DEBRE BERHAN UNIVERSITY COLLEGE OF BUSINESS & …

DEBRE BERHAN UNIVERSITY

COLLEGE OF BUSINESS & ECONOMICS

DEPARTMENT OF ACCOUNTING & FINANCE

Working Capital Management Practice

(With Special Reference to Manufacturing Companies in North Shewa Zone)

A Thesis Submitted to Debre berhan University Department of Accounting and

Finance in Partial Fulfillment of the Requirements for the Degree of Master of

Science in Accounting and Finance

By: - Getiye Mamo

Advisor: -

Kidanie kerebih (PhD)

JUNE, 2019 G.C.

DEBRE BERHAN, ETHIOPIA

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DECLARATION

I, the undersigned, declare that this thesis is my original work and it has never been presented

in any university. All sources and materials used for this thesis have been duly acknowledged.

Name: Getiye Mamo Woldeyohannes Signature______________

Place: Debrebirhan University

Date of Submission: June 14, 2019

This master thesis, has been submitted for examination with my approval as thesis

Advisor Name: Kidanie kerebih (PhD)

Signature_______________________ Date___________________________

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CERTIFICATE

This is to certify that the thesis entitled, Working Capital Management Practice (With Special

Reference to Manufacturing Companies in North Shewa Zone) was carried out by Getiye Mamo

Woldeyohannes under the supervision of Kidanie kerebih(PhD), submitted in partial

fulfillment of the requirements for the degree of Master of Science in Accounting and Finance

complies with the regulations of the University and meets the accepted standards with respect to

originality and quality.

Approved by:

Internal examiner: Signature Date ___________

External examiner: Signature Date ___________

Advisor: Kidanie kerebih (PhD) Signature Date ___________

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ACKNOWLEDGEMENT

In the List of expressing gratitude God always come first for his help in all my steps. I have

taken efforts in this Thesis. However, the success and final outcome of this thesis required a lot

of guidance and assistance from many people and I am grateful to all who provided assistance in

writing this research paper. Specially to my Advisor Dr. Kidanie Kerebih (PhD), who gave me

guidance in essential comments and corrections which are important in my pursuit of a Master‘s

degree & a research project, And My Brother Mr. Hailye Tadesse (ACCA, CIA, MSc.) for his

professional assistance in selecting research titles & over all consulting, and my best friend

Isayias Fikre for his material & financial support. At the last but not least my thanks go to DBU

for the Academic Sponsorship.

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ABSTRACT

The purpose of the study was to investigate working capital management practice of

manufacturing companies in north Shewa zone. Both theoretical and empirical review of WCMP

related literatures were used to clearly identify and understand the concerned issue of this

research. The target population of the study was 136 employees of 34 manufacturing companies,

and they have been purposively selected as respondents. Purposive sampling method was

selected as a sampling technique to distribute the designed questionnaire for purposively

selected sample respondents. The collected primary data have been coded and entered in to

statistical package for social science (SPSS) version 20 for analysis and results of the analysis

were presented using frequencies, percentages and tables. Results of the analysis show that

manufacturing companies in NSZ give accelerating collection of cash from credit customers the

at most importance in their working capital management practice. Management of companies

also allotted much of their time for working capital management decisions with the objective of

achieving liquidity, profitability and efficient use of current assets, considering cash as a highly

sensitive current asset. It was also found that there is no practice by which companies can invest

their idle cash on convertible securities. The study revealed that most of the companies do not

carry out age analysis of inventories & receivables, and do not use such reports as input for

decision makings at the top. There is also a limitation on having a written working capital &

credit policy. Many of the companies failed in assigning a responsible personnel & having

written working manuals for each component working capital management practice. Thus, to

strengthen the best practices and overcome the constraints, the study recommended that the

companies should have a written working capital & credit policy, and assign responsible

personnel for each WCM components, and make them well equipped with a full of working

manuals to achieve better working capital management practice.

TABLE OF CONTENTS

DECLARATION.............................................................................................................................................. I

CERTIFICATE ............................................................................................................................................... II

ACKNOWLEDGEMENT ............................................................................................................................ III

ABSTRACT ................................................................................................................................................... IV

TABLE OF CONTENTS ............................................................................................................................. VI

LIST OF ACRONYMS ................................................................................................................................ IX

LIST OF TABLES .......................................................................................................................................... X

CHAPTER І: INTRODUCTION ................................................................................................................... 1

1.1. Background of the study .......................................................................................................... 1

1.2. Statement of the problem ......................................................................................................... 2

1.3. General Objectives of the study ............................................................................................... 3

1.4. Specific objectives of the study ............................................................................................... 4

1.5. Research Questions .................................................................................................................. 4

1.6. Significance of the study .......................................................................................................... 4

1.7. Scope and Limitation ............................................................................................................... 5

1.8. Organization of the paper ......................................................................................................... 5

CHAPTER ІІ: REVIEW OF RELATED LITERATURE .......................................................................... 6

2.1 Introduction .............................................................................................................................. 6

2.2 Theoretical review of literature ................................................................................................ 6

2.2.1 Concepts of Working Capital ........................................................................................................ 7

2.2.2 Working capital Management practice .......................................................................................... 8

2.2.2.1 Cash management and short term securities.................................................................................. 8

2.2.2.2 Account receivable management ................................................................................................. 10

2.2.2.3 Inventory management ................................................................................................................ 10

2.2.2.4 Accounts Payables management ................................................................................................. 11

2.2.3 Metrics used in WCMP. .............................................................................................................. 12

2.2.4 Working capital management policies ........................................................................................ 13

2.3 Empirical literature review on working capital management Practice .................................. 14

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CHAPTER ІІІ: RESEARCH DESIGN AND METHODOLOGY ............................................................ 19

3.1. Introduction ............................................................................................................................. 19

3.2. Research Design...................................................................................................................... 19

3.3. Target Population .................................................................................................................... 19

3.4. Sampling technique ................................................................................................................. 19

3.5. Sample Size ............................................................................................................................. 20

3.6. Source and type of data ........................................................................................................... 20

3.7. Method of Data Collection ...................................................................................................... 20

3.8. Validity of the Instrument ....................................................................................................... 21

3.9. Method of data analysis .......................................................................................................... 21

CHAPTER IV: DATA ANALYSIS, RESULTS AND DISCUSSION ....................................................... 22

4.1 Introduction ............................................................................................................................ 22

4.2 Response rate ......................................................................................................................... 22

4.3 Reliability of the Instrument .................................................................................................... 22

4.4 Respondents‘ Profile .............................................................................................................. 23

4.5 Assessment of working capital management practice ........................................................... 25

4.5.1. Relevance of working capital management ................................................................................... 25

4.5.2. Management of Cash and short-term securities ............................................................................. 30

4.5.3. Management of Accounts Receivable ............................................................................................ 35

2.3.1.1 Inventory Management Practice .................................................................................................. 41

2.3.1.2 Account payables Management Practice ..................................................................................... 50

4.5 Working capital management policy ..................................................................................... 53

CHAPTER V: CONCLUSIONS AND RECOMMENDATION .............................................................. 56

5.1 INTRODUCTION ................................................................................................................. 56

5.2 CONCLUSIONS.................................................................................................................... 56

5.3 RECOMMENDATION ......................................................................................................... 58

5.4 SCOPE FOR FUTURE RESEARCH .................................................................................... 59

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REFERENCE ................................................................................................................................................. 60

Appendix -1: Questionnaire .......................................................................................................................... 62

Appendex-2: List of NSZ manufacturing industries on production. ........................................................ 69

Appendex-3: Cronbach’s alpha reliability statistics ................................................................................... 71

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LIST OF ACRONYMS

A: Agree

CCC: Cash Conversion Cycle

D: Dis Agree

DBU: Debre Birhan University

DIO: Days Inventory Outstanding

DPO: Days Payables Outstanding

DSO: Days Sales Outstanding

GWC: Gross Working Capital

H: High

ITID: Inventory turnover ratio in days

L: Low

N: Neutral

N.D: no date

NSZ: North Shewa Zone

NTC: Net trade cycle

NWC: Net Working Capital

SA: Strongly Agree

SD: Strongly Disagree

VH: Very High

VL: Very Low

WC: Working Capital

WCM: Working Capital Management

WCMP: Working Capital Management practice

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LIST OF TABLES

Table 1: Questionnaire Response Rate

Table 2: Cronbach's Alpha Reliability Statistics

Table 3: Job title of respondents

Table 4: Work experience of respondents

Table 5: Educational level of respondents

Table 6: Importance of working capital management practice

Table 7: Time allotted to financial management decisions

Table 8: Objective of Working Capital Management practice

Table 9: Highly sensitive Current asset(s) of the Company

Table 10: Metrics applied in working capital management practice

Table 11: Level of working capital management practice

Table 12: Objective of cash management practice

Table 13: Method used in determining target cash balance

Table 14: Cash Management Responsible personnel and written working manual

Table 15: Level of Cash & short term securities management practice

Table 16: Basis for selling Products to Customers

Table 17: Motives to sell on Account

Table 18: Techniques used to Assess Customers‘ Creditworthiness

Table 19: Techniques Used to Monitor Payment behavior of Customers

Table 20: Experience to the change in credit policy

Table 21: Long-outstanding receivables and producing Age Analysis

Table 22: Accounts Receivable Management Responsible personnel and written working manual

Table 23: Techniques used in monitoring the level of Inventory

Table 24: Techniques employed in Replenishing Inventory

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Table 25: Factors considered in Inventory purchase

Table 26: Factors considered in production of Inventory

Table 27: Criteria to change in Inventory policy

Table 28: Frequency of Inventory counting period

Table 29: Type of Inventory

Table 30: Level of Inventory use & hold practice

Table 31: Inventory Management Responsible personnel and written working manual

Table 32: Thoughts on Inventory Management Practice of the Company

Table 33: Credit policy

Table 34: Paying short-term debt earlier and brings cash discount with it

Table 35: Advantage associated with the company‘s account payables

Table 36: Estimated Annualized cost of trade credit

Table 37: Account payables Management Practice Responsible personnel and written working manual

Table 38: Over all working capital management policies

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CHAPTER І: INTRODUCTION

1.1. Background of the study

Efficient working capital management practices, particularly in manufacturing firms is vital and

contribute a lot for wealth maximization goal of such firms. According to Horne and Hachowicz

(2009) the current assets of a typical manufacturing firm account for over half of its total assets and

thus it is important to use such resources efficiently.

