO [ ]

If no to question (7), which department deals with financial matters in the organization? ..

8. In your view, what do you think is the meaning of working capital management? ............................................................................................................................................................ ......

9. Do you think working capital management is necessary in your organization? YES [ ] [ ]

NO

10.

Please

give

reasons

to

question

(9)

11. What form of financing does your organization operate? Trade credit [ ]

Short -term securities [ ] Long-term securities [ ]

34

If

any

other,

please

specify

12. What is the means of acquiring assets in the organization? Credit [ ] If Cash [ ] any Hire purchase [ ] other, Leasing [ ] please specify

................................ 13. Do you sell on credit? YES [ ] NO [ ]

If yes, how long does it take for debtors to pay back? 1-6 days [ ] 1 month [ ] If 1 week [ ] 2 weeks [ ]

2 months [ ] any other, please

specify.

14. Do you keep records of customers and creditors? YES [ ] NO [ ]

15.

What

is

the

customers

credit

limit?

.................................................................................................

16. Do you permit advance payments from customers?

35

YES [ ] If

NO [ ] yes, what benefit do you derive?

...

17.

What

means

do

you

adopt

in

collecting

overdue

debts?

. .

18. How often do you receive stock from your creditors? Daily [ ] If Weekly [ ] Monthly [ ] any other, please

specify................................

19. How long does it take to pay your creditors? Days [ ] If Weeks [ ] any Months [ ] other, please specify

...

20. Is your company listed on the stock market? YES [ ] NO [ ]

36

If yes, what do they deal in? Shares [ ] If Debentures [ ] any Government bonds [ ] other, please specify

..

21. Does your organization have access to bank loan at all times? YES [ ] NO [ ]

22. Does the organization dispose of fixed assets for cash? YES [ ] NO [ ]

23. Is the organization able to meet its budget? YES [ ] Give reasons................................ NO [ ]

24. Are you able to generate profit? YES [ ] If yes, how does the

NO [ ] organization manage profit?

................................

37

25. Does the organization have access to bank overdraft? YES [ ] If NO [ ] yes, what is the limit?

.....................................................................................................................

26.

How

do

you

finance

your

deficit?

.. ..

27. Does the organization factor debt? YES [ ] NO [ ] [ ]

If yes, is it; re-course

Or non recourse [ ]

38

UNIVERSITY COLLAGE OF EDUCATION WINNEBA SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING

ASSESSING

THE

MANAGEMENT

OF

WORKING

CAPITAL

IN

BUSINESS

ORGANISATION; A CASE STUDY IN ADANSI RURAL BANK LTD.

BY RUTH REGISTRATION NUMBER

A DISSERTATION SUBMITTED TO THE DEPARTMENT OF ACCOUNTING,SCHOOL OF BUSINESS,UNIVERSITY COLLAGE OF EDUCATION WINNEBA IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF A BACHELOR OF SCIENCE(HONOURS) DEGREE IN ACCOUNTING.

JUNE, 2012

39

DECLARATION I, Ruth do hereby declare that the work presented in this dissertation was solely done by me under the supervision of Dr. Apart from literature duly cited. I affirm that this work has never been presented in any institution for the award of a degree.

. RUTH (STUDENT) DATE:. DR

..

(SUPERVISOR) DATE:

.. PROFESSOR (HEAD OF DEPARTMENT) DATE..

40

DEDICATION

To God the almighty for his mercies throughout my studies To my parents, And to all my family and my co-workers who helped me through the research.

41

ACKNOWLEDGEMENTS I am highly indebted to my supervisor, Dr of department of Accounting, University college of Education Winneba .for his suggestions which proved very useful and effective for the successful completion of this work.

My special thanks go to Isaac Mensah Bonsu of department of management studies Kwame Nkrumah University of science and technology for his contribution in typing of this work.

I am grateful to all lecturers of school of Business whose excellent tuition throughout my course of study has greatly influenced my understanding of this research. Special thanks go to my family, and all my friends and course mates.

42

TABLE OF CONTENTS DECLARATIONi DEDICATION..ii ACKNOWLEDGEMENTS..iii TABLE OF CONTENTS..iv LIST OF TABLESv CHAPTER ONE-INTRODUCTION 1.0 BACKGROUND1 1.1 STATEMENTOF THE PROBLEM1
1.2 HYPOTHESIS.2 1.3 OBJECTIVES OF THE PROBLEM2 1.4 THE SCOPE AND LIMITATION OF STUDY..2 1.5 SIGNIFICANCE OF THE STUDY ..3 1.6 METHODOLOGY..3 1.7 ORGANIZATION OF STUDY ..4 CHAPTER TWO 2.0 INTRODUCTION.5 2.1 OPERATING CYCLE .5 2.2 WORKING CAPITAL CYCLE OF A MANUFACTURER6 2.3 MANAGEMENT OF STOCK6 2.4 MANAGEMENT OF DEBTORS ..9 2.5 DEBT COLLECTION POLICY 11 2.6 MANAGEMENT OF CASH 12

43

CHAPTER THREE 3.0 INTRODUCTION .16 3.1 RESEARCH FRAME WORK 16 3.2 DATA COLLECTION INSTRUMENT ..16 3.3 DATA COLLECTION METHOD 16 3.4 METHOD OF DATA ANALYSIS .17 3.5 SAMPLING PROCEDURE ..17 3.6 PROFILE OF ADANSI RURAL BANK LTD .......17 CHAPTER FOUR 4.0 INTRODUCTION .18 4.1 BACKGROUND OF RESPONDENTS .18 CHAPTER FIVE 5.0 INTRODUCTION ..29 5.1 CONCLUSION .29 5.2 RECOMMENDATION ..30

REFERENCE 31 APPENDIX .32

44

45