ABSTRACT
Working capital management plays a vital role in improving
the financial performance of companies. The purpose of the study is to analyze
the effects of working capital management on the financial performance of
pharmaceutical companies in Ghana. For this reason Pearson correlation and
regression were used to analyze the secondary data in the form of annual
financial report were obtained from the pharmaceutical companies for a period
of eleven years (2005-2015). The study measured financial performance using
Return on equity and Return on assets. The study used Rate of stock turnover,
Average collection period, Current ratio, Firm size and Average payment period
as the independent variable. The study found negative relationship with average
collection period, firm size and rate of stock turnover and found a positive
relation with current ratio and average payment period. However, firm size,
average collection period were statistically significant. The results indicate
that there was 22.5% and 9.8% of the variation in Return on assets (ROA) and
Return on equity (ROE) as the dependent variable explained by the independent
variables of Rate of stock turnover (ROST), Average collection period(ACP),
Current ratio (CR), Firm size (FS) and Average payment period(APP). Based on
the results from the study it concludes shareholders can create value for their
wealth by reducing average collection period and delay payment for creditors.
Managers of pharmaceutical companies must employ staffs with qualified
expertise and experience to manage their working capital to improve their
liquidity level and operations.
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Pharmaceutical industry in Ghana plays a vital role in
manufacturing, importing and distributing of quality and affordable drugs aimed
at improving the health care delivery system in the country. Government has
provided incentive to boost the pharmaceutical industry such as exemption in
payment of custom duty on all raw and packaging materials for the local
production of pharmaceuticals. Local produced pharmaceuticals are zero rated
under the Value Added Tax (VAT) law, despite incentives from Government; the
industry faces several constraints such as low capacity utilization,
undercapitalization, weak financial base and high cost of inputs.
These challenges have necessitated the management of working
capital to improve the financial performance of the pharmaceutical industry;
however, the economic theory of firms requires that firm’s resources should be
utilized efficiently in order to achieve economic success. Firm’s resources are
broadly classified into two, long term assets (non-current assets) and short
term assets (current assets).
Working capital management refers to investment in current
assets and current liabilities which are liquidated within one year or less and
is therefore crucial for firm’s day to day operations (Kesimli & Gunay,
2011). The components of working capital include cash, marketable securities,
account receivables, inventories and account payable. Firms fail mostly because
they are not able to meet their working capital needs; consequently, sound
working capital management is a requisite for firm’s survival (Deloof, 2003).
Working capital is very important to a firm’s survival which
is setting up and requires focus, adequate planning and management, since
resource available to the firms is scare, management of working capital plays a
vital role in the achievement of profitability and overall performance of such
firm.
1.2 STATEMENT OF THE PROBLEM
Company financial performance is very essential to
management; a financially stable company attracts investors both locally and
abroad. It is also very easy for a financial stable company to obtain loans for
development hence its growth. Well managed working capital is crucial to the
running of a healthy and successful business. Good working capital ensures that
the cash available to a business always exceed its current liabilities.
Stephen (2012) documents evidence that most business
organizations do not hold the right amount of stocks, debtors and cash; as a
result of which the firms are unable to meet their maturing short term
obligations and its upcoming operational needs. Similarly, insufficient working
capital means that a firm is unable to undertake expansion projects and
increase its sales, therefore limiting the growth and financial performance of
the business. These are particularly the symptoms revealed by the Ghana pharmaceutical
firms in the recent times, as majority of pharmaceutical firms in Ghana have
exhibited dwindling returns as well as poor financial performance.
Pharmaceutical companies handle 500-600 types of products that include huge raw
materials coupled with the high purity of items required making working capital
management difficult.
Moreover, Report from the Ghana Standard Board (2015) showed
that drug manufactures in Ghana are faced with several constraints, including
low capacity utilization, under capitalization, a weak financial base, high
production costs as a result of the high cost of inputs and unstable demand among others. Other research have focused on how
reduction of working capital improves a firm’s profitability (Shin &
Soenen, 1998; Deloof, 2008; Raheman & Nasr, 2007; Samiloglu, 2008;
Zariyawati, 2009; Falope & Ajilore, 2009; Dong & Su, 2010; Sharma &
Kumar, 2011. However, the inefficient management of working capital components in
the pharmaceutical companies in Ghana and also no known studies have focus
their attention on working capital management and its effects on financial
performance and this constitute the problem of the study.
