CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The corporate finance literature has traditionally focused on the study of long-term financial decisions, particularly investments, capital structure, dividends, or company valuation decisions. However, short-term assets and liabilities are important components of total assets and need to be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation since working capital management plays an important role in a firm's profitability and risk as well as its value (Smith, 1980). Efficient management of working capital is a fundamental part of the overall corporate strategy in creating shareholders' value. Firms try to keep an optimal level of working capital that maximizes their value, and recent African evidence reinforces this view: a study covering listed manufacturing firms in Nigeria found that working capital management efficiency has a significant positive relationship with firm profitability (Adegbite & Lawal, 2023), while comparable findings from Kenya, South Africa, and Ghana confirm a consistent link between working capital efficiency and manufacturing-sector performance (Enow & Brijlal, 2022; Mensah, Boateng & Owusu, 2023).

Short term assets and liabilities management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. It deals with current assets and current liabilities. For a typical manufacturing firm, current assets often account for over half of total assets, and excessive levels of current assets can result in a substandard return on investment, while firms with too few current assets may incur shortages and difficulties in maintaining smooth operations. Recent Nigerian evidence supports this concern directly: Okonkwo and Ahmed (2023) found that approximately 65% of listed manufacturing companies in Nigeria struggle with suboptimal working capital management practices, a problem associated with reduced profitability and, in some cases, operational discontinuity.

Efficient short term assets and liabilities management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short-term obligations on the one hand, and avoids excessive investment in these assets on the other hand. With regard to current liabilities, the firm is responsible for paying these obligations on a timely basis, and liquidity for the ongoing firm depends on operating cash flows rather than the liquidation value of its assets. Taken together, decisions on the level of different working capital components become frequent, repetitive, and time-consuming, and remain a sensitive area in financial management. It involves the decision of the amount and composition of current assets and the financing of these assets. Current assets include all those assets that, in the normal course of business, return to the form of cash within a short period ordinarily within a year or are readily convertible to cash upon need. The short term assets and liabilities of a firm therefore partly determine its profitability.

The ultimate objective of any firm is to maximize profit; however, preserving liquidity is also an important objective, and increasing profits at the cost of liquidity can bring serious problems to the firm. There must, therefore, be a trade-off between these two objectives, since neglecting profit threatens the firm's survival while neglecting liquidity exposes it to insolvency or bankruptcy risk. This liquidity-profitability trade-off is well established in the literature: working capital management theory itself rests on the premise of a trade-off between a firm's liquidity and its profitability (as discussed in Becerra et al., 2022, and reflected in recent dissertation-level reviews of working capital management strategy). For these reasons, working capital management should be given proper consideration, as it ultimately affects the profitability of the firm.

Firms may have an optimal level of working capital that maximizes their value. A large inventory and a generous trade credit policy may lead to high sales: a larger inventory reduces the risk of a stock-out, and trade credit may stimulate sales because it allows customers to assess product quality before paying. A further component of short-term assets and liabilities, popularly called working capital, is accounts payable. Delaying payments to suppliers allows a firm to assess the quality of purchased goods and can be an inexpensive, flexible source of financing, although late payment of invoices can be costly if a discount for early payment is foregone. A popular measure of working capital management is the cash conversion cycle the time lag between expenditure on raw materials and collection of sales of finished goods. The longer this time lag, the larger the investment in working capital. A longer cash conversion cycle might increase profitability because it leads to higher sales; however, corporate profitability might also decrease with the cash conversion cycle if the costs of higher investment in working capital rise faster than the benefits of holding more inventory or granting more trade credit. Recent Nigerian studies illustrate this mixed picture: a panel study of consumer goods manufacturing firms listed on the Nigerian Exchange found a positive but statistically insignificant effect of the cash conversion cycle on both return on assets and return on equity (Iiardjournals study on consumer goods firms; Adekoya & Oyewumi, 2023; Ademola & Adebayo, 2022), while other Nigerian evidence has found a significant negative relationship between cash conversion cycle components and profitability, depending on sector and measurement period (Muhammad Danyadado & Jinjiri, 2022).

Studies in corporate finance are customarily considered as the study of long-term financial decisions provision of long-term assets, and share and dividend policies. However, topics in short-term assets and liabilities finance are no less significant in developing an efficient corporate financial strategy, in Nigeria and elsewhere. Despite the vital role that short-term assets and liabilities management plays in increasing the shareholders' value of a firm, this area remains comparatively under-researched relative to Western literature, particularly in the Nigerian context (Oladipo & Okafor, 2023). This study, therefore, aims to provide an empirical analysis of the impact of short-term assets and liabilities management on the profitability of manufacturing firms in Nigeria.

1.2 Statement of the Problem

It appears that in Nigeria, short term assets and liabilities management is relatively neglected, despite the fact that a high proportion of business failures is attributable to poor decisions concerning the short-term assets and liabilities of firms. A poor decision in this regard could result in insolvency, a high gearing ratio, or loss of growth potential, among other consequences. The inefficient management of accounts receivable among Nigerian manufacturing firms, for instance, has been linked to significant cash flow problems, with some companies experiencing collection periods that substantially exceed industry norms; one comprehensive study found that poor receivables management alone accounted for a notable reduction in return on assets among sampled manufacturing firms (Yakubu et al., 2023).