Working capital mainly represents the current assets of a firm which is the portion of financial

resources of business that changes from one type of resources to another during the day-to-day

execution of business. Current assets comprise of cash, prepaid expenses, short-term investments,

accounts receivable, inventory and other current assets.

Net working capital can be measured by deducting current liabilities of a firm from its current assets.

If the value of current assets is less than that of current liabilities, then net working capital would

have a negative value showing a deficit working capital. When a business entity takes the decisions

regarding its current assets and current liabilities then it can be termed as working capital

management (Gitman, 2002).

according to Farounbi (2005), working capital refers to the amount of capital, which is readily

available to an organization, that is, the difference between resources in cash or readily convertible

into cash (current assets) and the organizational commitments for which cash will soon be required

(current liabilities). Working capital simply means the resources which a firm has at hand to run its

daily operations. It provides a measure of business‘s liquidity, or its ability to meet its short term

obligations as they come due (Emery et al., 2004).

An optimal working capital management practice is expected to contribute positively to the creation

of firm value. to reach optimal working capital management firm manager should control the tradeoff

between liquidity (ability to pay bills, keep sales coming in, keep customers happy, play it safe) and

profitability (size of earnings after taxes) accurately. Working capital management is the lifeblood of

business and every manager's primary task is to help keep it flowing and to use the cash flow to

generate profits. Working capital in business is considered as lifeblood in human body (Deloof,

2000).

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A financial manager in any organization has to play three functions. These functions are (i) the

management of long-term assets, (ii) the management of long-term capital and (iii) the management of

short-term assets and liabilities. The management of short term assets and liabilities refers to

management of Working Capital (Khan, 2002). To produce the best possible returns, the firm should

keep no unproductive assets and should finance with the cheapest available sources of funds. In general,

it is often advantageous for the firm to invest in short-term assets and to finance with short-term

liabilities (Scherr, 2007).

Efficient management of WC include preparation and controlling of current asset and existing liabilities

in a way that minimize the danger of incapability of a firm to meet up due near future debt and to keep

away from too much investment in these asset (Eljelly, 2004). Cash decline affects the company‘s.

Potential to finance operation, reinvest and meet up with capital requirements and payments. It requires

that whenever WC‘s go down too low, such business may be at risk; this is why it is very essential for

company to have effective management of WC to keep its financial system alive.

Management of working capital can also be defined as an accounting approach that emphasize on

keeping proper levels of both current assets and current liabilities. It provides enough cash to meet the

short-term obligations of a firm and besides this the management also plays an important role in

maintaining the financial health of the firm during the normal course of action (Gitman, 2002).So that

the focus of this study is on working capital management practice of manufacturing companies in North

Shewa Zone.

1.2. Statement of the problem

Working Capital Management includes keeping optimum balance of working capital components such

as receivables, inventory and payables and using the cash efficiently for day-to-day operations.

Optimization of working capital balance means minimizing the working capital requirement and

realizing maximum possible revenues (Ganesan, 2007).

The aim of WCM is to sustain the optimum balance of all components of working capital; therefore, it

is hugely necessary for companies to monitor overall trends so as to detect areas that necessitate closer

management. In achieving this, different methods and strategies are applied to effectively control each

component of working capital. For firms to minimize risk, effectively prepare for uncertainty and

improve on overall performance, the core working capital drivers and the appropriate level of working

capital must be understood (Harris, 2005).

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Working capital management practice is an important issue in any organization. Without a proper

management of working capital components, it‘s difficult for companies to run their operations

smoothly. That is why Brigham and Houston (2003) mentioned that about 60 percent of a typical

financial manager‘s time is devoted to working capital management. Hence, the crucial part of

managing working capital is maintaining the required liquidity in day-to-day operation to ensure firms

smooth running and to meet its obligation (Eljelly, 2004). Effective management of cash, inventory,

receivables, payables and credit releases funds for other purposes since the unnecessary investment in

working capital leads to decreasing returns (Filbeck & Kreuger, 2004).

Shortage of working capital is normally attributed as a major cause of failure of many small businesses

in various developing and developed countries (Rafuse, 1996). Effective management of working

capital consists of two steps which are planning for resources and controlling them. Both of these are

required to facilitate the firm in meeting its short term obligations and also to let the firm avoid wastage

of resources by over investment in current assets (Eljelly, 2004). Effective management of working

capital decreases the need for lending funds to pay back the short term debts of the firm.

Egbide (2009) discovered that large number of business failures in the past has been blamed on the

inability of the financial manager to plan and control the working capital of their respective firms. These

reported inadequacies among financial managers are still practiced today in many organizations in the

form of high bad debts, high inventory costs etc., which adversely affect their operating performance.

To contribute a lot for profit and wealth maximization goal, the practice is so crucial. Ross et al (2003)

discussed that profitability is the result of different practices and policies. To the extent of the existing

body of knowledge, only few studies like Derese and Abiy (n.d) surveyed the working capital

management practices in case of business enterprises of Jimma town in Ethiopia. Hereafter, to the best

of the researcher knowledge researchers have paid little attention on working capital management

practices of manufacturing companies especially in study area. Therefore, the issue is almost untouched

and there is a knowledge gap on the WCM practice. Hence, this study aimed at assessing the WCMP of

manufacturing companies in North Shewa Zone.

1.3. General Objectives of the study

The general objective of the study is to investigate working capital management practice of

manufacturing companies in North Shewa Zone.

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1.4. Specific objectives of the study

The specific objectives of the study are;

1. To assess current asset management practice of manufacturing companies in NSZ.

2. To evaluate current liability management practice of manufacturing companies in NSZ.

3. To identify the working capital policies implemented by manufacturing industries in NSZ.

4. To suggest best working capital management practice to enhance the operating performance

of manufacturing companies

1.5. Research Questions

After reviewing the available literature in line with the objective of the study, the following research

questions are framed to identify working capital management practices of manufacturing companies.

These are;

1. What are current assets management practices of existing manufacturing companies in north

shewa zone?

2. What are current liability management practices of existing manufacturing companies in north

shewa zone?

3. What is/are the working capital policy/policies implemented by the selected manufacturing

industries in north shewa zone?

4. What is the best working capital management practice to enhance the operating performance of

manufacturing companies?

1.6. Significance of the study

Since the study was conduct on working capital management practice of manufacturing companies in

North Shewa Zone, it is expected to add to the existing body of knowledge and information in the area

of working capital management. In addition, the result of the study will benefit managers of

manufacturing companies, especially Investment projects on production; to identify the weaknesses, to

solve the problem, and to improve their operation with a particular emphasis of working capital

management on practice. Further, even though there are some studies that have been conducted on the

topic ―working capital management practice‖ schemes that targeted different manufacturing firms in

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Ethiopia, so far, this study believed to be relevant to the fast growing manufacturing industries in NSZ

to look for more effective solutions for the problems regarding their practice of working capital

management. Finally, the study has valuable importance for further study and adds new idea to the

existing knowledge.

1.7. Scope and Limitation

The study is delimited to the working capital management practice of manufacturing industries such as:

relevance and objective of working capital management practice, cash and short term securities, account

receivable inventory, and accounts payable management, Metrics used in working capital management

practice and working capital management policies. The study covered only the manufacturing

companies in NSZ, which are on production status in 2018/19 G.C.

1.8. Organization of the paper

The research paper organized in five chapters. The first chapter deals with introduction such as;

background of the study, statement of the problem, objectives of the study, research questions,

significance of the study, and scope and limitation of the study. in the second chapter, different

theoretical and empirical literatures that relates to the topics of the study reviewed and presents. in the

third chapter, the research design and methodology including the target population and sampling

procedure, data and data collection instrument, data analysis & research method adopted, techniques

used in data collection and analysis will present. Then, the fourth chapter will discuss the results and

analysis of the findings of the study. Finally, the fifth chapter will provide the conclusion and

recommendation for the study according to the findings including further consideration.

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CHAPTER ІІ: REVIEW OF RELATED LITERATURE

2.1 Introduction

Working capital management practice is the management of company‘s short-term assets and short-term

liabilities. It intends to guarantee the sufficient ability of the company to continue its activity and to face

operational expenses. More explicitly, the working capital is the investment required from the time lag

between the purchase cost of raw materials and the sale of finished products. Its management involves

accounts receivable and payable, inventories and cash. Thus, the non-synchronous nature of flows

makes managing working capital essential for understanding liquidity needs (Deloof, 2003).

The purpose of this part is to assess different literature reviews made on the WCMP therefore, it

consists the theoretical part of the study, the empirical studies made by different researchers, the

conclusion and knowledge gap identification, and the conceptual frame work of the study and all this

section will be presented accordingly.

2.2 Theoretical review of literature

The term working capital originated with the old Yankee peddler, who would load up his wagon with

goods and then go off on his route to peddle his wares. The merchandise was called working capital

because it was what he actually sold, or turned over, to produce the profits. The wagon and horse were

the fixed assets. The peddler generally owned the horse and wagon so, they are financed with equity

capital. But, he borrowed the funds to buy the merchandise. These borrowing were called working

capital loan, they had to be repaid after each trip to demonstrate to the bank that the credit was sound. If

the peddler was able to repay the loan, then the bank would make another loan, and banks that followed

this procedure were said to be employing sound banking practices (Brigham and Gapenski, 2003).

Working capital is the capital that managers can immediately put to work to generate the benefits of

capital investment. Working capital is also known as current capital or circulating capital (Fabozzi &

Peterson, 2003). The objective of working capital management is to make certain that the firm is able to

carry on its operations and that it has enough cash flow to satisfy both maturing short-term debt and

upcoming operational expenses. In order to improve the working capital management practices, it is

essential for the finance managers to adopt a proper approach of working capital decisions making to

drive their respective firms towards success in order to generate the value for the shareholders (Ali,

2009).

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The effective working capital management is very important because it affects the performance and

liquidity of the firms (Taleb et al., 2010). The main objective of working capital management is to reach

optimal balance between working capital management components (Gill, 2011). The efficient

management of working capital is a fundamental part of the overall corporate strategy to create

shareholders value (Nazir & Afza, 2008). Therefore, firms try to keep an optimal level of working

capital that maximizes their value (Deloof, 2003).

2.2.1 Concepts of Working Capital

There are different phases of working capital; those are there are gross and net working capitals. Gross

working capital (GWC): Gross working capital generally deals with overall short term assets. It is also

the total cash, and cash equivalent that a business has on-hand to run the business.

Cash equivalents may include inventory, account receivable and investments on marketable securities;

which may be liquidated within the calendar year. Generally, gross working capital is simply called as

the total current assets of a firm (Paramasivan and Subramanian, 2009).