In summary, working capital management is a frequent area of
research in finance and accounting but very little research have been done on
pharmaceutical firms, most of these studies concentrated on a single working
capital component and the study are mostly from the developed economy, where
the market mechanisms and the business environment significantly differ from
Ghana. Therefore, this study will examine the effect of working capital
management on the financial performance of pharmaceutical companies in Ghana.
1.3 Purpose of the Study
1.3.1 General Purpose
of the Study
The purpose of this study is to determine the effects of
working capital management on the financial performance of listed
pharmaceutical companies in Ghana.
1.3.2 Research
Objectives
Analyze the effect of average collection period on the
financial performance of pharmaceutical firms in Ghana.
Examine the impact of rate of stock turnover on the financial
performance of pharmaceutical firms in Ghana.
Assess the effect of average payment period on the financial
performance of the pharmaceutical firms in Ghana.
Test the effect of firm size on the financial performance of
pharmaceutical firms in Ghana.
Examine the effect of current ratio on the financial
performance of pharmaceutical firms in Ghana.
1.4 Research Hypotheses
In line with the objectives of the study, the following
hypotheses have been formulated:
H01: Average collection period has no significant effect on
the financial performance of pharmaceutical companies in Ghana.
H11: Average collection period has a significant effect on
the financial performance of pharmaceutical companies in Ghana
H02: Average payment period has no significant effect on the
financial performance of pharmaceutical companies in Ghana.
H12: Average payment period has a significant effect on the
financial performance of pharmaceutical companies in Ghana.
H03: Rate of stock turnover has no significant effect on the
financial performance of pharmaceutical companies in Ghana.
H13: Rate of stock turnover has a significant effect on the
financial performance of pharmaceutical companies in Ghana.
H04: Firm size has no significant effect on the financial
performance of pharmaceutical companies in Ghana.
H14: Firm size has a significant effect on the financial
performance of pharmaceutical companies in Ghana.
H05: Current ratio has no significant effect on the financial
performance of pharmaceutical companies in Ghana.
H15: Current ratio has a significant effect on the financial
performance of pharmaceutical companies in Ghana.
1.5 Significance of the Study
The critical role of working capital management is playing in
the short-term liquidity position and the recent crises of credit and liquidity
make this study a necessity. Therefore, this study is significant in revealing
the effect of working capital components on the financial performance of
pharmaceutical companies in Ghana. The study finding is expected to be of
useful benefit to Shareholders (as owners), Management, Creditors, Researchers
and Regulators or policy makers of pharmaceutical companies in Ghana.
1.6 Delimitations
The research is delimited to study the effects of working
capital components on the financial performance of pharmaceutical companies in
Ghana. It will have help explore the study if the research had also recognized
other pharmaceutical companies not listed on the Ghana stock exchange. The
sampling units of this research is delimited to 37 pharmaceutical in Ghana, however, the sampling size is delimited to ten(10)
pharmaceutical companies of which three(3) are listed on the Ghana stock
exchange and remaining seven(7) are unlisted. The research method is delimited
to quantitative method with descriptive and inferential statistics.
1.7 Limitations
The findings of this research is limited to only ten (10)
pharmaceutical companies of which three(3) are listed on the Ghana Stock
Exchange and seven(7) of the remaining ten are not listed because of lack of
secondary data from pharmaceutical companies not listed on Ghana Stock
Exchange.
1.8 Organization of study
The study will be structured into five chapters as follow.
Chapter one represents the introduction chapter which comprises; background of
the study, statement of the problem, objectives of the study, research
questions/hypothesis, significance of the study and finally the scope and
organization of the study. Chapter Two reviews both theoretical and empirical
literature on Working Capital Management and Financial Performance. Chapter
Three also presents methodology of the study. It includes the study design,
population and sampling, data collection methods, data collection procedures,
and data analysis. Chapter four then presents findings and interpretations. It
also discusses the findings relative to the literature. Chapter Five finally
presents summary, conclusions and recommendations based on the study. The
limitations and recommendations for further studies were also included in this
chapter.
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