Important theoretical developments in finance over the past decade have provided the potential for improved decisions in business organisations; however, these developments have not been applied uniformly across all areas of financial decision-making within and between organisations. In a perfect business world, working capital assets and liabilities would not be necessary, since there would be no uncertainty, no transaction costs, and no scheduling constraints. Firms would borrow and lend at the same interest rate, and capital, labour, and product markets would reflect all available information and be perfectly competitive. In such an ideal world there would be little need to hold inventory beyond goods in process, no need to hold cash beyond initial costs, and no need for receivables or payables. However, because these ideal assumptions are never realistic, short-term assets and liabilities make up a significant part of a firm's investment in assets, implying that such investment carries both benefits and costs.

Short term assets and liabilities investments and related short-term finance decisions originate from three main business operations purchasing, producing, and selling and can be regarded as consequences of these operations. At the same time, the levels of short-term assets and liabilities determine the cost and flexibility with which these operations are performed. Efficient management of short-term assets and liabilities can therefore make purchasing, producing, and selling cheaper and more flexible, serving as an instrument for managing business operations that generate both benefits and costs. The relevance of working capital investment and short-term debt therefore stems from these benefits and costs, and efficient management of both can meaningfully support firms in generating value a conclusion borne out by recent Nigerian evidence linking working capital management to firm value among listed manufacturing companies (Abata & Migiro, 2023; Akinleye & Salami, 2024).

1.3 Objectives of the Study

The main objective of this study is to assess the impact of short term assets and liabilities on the profitability of Nigerian firms. In line with this broad objective, the specific objectives of this study are to:

1. Assess the impact of receivable periods on the profitability of manufacturing firms in Nigeria.

2. Evaluate the impact of inventory management on the profitability of manufacturing firms in Nigeria.

3. Determine the impact of the cash conversion cycle on the profitability of manufacturing firms in Nigeria.

1.4 Research Questions

In line with the specific research objectives of this study, the following research questions are posed:

1. To what extent does the receivable period of Nigerian firms have an impact on the profitability of manufacturing firms in Nigeria?

2. To

what extent does the inventory management of Nigerian firms have an impact on the profitability of manufacturing firms in Nigeria?

3. To what extent does the cash conversion cycle of Nigerian firms have an impact on the profitability of manufacturing firms in Nigeria?

1.5 Hypotheses of the Study

As a follow-up to the research questions raised above, the following hypotheses will be tested in this study:

1. Receivable

periods of Nigerian firms do not have a positive and significant impact on the profitability of manufacturing firms in Nigeria.

2. Inventory turnover ratio of Nigerian firms does not have a positive and significant impact on the profitability of manufacturing firms in Nigeria.

3. Cash conversion cycle of Nigerian firms does not have a positive and significant impact on the profitability of manufacturing firms in Nigeria.

1.6 Scope of the Study

The study covers the period 1999-2012. The choice of 1999 as a base year is predicated on the period of uninterrupted democratic rule in Nigeria. The manufacturing sector of any economy succinctly represents the engine of that economy and one of the most powerful drivers of economic growth, and since 1999 the Nigerian government has been at the forefront of efforts to transform the economy. The manufacturing sector acts as a mechanism that transforms an economy's structure from simple, slow-growing, low-value activities into more productive, higher-margin, technology-driven activities with greater growth prospects. With rapid technological change and the increasing fragmentation and internationalization of production, manufacturing has become a key means for developing countries to benefit from globalization and narrow the income gap with industrialized economies. This study will therefore examine the impact of firm-specific, internally controlled activities that is, short term assets and liabilities on the profitability of Nigerian firms since the beginning of sustained democratic rule in Nigeria.

1.7 Significance of the Study

The study will be of immense benefit to the following groups:

1. Management of Nigerian Firms

Each working capital item cash, receivables, and inventories assists the management of firms in its own particular way. Cash keeps the firm liquid enough to meet obligations as they fall due, protecting it from bankruptcy; under-investment in cash carries the danger of being unable to repay short-term and long-term debts when due, while every business also needs adequate cash levels to maintain day-to-day operations. The findings of this research will therefore benefit management in the day-to-day running of their businesses.

2. Investors and Potential Investors

The benefits firms derive from an increased volume of working capital do not come without costs. Investment in working capital is expensive: the more funds tied up in working capital assets, the higher the cost of that investment. Over-investment in cash, receivables, and inventories ties up capital and results in the opportunity cost of lost profits for example, surplus cash held in a current account attracts service charges while generating little return, and over-investment in receivables can result in uncollectable debts. Investors and potential investors therefore stand to benefit from the findings of this research.

3. Academia

Although the study of short term assets and liabilities management also known as working capital management is well established internationally, comparatively little literature exists on the subject in the Nigerian context. This study will therefore contribute to the existing body of literature on short term assets and liabilities management in Nigeria, complementing recent contributions such as Adegbite and Lawal (2023) and Akinleye and Ogunlana (2025).

1.8 Operational Definition of Terms

The following terms are defined as they relate to this research:

Insolvency: This is a state of being unable to meet cash obligations as and when due, as a result of a lack of cash (funds).

Gearing: This refers to the contribution of outsiders, or the volume of debt contributed by outsiders, to the business operations of the firm.

Growth Potentials: The ability of a firm to continually increase sales, which has the potential to translate into higher turnover and increased profitability.

REFERENCES

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