Net working capital (NWC): is the amount of assets or cash that remain after subtracting a company‘s

current liabilities which refers to the claims of outsiders which are expected to mature for payment

within an accounting year and include creditors for goods, bills payable, bank overdraft and accrued

expenses from its total current asset (Brealey and Myers, 2006).

This can be mathematically presented as:

Working capital = Current Assets – Current Liabilities

Current assets; - are assets which can be converted into cash within an accounting year (or operating

cycle) and include cash, short-term securities, debtors (accounts receivable or book debts) bills

receivable and Inventory (Pandey, 2007). Current assets contain all assets that are converted to cash

within a short timely basis. The company‘s liquidity depends on the operating cash flows generated by

those assets and not their value (Rahman and Nasr, 2007).

Current liabilities (CL); - are those claims of outsiders which are expected to mature for payment

within an accounting year and include accounts payable, bills payable, and outstanding expenses

(Pandey, 2007).

According to Brigham and Houston (2003) both (positive or negative NWC) aspects have equal

importance for management. Therefore, positive WC (CA > CL) focuses the attention on the optimum

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investment in and financing of the current assets, while negative Working Capital (CA < CL) indicates

the liquidity position of the firm and suggests the extent to which working capital needs may be

financed by permanent sources of funds.

2.2.2 Working capital Management practice

To efficiently practice and manage working capital, the company needs to direct its attention to the

major short-term assets; account receivable, inventories, cash, and short-term securities (Brealey, et al.,

2006 pp. 813). Those short term assets are discussed below;

2.2.2.1 Cash management and short term securities

Cash flows out of a firm as it pays for the goods and services it purchases from others. Cash flows into

the firm as customers pay for the goods and services they purchase. The writers refer cash as the amount

of cash and cash-like assets—currency, coin, and bank balances. When we refer to cash management,

we mean management of cash inflows and outflows, as well as the stock of cash on hand (Fabozzi and

Peterson, 2003).

According to Brealey et al., (2006 pp. 821-822). Cash can be compared to inventories as it is also

something of a raw material that the company needs to do business. It is very often comfortable for

companies to hold large quantities of idle cash for liquidity purposes or so that they do not have to raise

more capital at a short notice. The issue with holding too much cash at hand is the cost of capital. In

case the company can invest some of its cash into marketable securities, it can reduce its cost of capital

and gain return on their idle funds. The problem is that the company cannot invest all cash into

securities, as a transaction costs would raise too high. The larger the company, though, the more

minimal these transaction costs are in relation to the profit made from investing in the securities.

According to U.S. department of treasury financial management service, cash management made easy

guidebook; Cash management is the stewardship or proper use of an entity‘s cash resources. It serves as

the means to keep an organization functioning by making the best use of cash or liquid resources of the

organization. The function of cash management at the U.S. Treasury is threefold:

1. To eliminates idle cash balances. Every dollar held as cash rather than used to augment revenues or

decrease expenditures represents a lost opportunity. Funds that are not needed to cover expected

transactions can be used to buy back outstanding debt (and cease a flow of funds out of the Treasury for

interest payments) or can be invested to generate a flow of funds into the Treasury‘s account.

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Minimizing idle cash balances requires accurate information about expected receipts and likely

disbursements.

2. To deposit collections timely. Having funds in-hand is better than having accounts receivable. The

cash is easier to convert immediately into value or goods. A receivable, an item to be converted in the

future, often is subject to a transaction delay or a depreciation of value. Once funds are due to the

Government, they should be converted to cash-in-hand immediately and deposited in the Treasury's

account as soon as possible.

3. to properly time disbursements. Some payments must be made on a specified or legal date, such as

Social Security payments. For such payments, there is no cash management decision. For other

payments, such as vendor payments, discretion in timing is possible. Government vendors face the same

cash management needs as the Government. They want to accelerate collections. One way vendors can

do this is to offer discount terms for timely payment for goods sold.

The short term securities that the company can invest their liquid funds in are commercial papers,

bonds, mutual funds, corporate notes and mortgage-backed securities.

A company can monitor its cash needs through cash forecasting. Cash forecasting is analyzing how

much and when cash is needed, and how much and when to generate it. Cash forecasting requires

pulling together and consolidating the short-term projections that relate to cash inflows and outflows.

These cash flows may be a part of the capital budget, production plans, sales forecasts, or collection on

accounts. To understand the cash needs and generation, managers have to understand how long it takes

to generate cash once an investment in inventory is made. We‘re referring to the operating cycle—the

time it takes to make cash out of cash. If we consider cash disbursements, we get a better picture of the

net cash—the net operating cycle—the time it takes to make cash from cash plus the time we delay

payment on our purchases:

Net operating cycle = Operating cycle – Number of days of purchases

Estimating net operating cycle gives manager information on how long it takes to generate cash from

current assets. The longer the net operating cycle, the more cash needed on hand (Fabozzi and Peterson,

2003).

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2.2.2.2 Account receivable management

A company accrues account receivable when it sells its goods on credit. Depending on the payment

terms, the company might receive cash in weeks or even months. A company can manage its account

receivable by credit management. Meaning that decisions regarding terms of sale, credit analysis and

decision and collection policy have to be made. By, for example, improving the efficiency of collection,

the company can gain significant advantages in working capital. A too aggressive collection, though,

can affect the company‘s sales, and can create a conflict between sales and collection.

A company can also rely on factoring to shorten its cash cycle. Factoring means that the company sells

its receivables to a factor, which usually holds a percentage of the payable sum as interest (Brealey,

Myers, & Allen, 2006 pp. 814-819).

2.2.2.3 Inventory management

Inventory is the stock of physical goods for eventual sale and consists of raw material, work-in-process,

and finished goods available for sale. There are many factors in a decision of how much inventory to

have on hand. As with accounts receivable, there is a trade-off between the costs of investing in

inventory and the costs of insufficient inventory. There is a cost associated with holding to too much

inventory, and there is a cost associated with holding too little inventory (Fabozzi and Peterson, 2003 p.

545).

The decision to invest in inventory involves, ultimately, determining the level of inventory such that the

marginal benefit (such as providing for transactions and precautionary needs) equal the marginal cost

(such as carrying costs). The level of inventory at which the marginal benefits equal the marginal cost is

the owners‘ wealth maximizing level (Fabozzi and Peterson, 2003 p. 546).

Operating cycle is the time duration required to convert sales, after the conversion of resources into

inventories, into cash. The operating cycle of a manufacturing company involves three phases:

Acquisition of resources such as raw material, labour, power and fuel etc.

Manufacture of the product which includes conversion of raw material into work-in-progress into

finished goods.

Sale of the product either for cash or on credit. Credit sales create account receivable for

collection.

The length of the operating cycle of a manufacturing firm is the sum of:

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Inventory conversion period (ICP) + Debtors (receivable) conversion period (DCP)

Where; Inventory conversion period is the total time needed for producing and selling the product it

includes;

Raw material conversion period (RMCP)

Work-In-Process Conversion period (WIPCP)

Finished Goods Conversion Period (FGCP), (Pandey, 2007).

Companies can monitor its inventory by looking through its financial ratios like that of monitoring

receivables. Inventory turnover ratio in days (ITID) indicates the number of time the stock has been

turned over sales during the period and evaluates the efficiency with which a firm is able to manage its

inventory. This ratio indicates whether investment in stock is within proper limit or not. Therefore, the

ration is calculated by dividing inventory by cost of goods sold and multiplying with 365 days and

depicted as follows:

Inventory Turnover in Day (ITID) = Inventory / (Cost of sales/365)

In general, there is no rule of thumb or standard for interpreting the inventory turnover ratio. The norms

may be different for different firms depending upon the nature of industry and business conditions.

However, the study of the comparative or trend analysis of inventory turnover is still useful for financial

analysis (Brigham and Houston, 2003, p. 691).

2.2.2.4 Accounts Payables management

Account payable is defined as a debt arising from credit sales and recorded as an account receivable by

the seller and as an account payable by the buyer. Firms generally make purchases from other firms on

credit, recording the debt as an account payable. Accounts payable is the largest single category of

short-term debt, representing about 40 percent of the current liabilities of the average nonfinancial

corporation (Brigham and Houston 2003, p. 720).

Accounts payable are a part of all the businesses and have some advantages associated with it e.g. it is

available to all the companies regardless of the size of the company and earlier payment can bring cash

discount with it. Companies not only need to manage their account payables in a good way but they

should also have the ability to generate enough cash to pay the mature account payables. This is

because, in case if a company fails to generate enough cash to fulfill the mature account payables then

such a situation will pass the negative signal to the market and it will directly affect the share price,

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relationship with creditors and suppliers. Hence, in this situation it will be difficult for the company to

raise more funds by borrowing money or get more supplies from the suppliers. Such a financial distress

will lead to the death of the nonliving entity. Therefore, one way of monitoring accounts payables is by

the Average payment period (APP) or day‘s payables outstanding ratio which measures the average

length of time between the purchase of materials or labor and the payment of cash for supplies

(Brigham & Houston 2003, p. 720). It can be calculated as:

Average Payment period (APP) = Payables / (Cost of Goods Sold/ 365)

2.2.3 Metrics used in WCMP.

The major metrics of working capital and its effective management practice are DSO, DPO, DIO, CCC,

and NTC (Rehn, 2012). And their way of calculating the metrics are listed as follows;

Days sales outstanding: - expresses the number of days‘ worth of sales (or revenue) still outstanding in

the balances (receivables). This can be improved by optimizing the collection process in a company.

Also, credit policies in a company can be harmonized, which leaves less room for sales to give out lax

payment schedules.

DSO= Average Accounts Receivable * 365 (Banomyong, 2005).

Sales

Days payables outstanding expenses: - the number of days‘ worth of payments still outstanding at the

end of the period. This figure tells how many days the company, on average, uses to pay out its

liabilities. By lengthening this period, the company can to some degree improve its net working capital.

The DPO is usually expressed as cost of goods sold (COGS).

DPO = Average Accounts payable * 365 (Banomyong, 2005)

COGS

Days inventory outstanding: - Is a financial and operational figure that estimates the value of

inventory. This value is given by the days of inventory outstanding in terms of cost of goods sold. The

number can be seen as the time it takes to convert inventory into revenue.

DIO = Average Inventory *365 (Banomyong, 2005).

COGS

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Cash conversion cycle: - is a combination of the previous metrics. The cash conversion cycle (CCC) is

an additive measure, which measures the number of days‘ funds are tied to inventories and receivables,

minus the number of days‘ payments are deferred to supplies (CCC = DIO+DSO - DPO). The CCC

expresses, in other words, how many days it takes from the purchases of raw materials to collecting the

receivables of the finished product (Rehn, 2012). The debtors (receivable) conversion period is the time

required to collect the outstanding amount from the customers (Pandy, 2009).

Net Trade Cycle: - is a measure that is easier to use than the cash conversion cycle, as it expresses the

different components of the cash conversion cycle as a percentage of sales. The net trade cycle is

calculating as;

Sales of a company

Net Working capital

The net trade credit cycle is also indicating the number of days‘ sales the company has to finance its

working capital. By shortening the net trade credit cycle, the present value of net cash flows will be

higher. The shortening also contributes to managing the working capital as it reduces the need for

external financing and lowers the cost of borrowing, improving the financial performance of the

company (Shin & Soenen, 1998).

2.2.4 Working capital management policies

An important aspect of working capital policy is to maintain and provide sufficient liquidity to the firm.

The decision on how much working capital is maintained involves a trade-off, for instance, having a

large net working capital may reduce the liquidity-risk faced by the firm, but it can have a negative

effect on the cash flows. That‘s why the net effect on the value of the firm should be used to determine

the optimal amount of working capital. Generally, three types of working capital policy are accepted, (i)

Moderate working capital policy; (ii) Conservative working capital policy; (iii) aggressive working

capital policy.

According to Weinraub and Visscher (1998) they classifies working capital management policies as

aggressive, moderate, (or matching) and conservative.

Aggressive working capital management policy is when working capital investment and financing is

characterized by high risk and high returns. If the firm decides to finance a part of the permanent working

capital by the short term sources. The aggressive policy seeks to minimize exceed liquidity while meeting

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the short term requirements. The firm may accept even greater risk of insolvency in order to save cost of

long term financing and thus in order to earn greater return.

Moderate or matching working capital management policy entails lower risk and returns, and in

accordance with the approach of Hedging or Marching, the maturity of the sources of the funds should

march the nature of the assets to be financed. This kind of approach suggests that long-term funds should be

used to finance the fixed portion of current assets requirements in a manner similar to the financial of fixed

assets.

Conservative working capital management policy strategies have the lowest risk/ return ratios. This

approach suggests that the estimated requirements of total funds should be met from long-term sources; the

use of short-term funds should be restricted to only emergency situations or when there is an unexpected

outflow of funds.

2.3 Empirical literature review on working capital management Practice

This part of the literature review discusses the different types of studies made on the researcher related

areas and topic. A research works related to working capital management practices in manufacturing

firms undertaken on Ethiopia and outside.

And for the sake of easy of understanding the researcher reviews different works based on countries in

which the area has focused on.

A study by N.T. Tesfa & Dr. A.S. Chawla, (2017) on ―A survey of working capital management

practices among manufacturing companies in Ethiopia‖, the purpose of this study was to explore the

working capital management practices of manufacturing companies in Ethiopia and make comparison

with previous similar studies. The study used survey method on a sample of 144 manufacturing

companies in Ethiopia that were selected using two-stage stratified random sampling. Survey analysis

was employed and then results were presented using tables followed by explanation in three sections

where the first section presented the working capital policy matters, followed by the overall

management of working capital and finally the management of specific components of working capital.

The result showed that the manufacturing companies of Ethiopia have formal and situational working

capital policy that are under the responsibility of financial managers who make working capital review

per year. The finding also showed that much time is dedicated towards the management of working

capital through use of various managerial methods and techniques.

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Deresse Mersha Lakew and Abiy Getahun Kolech (n.d) a study on" working capital management

practices on business Enterprises in Jimma town, Ethiopia”, the study is aimed to assess the practices of

working capital management in business enterprises in Jimma town, Ethiopia. Data were collected from

40 firms using questioner. The finding of the study showed that firms are weak in using scientific

working capital management techniques and computerized record system. The researchers recommend

that firms should think of hiring qualified personnel for the position of financial management in their

firms.

K.L. Wasantha Perera and Guneratne B. Wickremasinghe (2010),"Working capital management

practices of manufacturing sector companies in Sri Lanka: survey evidence", this study focuses on

working capital management (WCM) practices of manufacturing companies in Sri Lanka. The data for

the study were gathered through a questionnaire and interviews with chief financial officers of a sample

of listed and unlisted manufacturing companies. It is observed that most of the manufacturing

companies in Sri Lanka have an informal policy related to working capital management. The finance

manager takes the main responsibility to manage working capital components and the managing

director plays a major role in formulating ad-hoc working capital policies. Lagging of credit payment

and ageing schedule are the major techniques in disbursement float and controlling trade debtors,

respectively. Perpetual inventory control system and material requirements planning are primary tools

of inventory management. Most of the sample companies use cash budget and current assets ratio as

techniques to plan and control their working capital components.

Oroka, Othuke Valentine (2013), a study on" working capital management practices required by small

and medium scale Enterprises for effective operations in delta state Nigeria ", the main purpose of this

study was to determine the working capital management practices required by Small and Medium Scale

Enterprises (SMEs) for effective operations in Delta State, Nigeria. Six research questions were raised

for the study which include; what are the sources of financing working capital required by SMEs for

effective operations and six null hypotheses were formulated for the study which include; there is no

significant difference between the mean responses of managers and accountants on the cash

management practices required by Small and Medium Scale Enterprises for effective operations in

Delta State. A descriptive survey design was adopted for this study. The population for the study

consisted of 3,627 respondents, made up of 2,012 managers and 1,615 accountants from the 2,012 Small

and Medium Scale Enterprises operating in Delta State, as registered with the Ministry of Commerce

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and Industry. The proportionate stratified and systematic random sampling techniques were employed

to select a sample size of 1,110 respondents made up of 616 managers and 494 accountants, which is

30.6% of the population. A Working Capital Management Practices Questionnaire (WCMPQ) was used

as the instrument for the study, which was face validated by five experts; two from the Department of

Vocational Teacher Education, University of Nigeria Nsukka, two from the faculty of education, Delta

State University, and one professional in the industry. The Cronbach Alpha Reliability Coefficient of

0.81 was obtained for the study. The instrument was administered on personal contact by the help of 18

trained research assistants. Out of the 1110 copies of questionnaire administered, 990 were retrieved and

used for the study. The data collected were analyzed using the mean and standard deviation in

answering the six research questions while t-test analysis was employed in testing the six null

hypotheses at 0.05level of significance. The findings obtained includes: (1) SMEs in Delta State highly

require both long-term and short-term sources in financing their working capital; (2) SMEs in Delta

State highly require most cash management practices. Amongst others, it was recommended that

Business educators, especially accounting educators should be innovative in their instruction by

equipping their students with the relevant skills on cash management, accounts receivables

management, inventory management, accounts payable management, and investment management;

which will enable these students to stand the better chance of succeeding when they establish SMEs.

A study by Dr. Md. Muzamme, Dr. Md. Abu Taher, and Anupam Kumar Das (2014), on "Working

Capital Management Practices in Selected Listed Companies of Bangladesh" The main objective of the

study was to evaluate the structure of working capital and suggest a prudent framework for making

working capital management smooth and effective in the sample companies. The main findings of the

study are as regards the distribution of current assets into different uses, it is seen that the share of

inventories is the largest followed by the share of accounts receivables and cash. But, across the study

period, accounts receivables have shown slow and steady decline; whereas the cash and inventories

have shown an increasing trend. The largest share of inventories in current assets indicates the less

qualitative aspect of inventories. In the policy implications of the study, the important suggestions cover

promulgate application of budgetary control and responsibility accounting techniques. The

implementation of these suggestions is expected to improve the existing working capital structure of the

exemplary companies.

Muhayadeen Adam Kaleem (2015),"An Assessment of working capital management practices in Ghana, a

case study of selected super markets in Kumasi metropolis", the study seeks to add to existing literature the

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working capital management practices of selected supermarkets in Ghana. The problem was motivated by

the fact that businesses have been noted to rely on banks, the stock market and equity capital. They give less

attention to efficient working capital as a viable means of raising capital. They seem not to appreciate the

feasibility of raising capital through efficient working capital management. Nonetheless, efficient working

capital management is one of the major sources of raising capital, according to Nyamao et al (2012). To

achieve this, survey instrument was administered on 20 Accountants of leading supermarkets in Kumasi

with a response rate of 80%. The data collected was processed by the capability of survey gizmo and

Microsoft excel. The results showed that the supermarkets face liquidity challenges, low profitability, worse

competitive position, increased funds tied up in working capital and finally lack of ability to unlock capital

to finance growth. It is therefore recommended that the supermarkets reexamine the factors that determine

their working capital so that they come up with best practices of working capital that can militate against the

challenges. The working capital management policy need to be changed from informal to formal to enhance

the chances of the supermarkets to be successful in their WCM.

A study by Peter Maina Wambugu,(2013) on "Effects of working capital management practices on

profitability of small and medium Enterprises in Nairobi county, Kenya", the general objective of this

study was to determine the effects of working capital management practices on profitability of Small

and Medium Enterprises (SMEs) in Nairobi County which was guided by the following specific

objectives; to determine the effect of cash conversion cycle on profitability of SMEs of Nairobi County,

to establish the influence of inventory holding period on profitability of SMEs of Nairobi County, to

determine the effect of accounts receivable period on profitability of SMEs of Nairobi county, to

establish the effect of accounts payable period on profitability of SMEs of Nairobi county and, to

establish the effect of the approaches of working capital management on profitability of SMEs of

Nairobi county.

The study provided insight on which working capital management practices are efficient and necessary

for the success of SMEs. The study adopted a cross-sectional survey research design and in depth

interviews which allowed the collection of primary quantitative data through structured questionnaires.

A population of SMEs operating in Nairobi County was targeted. The study used stratified random

sampling method by dividing the population into six subpopulations or strata. A simple random

sampling method was then used to select the specific respondents for the study. Data was analyzed for

descriptive and inferential statistics. Descriptive statistics such as tables, graphs, charts and percentages

analysis were used for presentation of data. Also, a linear regression model was used to analyze

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quantitative data and was developed and tested to explain the relationship between various proxies of

working capital management practices and profitability of SMEs of Nairobi County. The study results

of the regression analysis indicated that the dependent variables are significant and have an effect on

profitability of SMEs. The study concluded that managers of SMEs should adopt the correct working

capital management practices and identifying critical areas that may improve the profitability of SMEs.

The study recommended that SMEs managers should be thoroughly trained on working capital

management skills. The study suggested that further researcher should be conducted for the same study

in other counties so as to compare the findings of this study with those of other counties. The study also

recommends that in future researchers should do a follow up study in the same area so as to monitor and

evaluate for improvements in the management of working capital management practices.

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CHAPTER ІІІ: RESEARCH DESIGN AND METHODOLOGY

3.1. Introduction

This section of the study provides details of the target population, sample size, sampling technique and

method of data collection as well as the manner in which the data are analyzed for this study.

3.2. Research Design

This research study is designed to describe the working capital management practices of manufacturing

companies in north Shewa zone. Thus, descriptive study is an appropriate for this study. Manufacturing

companies operating in north Shewa zone were the target population of the study. North Shewa zone is

selected for this study because of the following reasons. First, it is one of the investments destinations in

Ethiopia and a research conducted in this area can more or less represent the practice in the other parts

of the country. Second, it is chosen by the researcher because of its proximity and convenience for data

collection with the limited time and fund available and finally as the researcher is an MSc student in

accounting and finance at Debre Berhan University, he is tried to contribute his part in solving local

problems.

3.3. Target Population

The target populations and research samples for the study were the whole manufacturing companies in

north Shewa zone which are on the production. According to the information provided from north

Shewa zone trade, industry & market development department- investment promotion work process,

there are 34 manufacturing companies operating in the zone. Totaling of 136 employees has been taken

as a target population for the study. General Managers, general accountants, internal auditors and

finance managers of these companies‘ employees with these positions were selected for they are the

ideal workforces to understand working capital management practice.

3.4. Sampling technique

The sampling technique used in this study is purposive sampling. Employees were purposively selected

from each company based on their seniority and job titles. Thus, all companies in the target population

have been considered for the study.

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3.5. Sample Size

Perhaps the most frequently asked question concerning sampling is, ―what sample size do I need?‖ the

answer to this question is influenced by a number of factors, including the purpose of the study,

population size, the risk of selecting a ―bad‖ sample, and the allowable sampling error. Using formula to

calculate a sample size is one of the several strategies for determining a sample size. (Israel, Glenn

D.1992.). Yamane (1967:886) provides a simplified formula to determine and calculate sample sizes.

n = N

1+N (e) 2

Where n is the sample size, N is the population size, and e is the level of precision (0.05). And

according to the above formula the sample size is;

= 136 = 101

1+136 (0.05) 2

3.6. Source and type of data

Primary source and qualitative type of data used in this study to collect the data related to their working

capital management practices.

3.7. Method of Data Collection

Both open and close ended questionnaires as well as five Likert scale questions were designed and

distributed to the selected respondents. The completed questionnaires were collected from the

respondents by the researcher‘s own travel to each company on the agreed return date. In general, the

distribution and collection of research data was self-administered. then, the questionnaires were

distributed to a sample of 101 respondents of 34 manufacturing companies; and 11 general managers,

28 general accountants, 31 finance managers and 14 internal auditors engaged as a respondent in this

research.

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3.8. Validity of the Instrument

The prepared instrument for data collection was measured by taking into account the applicable issues

of the components in WCM practices of the selected companies which are also compatible to other

related researches.

A content validity of the questionnaire was established by asking for assistance of a research advisor to

pass judgment on the suitability of the items chosen before conducting the survey.

3.9. Method of data analysis

This part of the research methodology deals with on how the collected data was analyzed and

interpreted. After the collected data have been coded and entered into Statistical Package for Social

Science (SPSS) Version 20, descriptive statistics was used to investigate and describe characteristics of

working capital management practices. Finally, responses were presented using frequencies &

percentages, as well as the measures of central tendency and dispersion such as mean, median,

maximum and minimum were used to describe the data.

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CHAPTER IV: DATA ANALYSIS, RESULTS AND DISCUSSION

4.1 Introduction

The analysis, results and discussion part is divided in to two parts which are the respondents‘ profile and

assessment of WCMP information. the main part divided in to six sections where the first section

presents the findings on overall working capital management practices, the second section is on cash and

short term securities management practice, the third section is on accounts receivable management

practice, the fourth section is on inventory management practice, the fifth part is on accounts payable

management practice, and the last section is on working capital management policy.

4.2 Response rate

A total of 101 questionnaires containing six pages with 54 main questions, each have been distributed to

the selected respondents. A maximum effort has been placed so as to collect all the distributed

questionnaires and reduce the non-response rate. The respondents were handed the questionnaire and

requested to fill the questionnaire immediately in front of the data collector. Before handing them the

questionnaire, respondents were kindly requested if they have some time to fill the questionnaire

responsibly. However, some respondents refused to fill the questionnaire immediately for they had no

time. From the distributed questionnaire 84 usable questionnaires were obtained representing 83.17

percent response rate and 17(16.83 %) non-response rate has been achieved.

Table 1: Questionnaire Response Rate

Distributed Questionnaires 101

Completed and Returned Questionnaires 84

Response rate 83.17 %

Source: survey, 2019

4.3 Reliability of the Instrument

The questionnaire used to collect the data is said to be valid, since it is composed of questions used in

most previous studies. Moreover, high quality tests are crucial to evaluate the reliability of data used in

research (Tavakol & Dennick, 2011). In this study, the reliability of the measurement instrument is

verified. Reliability of the measurement instrument can be measured using Cronbach‟s alpha (Tavakol &

Dennick, 2011). Chronbach‟s alpha is used to test how well the items used in the scale construct measure

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the same concept. Presented in the table 2 as follows is the result of the Cronbach's alpha computed using

SPSS.

Table 2: Cronbach’s alpha reliability statistics

Cronbach's Alpha

Cronbach's Alpha Based on

Standardized Items No. of Items

.796 .843 542


4.4 Respondents’ Profile

This part discusses about the general Information such as; job title, work experience and educational

level of respondents.

Table 3: Job title

Job title Frequency %

Finance Manager 31 36.9%

General Accountant 28 33.3 %

General Manager 14 16.7%

Internal Auditor 11 13.1%

Total 84 100%


As per table 3, job title of respondents; 11(13.1%) of them are general managers, 28(33.3%) general

accountants, 31(36.9%) finance managers, and 14(16.7%) are internal auditors. As a result, most of the

respondents are finance managers and general accountants followed by general managers and internal

auditors.

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Table 4: Work experience

Years Frequency %

0-5 years 43 51.2 %

above 5-10 years 32 38.1 %

above 10-15 years 7 8.3%

above 15 years 2 2.4%

Total 84 100%


As Table 4 depicts; out of 84 respondents 43(51.2%) of them are from 0-5 years‘ work experience,

32(38.1%) above 5-10 years, 7(8.3%) above 10 -15 years and 2(2.4%) have above 15 years work

experience in the Industry. As a result, above 50% of the respondents‘ experience is up to 5 years and

there is also very few employees have an experience above 15 years.

Table 5: Educational Level

Educational Level Frequency %

Degree 49 58.3%

Diploma 29 34.5%

MA/MSc & above 4 4.8%

Certificate 2 2.4%

Total 84 100%


As shown in table 5 educational level of respondents, 2(2.4%) of them are certificate, 29(34.5%)

diploma, 49(58.3%) degree, and 4(4.8%) MA or MSc & above. As a result, the main respondents are

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degree and diploma holders respectively. However, there is also certificate and on the other hand

MA/MSc & above holders are working in the companies.

In general, regarding the data analyzed on respondents, most of them are finance managers and general

accountants; they have 0-5 years above & 5-10 years‘ work experience, and are degree and diploma

holders respectively.

4.5 Assessment of working capital management practice

4.5.1. Relevance of working capital management

Part of the survey emphasize on the importance of working capital management practice. To achieve

these relevant issues were given to respondents to rate. They are time allotted to financial management

decisions, objective of working capital management practice, highly sensitive current asset(s) of the

company, metrics applied in working capital management practice, and level of working capital

management practice findings.

Table 6: Importance of working capital management practice


Table 6 indicates the responses regarding the importance of key aspects of working capital management

practice. according to the responses speeding up collections, slowing down payments, minimizing

inventory level, minimizing bank account, increasing inventory level, and increasing bank account are

ranked from highest to lowest with the frequency and percentage ranking of 30(28.6%), 26(24.8%),

Response Frequency Percentage (%) Central

tendency

Dispersion

Speeding up collections 30 28.6%

Mean

= 4.4571

Median

= 5.0000

Maximum

= 6.00

Minimum

= 1.00

Slowing down payments 26 24.8%

Minimizing inventory level 25 23.8%

Minimizing bank account 13 12.4%

Increasing inventory level 8 7.6%

Increasing bank account 3 2.9%

Total 105 100%

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25(23.8%), 13(12.4%), 8(7.6%), and 3(2.9%) respectively. The responses were then coded as 6, 5, 4, 3, 2,

and 1 respectively from 6(highest score) to 1(lowest score). Therefore, the importance of working capital

management practice respondents score may range from 1 (Increasing bank account) to 6 (Speeding up

collections). The median (5.0000) and mean (4.4571) indicates that higher number of respondents tells

slowing down payments and minimizing inventory level. The result also implies accelerating the

collection of cash from debtors appears to be more important aspect of all working capital management

practice of manufacturing companies in NSZ.

Table 7: Time allotted to financial management decisions

Response Frequency Percentage (%)

Central

tendency

Dispersion

Working Capital 36 42.9%

Mean

= 3.9167

Median

= 4.0000

Maximum

= 5.00

Minimum

= 1.00

Capital Budgeting 23 27.4%

Dividend Decision 12 14.3%

Valuation Decision 8 9.5%

Capital Structure 5 6%

Total 84 100%


Regarding the responses on the time devoted in financial management decisions, table 3 shows that the

highest percentage is given to ―working capital management‖ followed by ―capital budgeting‖ and

then ―dividend decision‖ with the frequency and percentage ranking of 30(42.9%), 23(27.4%) and

12(14.3%) respectively. ―Valuation decision‖ is ranked fourth and ―capital structure‖ is ranked as least

with 8(9.5%) and 5(6%), respectively. The responses were then coded as 5, 4, 3, 2, and 1 respectively

from 5(highest score) to 1(lowest score). Therefore, the time devoted in financial management

decisions as the respondents score may range from 1 (capital structure) to 5 (working capital). The

mean (3.9167) and median (4.0000) indicates that respondents say much time is given to capital

budgeting & dividend decision. The result implies that much time is devoted for the management of

working capital decision (5) which in fact requires day to day supervision so as to undertake the

financial activities smoothly.

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Table 8: Objective of Working Capital Management practice

Response Frequency Percentage

(%)

Central

tendency

Dispersion

Liquidity, profitability and efficient

use of current assets

54 33.5%

Mean

= 3.7143

Median

= 4.0000

Maximum

= 5.00

Minimum

= 1.00

Profitability 41 25.5%

Liquidity and profitability 37 23%

Efficient use of current assets 24 14.9%

Confer strictly to Gov‘t regulation 5 3.1%

Total 161 100%


As it can be seen on Table 8 above, respondents have chosen more than one responses from the listed

objectives. regarding to the given aggregate frequency of responses, ―liquidity, profitability, and

efficient use of current assets‖, ―profitability‖, ―liquidity and profitability‖, and ―compliance with

government regulation‖ are ranked from highest to lowest; with response rates of 54(33.5%),

41(25.5%), 37(23%), 24(14.9%) and 5(3.1%) respectively. The responses were then coded as 5, 4, 3, 2,

and 1 respectively from 5(highest score) to 1(lowest score). Therefore, the responses given to objectives

of working capital management practice range from 1 (Confer strictly to Gov‘t regulation) to 5

(Liquidity, profitability and efficient use of current assets). The mean (3.7143) and median (4.0000)

indicates majority of that respondents near here profitability, Liquidity and profitability as objectives.

This indicates the primary working capital management practice objectives are liquidity, profitability

and efficient use of current assets.

Table 9: Highly sensitive Current asset(s) of the Company


tendency

Dispersion

Cash and Short-term securities 51 60.7%

Mean

Maximum Inventories

29 34.5%

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Account receivable 4 4.8% = 2.6548

Median

= 3.0000

= 3.00

Minimum

= 1.00

Total 84 100%


As per information in respondents rank, cash as the most sensitive current asset followed by inventory

and receivables respectively; with response rates of 51(60.7%), 29(34.5%), 4(4.8%) respectively. The

responses were then coded as 3, 2, and 1 respectively from 3(highest score) to 1(lowest score).

Therefore, the responses given to highly sensitive current asset of the companies ranges from 1 (account

receivable) to 3(cash). The average score mean (2.6548) shows cash and inventory, and median

(3.0000) indicates that majority of respondents replies cash. As a result, receivables and inventories are

given less attention by manufacturing companies of the zone next to cash.

Table 10: Metrics applied in working capital management practice


(%)

Central

tendency

Dispersion

Days sales outstanding 33 34%

Mean

= 4.6804

Median

= 5.0000

Maximum

= 6.00

Minimum

= 1.00

Cash Conversion cycle 28 28.9%

No Metrics 17 17.5%

Days Inventory Outstanding 11 11.3%

Net Trade Cycle 7 7.2%

Days Payables outstanding expenses 1 1 %

Total 97 100%


As can be seen in Table 10 above, respondents have chosen more than one response from the listed

working capital management performance metrics. DSO, CCC, DIO, NTC, and DPO have been listed

from mostly used to the least used working capital management performance metric with response

rates of 33(34%), 28 (28.9%), 11 (11.3%) 7 (7.2%) and 1 (1%) to each of the metrics according to their

rank. Of the total respondents, 17 (17.5%) replied that their company does not apply any of working

29 | P a g e

capital management performance metrics. The responses were then coded as 6,5,4,3, 2, and 1

respectively from 6(highest score) to 1(lowest score). Therefore, the responses given to metrics applied

in working capital management practice ranges from 1 (days Payables outstanding expenses) to 3(days

sales outstanding). Mean (4.6804) and median (5.0000) indicates that majority of respondent‘s replies

cash conversion cycle and no metrics used. The result also indicates that more of the manufacturing

companies in the zone focus of acceleration of receivables while some emphasis on the overall cash

conversion cycle of companies. But still there are manufacturing companies that do not use any of

working capital management performance metrics as a tool for evaluation of WCMP.

Table 11: Level of working capital management practice:

Response

Frequency & Percentage (%) Central tendency &

dispersion V H H N L VL Total

Working capital

/cash budget is

properly planned

and adequately

allocated

6

(7.1)

36

(42.9)

2

(2.4)

29

(34.5)

11

(13.1)

84

(100)

Mean

= 4.0833

Median

= 4.0000

Maximum

=5.00

Minimum

=1.00

Finance manager

consume his

working time to

manage and

control short

term capital

18

(21.4)

23

(27.4)

9

(10.7)

13

(15.5)

21

(25)

84

(100)

Mean

= 3.4286

Median

= 4.0000

Maximum

=5.00

Minimum

=1.00

Working capital

management

practice of the

company helps

to run its day to

day operation

smoothly

11

(13.1)

33

(39.3)

4

(4.8)

28

(33.3)

8

(9.5)

84

(100)

Mean

= 3.9405

Median

= 4.0000

Maximum

=5.00

Minimum

=1.00


30 | P a g e

As Depicted in Table 11, the level of working capital management practice analyzed in three

dimensions. The five Likert scale responses were then coded as, 5,4,3,2, and 1 respectively from

5(highest score) to 1(lowest score). Firstly, the proper planning and adequate allocation of WC budget

is rated as High (7.1%), Very high (42.9%), Neutral (2.4%), Low (34.5%), and Very Low (13.1%)

with the mean value 4.0833 and median 4.0000. Secondly, the extent of time consumed by Finance

manager to manage and control short term capital is 21.4%, 27.4%, 10.7%, 15.5% & 25%, High, Very

high, Neutral, Low and Very Low respectively with the mean value 3.4286 and median 4.0000.

Thirdly, through considering the responses given, the role of Working capital management practice in

running day to day operation smoothly ranked as 13.1% (High), 39.3% (Very high), 4.8% (Neutral),

33.3% (Low), and 9.5% (Very Low) with the value of mean 3.9405 and median 4. 0000.Thus the

composite mean and median value indicates that majority of respondent‘s replies their level of

working capital management practice at high level. Therefore, the results indicate that employees‘

attitude to the proper planning and adequate allocation of WC budget and the time devoted by finance

mangers to control and management of short term capital and on the role of proper WCMP for smooth

daily operations is higher.

In general, the results of the above analysis on relevance of working capital management viewed as;

slowing down payments, minimizing inventory level and accelerating the collection of cash from

debtors appears to be more important aspects. Much time is devoted for the management of working

capital decision which in fact requires day to day supervision so as to undertake the financial activities

smoothly, and the companies considered cash as highly sensitive current asset. The primary working

capital management practice objectives are liquidity, profitability and efficient use of current assets.

The manufacturing companies in the zone focus of acceleration of receivables while some emphasis on

the overall cash conversion cycle as the metrics of measuring their WCMP performance, but still there

are companies that do not use any of working capital management performance metrics as a tool for

evaluation of WCMP. The majority of respondent‘s replies that their level of working capital

management practice is at high level in taking into account; proper planning and adequate allocation of

WC budget, time devoted by finance mangers to control and management of short term capital, and the

role of WCMP for smooth daily operations.

4.5.2. Management of Cash and short-term securities

Cash is said to be the life blood of business organizations. It needs strict control and good management

practice. In this section; objective of cash management practice, method used in determining target cash

31 | P a g e

balance, cash management responsible personnel and written working manual, and level of cash

management practice issues analyzed and interpreted below. However short term security issues could

not be analyzed and interpreted due to the given responses were no short term securities that the

company can invest its liquid funds in North Shewa zone manufacturing companies.

Table 12: Objective of cash management


tendency

Dispersion

To keep an organization

functioning, by making the

best use of liquid resources.

53 43.8%

Mean

= 3.0000

Median

= 3.0000

Maximum

= 4.00

Minimum

= 1.00

To Eliminates idle cash

balance

29 24%

To deposit collections on

timely basis

25 20.7%

To hold as big as possible

cash so as to highly liquid

14 11.6%

Total 121 100%


As it can be seen from Table 12, respondents have chosen more than one response from the listed

objectives. Regarding to the given aggregate frequency of responses and ranked percentage; to keep an

organization functioning, by making the best use of liquid resources 53(43.8%), to Eliminates idle cash

balance 29(24%), to deposit collections on timely basis 25(20.7%), and to hold as big as possible cash

so as to highly liquid 14(11.6%). The responses were then coded as 4, 3, 2, and 1 respectively from

4(highest score) to 1(lowest score). Therefore, the responses given to objective of cash management

arrays from 1 (to hold as big as possible cash so as to highly liquid) to 4(to keep an organization

functioning, by making the best use of liquid resources). Both mean (3.0000) and median (3.0000)

indicates the response for to eliminate idle cash balance. The results indicate that the objective of cash

management is mainly for enabling the manufacturing companies to function properly by making the

best use of liquid resources.

32 | P a g e

Table 13: Determination of target cash balance


Central

tendency

Dispersion

Cash budget and forecasting 47 44.3% Mean

= 2.2453

Median

= 2.0000

Maximum

= 3.00

Minimum

= 1.00

Past Experience 38 35.8%

Ad-hoc Decision 21 19.8%

Total 106 100%


As per table 13, respondents have chosen more than one response from the listed methods. Therefore

47 (44.3%) of responses showed cash budget and forecasting, 38(35.8%) used past experience and,

21(19.8%) of them selected ad-hoc decision. The responses were then coded as 3, 2, and 1 respectively

from 3(highest score) to 1(lowest score). Therefore, the responses given to methods used in

determining target cash balance ranges from 1(ad-hoc decision) to 3(cash budget and forecasting).

Both mean (2.2453) and median (2.0000) indicates past experience used as a method. Results indicate

that cash budget and forecasting, and past experience are the methods used to determining target cash

balance in sample manufacturing companies.

Table 14: Responsibility and direction for management of cash

Responsible person


(%)

Central

tendency

Dispersion

Responsible

personnel assigned

lonely to cash and

short term security

practice issues

Yes 37 44% Mean

= 1.5595

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 47 56%

Total 84 100%

Working manual Response

Frequency Percentage

(%)

Central

tendency

Dispersion

There is a formal Yes 23 27.4% Mean Maximum

33 | P a g e

and written working

manual for cash and

short term security

practices

No 61 72.6% = 1.7262

Median

= 2.0000

= 2.00

Minimum

= 1.00

Total 84 100%


Table 14 shows that 37(44%) of respondents replied that their company assigns responsible personnel

for their cash management practice as a separate duty, while 47(56%) have replied that there is no

responsible personal assigned for cash management. With respect to the preparation and cash

management working manual, 23(27.4%) have replied their company has a formal and written

working manual for cash and short-term security practices. However, but majority of the respondents,

61(72.6%) have replied that their company has no working manual as far as cash management is

concerned. The responses were then coded as 2 and 1 respectively from 2(highest score) to 1(lowest

score). Therefore, the mean values (1.5595) for responsible person and (1.7262) for working manual

indicates the average score. And the median (2.0000) indicates majority of the responses for both

issues. This indicates that manufacturing companies in the zone do not ascertain accountability for

cash management and they have no written cash management working manual.

Table 15: Level of Cash management practice

Response

Frequency & Percentage (%) Central

tendency

dispersion VH H N L VL Total

Cash

budgeting

31

(36.9%)

25

(29.8%)

-

-

18

(21.4%)

10

(11.9%)

84

(100%)

Mean

= 3.9167

Maximum

=5.00

Median

= 4.0000

Minimum

=2.00

proper Check 32 27 - 9 16 84 Mean

= 3.9762

Maximum

=5.00

34 | P a g e

preparation 38.1% 32.1% - 10.7% 19 % 100% Median

= 4.0000

Minimum

=2.00

Timely cash

Receipt

21

25%

23

27.4%

11

(13.1%)

15

17.9%

14

16.7%

84

100%

Mean

=3.3690

Maximum

=5.00

Median

= 4.0000

Minimum

=1.00

Formal cash

disbursement

22

26.2%

26

31%

3

3.6%

20

23.8%

13

15.5%

84

100%

Mean

=3.6548

Maximum

=5.00

Median

= 4.0000

Minimum

=1.00

Management

and Holding

cash voucher

17

20.2%

36

42.9%

4

4.8%

14

16.7%

13

15.5%

84

100%

Mean

=3.8095

Maximum

=5.00

Median

= 4.0000

Minimum

=1.00

Timely cash

deposit

19

22.6%

41

48.8%

7

8.3%

10

11.9%

7

8.3%

84

100%

Mean

=3. 9524

Maximum

=5.00

Median

= 4.0000

Minimum

=1.00

Existence of

Idle cash

8

9.5%

10

11.9%

2

2.4%

16

19%

48

57.1%

84

100%

Mean

= 4. 1905

Maximum

=5.00

Median

= 5.0000

Minimum

=1.00


35 | P a g e

Table 15, depicts the responses on the level of cash management. To analyze this, seven parameters

were used. The five Likert scale responses were then coded as, 5,4,3,2, and 1 respectively from

5(highest score) to 1(lowest score). Firstly, cash budgeting is rated as high (36.9%), very high (29.8%),

low (21.4%), and very low (11.9%) with the mean value 3.9167 and median 4.0000. Secondly, the

extent of proper check preparation is 38.1%, 32.1%, 10.7% & 19 %, high, very high, low and very low

respectively with the mean value 3.9762 and median 4.0000. Thirdly, through considering the responses

given timely cash receipt arranged as 25% (high), 27.4% (very high), 13.1%(neutral), 17.9% (low), and

16.7% (very low) with the mean value 3.3690 and median 4. 0000.The fourth activity considered as a

measurement is formal cash disbursement ranked as 26.2% (high), 31% (very high), 3.6%(neutral),

23.8% (low), and 15.5% (very low) with the mean value 3.6548 and median 4.0000. The fifth point is

management and holding cash voucher ordered as high (20.2%), very high (42.9%), neutral (4.8%), low

(16.7%), and very low (15.5%) with the mean value 3.8095 and median 4.0000. At the sixth stage

timely cash deposit is valued as 22.6% (high), 48.8% (very high), 8.3% (neutral), 11.9% (low), and

8.3% (very low) with the mean value 3. 9524 and median 4. 0000.The last sentence, existence of idle

cash weighed as 9.5% (high), 11.9% (very high), 2.4% (neutral), 19 % (low), and 57.1% (very low)

with the mean value 4.1905 and median 5. 0000.results imply that the composite mean (3.8385)

indicates ―high level‖ on average and the composite median (4.1429) also shows many of the

respondents believed that their company cash management practice was put on high level.

In general, regarding the analysis result on cash and short term securities management practice; the

objective relies on keeping an organization functioning, by making the best use of liquid resources.

Cash budget forecasting and past experience methods utilized in most of the companies in

determining target cash balance. The companies did not use any type of short term securities to invest

their liquid funds. in determining the level of cash management, the following issues such as: cash

budgeting, proper check preparation, timely cash receipt, formal cash disbursement, management and

holding cash voucher, timely cash deposit, and existence of idle cash were well performed. However,

assigning responsible person and having written working manual for is practice is the limitation of

most of the companies.

4.5.3. Management of Accounts Receivable

This section presents the result and discussion of data analysis related to accounts receivable

management practices that include basis of selling product to customers , motives to sell on account,

techniques used to assess customers‘ creditworthiness, techniques used to monitor payment behavior of

36 | P a g e

customers, experience to the change in credit policy, long-outstanding receivable and producing age

analysis, and accounts receivable management practice responsible personnel and written working

manual.

Table 16: Basis for selling Products to Customers


Central

tendency

Dispersion

Mixed

(both cash and Credit

Basis)

67 79.8% Mean

= 1.7976

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00 Cash Basis 17 20.2%

Total 84 100%


As it can be seen from table 16, 67(79.8%) of the respondents replied about the basis for selling

products to customers in their company is mixed (both cash and credit basis) while the remaining

17(20.2%) responds only cash basis. The responses were then coded as 2 and 1 respectively from

2(highest score) to 1(lowest score). Therefore, the mean value (1.7976) indicates the average score of

both basis and the median (2.00) shows the most respondents reaction. Thus the results indicate that

most of the manufacturing companies conduct cash and credit sales to their customers.

Table 17: Motives to sell on Account


(%)

Central

tendency

Dispersion

Increasing/Stimulating Sales 41 48.8% Mean

= 3.1667

Median

= 3.0000

Maximum

= 4.00

Minimum

= 1.00

It is industry practice 23 27.4%

Increasing customer base 13 15.5%

Supporting customers‘ liquidity 7 8.3%

Total 84 100%


37 | P a g e

Regarding the motives to sell on account, the highest response rate is given to increasing/stimulating

sales with a frequency & percentage of 41(48.8%), industry practice is the second rank with

23(27.4%), followed by increasing customer base, with 13(15.5%), and supporting customers‘

liquidity rated least with a frequency of 7 responses with a percentage of 8.3%. The responses were

then coded as 4, 3, 2, and 1 respectively from 4(highest score) to 1(lowest score). Therefore, the

responses given to motives to sell on account ranges from 1(supporting customers‘ liquidity) to

4(increasing/stimulating sales). Both mean (3.1667) and median (3.0000) indicates the motive as an

industry practice. The results show the majority of the companies conduct sales on account, because

this can help them to increase sales volume. Besides the result indicate that selling on account to

customers is also taken as industry practice.

Table 18: Techniques used to Assess Customers’ Creditworthiness


(%)

Central

tendency

Dispersion

―Four C‘s‖ of Credit Sequential

(character, condition, capacity and

capital of their customers)

51 60.7%

Mean

= 2.4762

Median

= 3.0000

Maximum

= 3.00

Minimum

= 1.00

Credit Analysis 22 26.2%

Credit Scoring 11 13.1%

Total 84 100%


As table 18 analysis, 51(60.7%) responses showed that the ―four c‘s‖ of credit sequential (character,

condition, capacity and capital of their customers) used as a technique to assess customers‘

creditworthiness, and the remaining listed techniques, credit analysis 22(26.2%) and credit scoring

11(13.1%) ranked second & third respectively. The responses were then coded as 3, 2, and 1

respectively from 3(highest score) to 1(lowest score). Therefore, the responses given to technique to

assess customers‘ creditworthiness ranges from 1(credit scoring) to 3(―four c‘s‖ of credit sequential).

An average value of mean (2.4762) shows credit analysis and the median (3.0000) specifies the

majority of the response. Thus the result indicates ―four c‘s‖ are used as major techniques to assess

the creditworthiness of their customers in concerned manufacturing companies.

38 | P a g e

Table 19: Techniques Used to Monitor Payment behavior of Customers


tendency

Dispersion

Average Collection Period 35 41.7%

Mean

= 3.1071

Median

= 3.0000

Maximum

= 4.00

Minimum

= 1.00

Accounts Receivable Turnover 28 33.3%

Aging of Receivable Schedule 16 19%

No technique used 5 6%

Total 84 100%


As per table 19, the response given that accounts receivable turnover 28(33.3%), average collection

period 35(41.7%), and aging of receivable schedule 16(19%) ranked first, second & third respectively

as a technique used to monitor payment behavior of customers, and the finding also declares 5(6%) of

them did not use any of the techniques. The responses were then coded as 4, 3, 2, and 1 respectively

from 4(highest score) to 1(lowest score). Therefore, the responses given to monitor payment behavior

of customers ranges from 1(no technique used) to 4(average collection period). Mean (3.1071) and

median (3.0000) together indicates accounts receivable turnover. As a result, average collection period

and accounts receivable turnover techniques are commonly used in the target companies.

Table 20: Experience to the change in credit policy


Central

tendency

Dispersion

It affects sales 49 58.3%

Mean

= 2.4881

Median

= 3.0000

Maximum

= 3.00

Minimum

= 1.00

It affects customer relationship 27 32.1%

It affects profit level 8 9.5%

Total 84 100%


39 | P a g e

As presented in Table 20, about experience to the change in credit policy, the responses revealed that

the companies taking in to account it affects sales 49(58.3%), it affects customer relationship

27(32.1%), and it affects profit level 8(9.5%). The responses were then coded as 3, 2, and 1

respectively from 3(highest score) to 1(lowest score). Therefore, an average value of mean (2.4881)

shows it affects customer relationship and the median (3.0000) reveals the major of the response. The

result shows that the most experience to the change in credit policy is affecting sales followed by

affects customer relationship.

Table 21: Long-outstanding receivables and producing Age Analysis

Long-outstanding

receivable


(%)

Central

tendency

Dispersion

The Company have long-

outstanding receivables

Yes 37 44%

Mean

= 1.5595

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 47 56%

Total 84 100%

Aged Account Receivable

Analysis


(%)

Central

tendency

Dispersion

The Company has a practice

by which it produces age

analysis of its receivables

and reports to the top

management

Yes 23 27.4%

Mean

= 1.7024

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 61 72.6%

Total 84 100%


Table 21 presents responses regarding account receivable management: long-outstanding receivables

and producing age analysis is one of the essential issues. Based on the responses 44% of the

companies have long-outstanding receivables, and about 56% of them have not. In relation to this

27.4 % producing age analysis for receivables and reports to the top management, but 72.6% of them

40 | P a g e

did not. The responses were then coded as 2 and 1 respectively from 2(highest score) to 1(lowest

score). Therefore, the mean values (1.5595) for long-outstanding receivables and (1.7024) for aged

account receivable analysis indicates the average score. And the median (2.0000) indicates majority

of the responses for both issues. This result indicates that the management of receivable lack

management concern.

Table 22: Responsibility and direction for management of Accounts Receivable

Responsible person


(%)

Central

tendency

Dispersion

Responsible person

assigned lonely to

Accounts Receivable

Management Practice

issues

Yes 13 15.5%

Mean

= 1.8452

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 71 84.5%

Total 84 100%

Working manual


(%)

Central

tendency

Dispersion

There is a formal and

written working manual

for Accounts

Receivable

Management Practice

Yes 28 33.3%

Mean

= 1.6667

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 56 66.7%

Total 84 100%


Table 22 shows that 13 (15.5%) of target companies lonely assign a responsible personnel for their

account receivables management practice, but most of 71(84.5%) did not assigned. and 28(33.3%)

have a formal and written working manual for accounts receivable management practices, but the

majority 56(66.7%) of them have not working manual. The responses were then coded as 2 and 1

respectively from 2(highest score) to 1(lowest score). Therefore, the mean values (1.8452) for

responsible person and (1.6667) for working manual indicates the average score. and the median

41 | P a g e

(2.0000) indicates majority of the respondents saying for both issues. This indicates that less attention

is given by most of the companies for both issues.

To summarizing the findings about receivables management practice: most of the time the experience

to the change in credit policy is due to affecting sales and the basis for selling products to customers in

most of the companies is both in cash & credit basis, and increasing/stimulating sales as a reason to

sell on account. ―Four c‘s‖ of credit sequential (character, condition, capacity and capital of their

customers) used as a major techniques used to assess customers‘ creditworthiness, and average

collection period & accounts receivable turnover techniques are commonly used in the target

companies to monitor payment behavior of customers. There is also lack of attention in producing age

analysis for long-outstanding receivables and reports to top management. Assigning responsible

person and having written working manual for receivable management practice is the drawback of

most of the companies.

2.3.1.1 Inventory Management Practice

This section presents the result and discussion related to analysis of inventory management practices

that include techniques used in monitoring the level of inventory and in replenishing inventory,

factors considered in inventory purchase of inventory and production, criteria to change in inventory

policy, frequency of inventory counting period, types of inventory, level of inventory use & hold

practice, inventory management responsible personnel and written working manual, and thoughts on

inventory management practice of the company.

Table 23: Techniques used in monitoring the level of Inventory


tendency

Dispersion

Inventory turnover 48 57.1%

Mean

= 2.4405

Median

= 3.0000

Maximum

= 3.00

Minimum

= 1.00

Average Inventory Period 25 29.8%

No technique used 11 13.1%

Total 84 100%


42 | P a g e

As per the table 23, the response given that Inventory turnover 48(57.1%), and Average Inventory

Period 25(29.8%) ranked first & second respectively as a technique used to Monitor Level of

Inventory, and the finding also reveals that 11(13.1%) of them did not use any of the techniques. The


Therefore, an average value of mean (2.4405) shows the respondents reaction to Average Inventory

Period and the median (3.0000) discloses the major response. As a result, Inventory turnover and

Average Inventory Period techniques are commonly used in the target companies.

Table 24: Techniques employed in Replenishing Inventory


(%)

Central

tendency

Dispersion

Materials requirement planning 38 45.2%

Mean

= 2.2262

Median

= 2.0000

Maximum

= 3.00

Minimum

= 1.00

Just in time 27 32.1%

Economic order Quantity 19 22.6%

Total 84 100%


As it can be seen from Table 24, respondents replied about the techniques employed in stock up

Inventory in their company is 38(45.2%) of them said "Materials requirement planning ", 19(22.6%)

"Economic order Quantity ", and the remaining 27(32.1%) responds "Just in Time". The responses

were then coded as 3, 2, and 1 respectively from 3(highest score) to 1(lowest score). Therefore, both

mean (2.2262) and median (2.0000) shows average and the middle response. The result indicates that

most of responding companies used Materials requirement planning method followed by just in time

and economic order quantity.

Table 25: Factors considered in inventory purchase


Central

tendency

Dispersion

Availability of material 69

33%

43 | P a g e

Possible discount 53 25.4% Mean

= 4.6029

Median

= 5.0000

Maximum

= 6.00

Minimum

= 1.00

Credit term of suppliers 45 21.5%

Inflation Effect 25 12%

Shortage cost 11 5.3%

Other factors/quality of

raw material

6 2.9%

Total 209 100%


As presented in table 25, respondents have been chosen more than one responses from the listed

factors. therefore, the frequency and percentage of responses showed that 69(33%) of them consider

availability of material, 53(25.4%) possible discount, 45(21.5%) credit term of suppliers, 11(5.3%)

shortage cost, 25(12%) inflation effect and the remaining 6(2.9%) ponder quality of raw material.

The responses were then coded as 6, 5, 4, 3, 2, and 1 respectively from 6(highest score) to 1(lowest

score). Therefore, the respondents score on factors considered in inventory purchase may range from

1 (quality of raw material) to 6 (availability of material). The median (5.0000) and mean (4.6029)

indicates that higher number of respondents tells possible discount and credit term of suppliers.

Thus, the result revealed, at the time of inventory purchase most of the companies given priority to

availability of material, possible discount, and credit term of suppliers correspondingly.

Table 26: Factors considered in production of Inventory


Central

tendency

Dispersion

Production Schedule 50 45.9%

Mean

= 3.2477

Median

= 3.0000

Maximum

= 4.00

Minimum

= 1.00

Seasonality of demand 41 37.6%

Inflation Effect 13 11.9%

Shortage Cost 5 4.6%

Total 109 100%


44 | P a g e

Regarding the factors considered in production of inventory, respondents have been chosen more

than one responses from the listed factors, and the highest response rate is given to production

schedule with a frequency & percentage of 50(45.9%), seasonality of demand is the second rank with

41(37.6%), followed by inflation effect, with 13(11.9%), and shortage cost rated least with a

frequency of 5 responses with a percentage of 4.6%. The responses were then coded as 4, 3, 2, and 1

respectively from 4(highest score) to 1(lowest score). Therefore, mean (3.2477) and median (3.0000)

together indicates seasonality of demand as a factor of production. The result also shows that

responding companies highly consider production schedule followed by seasonality of demand as a

factor in production.

Table 27: Criteria to change in Inventory policy

Response Frequency Percentage (%) Central tendency Dispersion

Inventory Level 54 41.9%

Mean

= 3.1085

Median

= 3.0000

Maximum

= 4.00

Minimum

= 1.00

Inventory Cost 46 35.7%

Profit 18 14%

Return on Investment 11 8.5%

Total 129 100%


As it can be seen from table 27, respondents have been chosen more than one responses from the

listed criteria. According to the given aggregate frequency of responses and ranked percentage;

inventory level 54(41.9%), inventory cost 46(35.7%), profit 18(14%), and return on investment

11(8. 5%).The responses were then coded as 4, 3, 2, and 1 respectively from 4(highest score) to

1(lowest score). Therefore, mean (3.1085) and median (3.0000) together indicates inventory cost as

a criterion. This indicates that inventory level and inventory cost are the major reasons in most of

manufacturing companies in north Shewa zone to change their inventory policy respectively.

Table 28: Frequency of Inventory counting period


(%)

Central

tendency

Dispersion

45 | P a g e

Annually 41 37.3%

Mean

= 3.7909

Median

= 4.0000

Maximum

= 5.00

Minimum

= 1.00

Semi-Annually 27 24.5%

At any time if necessary 26 23.6%

Quarterly 10 9.1%

Monthly 6 5.5%

Total 110 100%

As presented in Table 28, respondents have been chosen more than one responses from the listed

Counting periods. Therefore, the frequency and percentage of responses showed that 6(5.5%) of

them answers Monthly, 10(9.1%) Quarterly, 27(24.5%) Semi-Annually, 41(37.3%) Annually, and

the remaining 26(23.6%) replied at any time if necessary. The responses were then coded as 5, 4, 3,

2, and 1 respectively from 5(highest score) to 1(lowest score). Therefore, the responses given to

frequency of Inventory counting period ranges from 1 (monthly) to 5 (annually). The mean (3.7909)

and median (4.0000) indicates majority of that respondents near here semi-annually and somehow at

any time if necessary. The result also revealed more of the companies undertaking Inventory

counting annually followed by Semi-Annually and at any time if necessary.

Table 29: Type of Inventory


tendency

Dispersion

Finished goods Inventory 84 34.9%

Mean

= 2.0332

Median

= 2.0000

Maximum

= 3.00

Minimum

= 1.00

Raw material Inventory 81 33.6%

Work-in-progress

Inventory

76 31.5%

Total 241 100%


According to table 29, respondents have been chosen more than one responses for types of inventory

listed. therefore 81 (33.6%) of responses showed raw material inventory, 76(31.5%) adept work-in-

progress inventory and 84(34.9%) of them selected finished goods inventory. The responses were

46 | P a g e

then coded as 3, 2, and 1 respectively from 3(highest score) to 1(lowest score). Therefore, both

mean (2.0332) and median (2.0000) shows average and the middle response. As a result, the above

majorly listed types of inventories practiced in most of manufacturing companies in north Shewa

zone.

Table 30: Level of Inventory use & hold practice

Response Frequency Percentage (%) Central tendency Dispersion

Very High 6 7.1%

Mean

= 3.1548

Median

= 3.0000

Maximum

= 4.00

Minimum

= 1.00

High 27 32.1%

Moderate 38 45.2%

Low 13 15.5%

Total 84 100%


As it can be seen from Table 30, respondents rated the Level of Inventory use & hold practice in their

company. Thus, 6(7.1%) Very High, 27(32.1%) High, 38(45.2%) moderate and the remaining 13

(15.5%) low. The responses were then coded as 4, 3, 2, and 1 respectively from 4(highest score) to

1(lowest score). Therefore, mean (3.1548) and median (3.0000) both indicates high level. The result

also indicates most of responding companies ranked their use and hold Inventory practice on

moderate as well as high Level.

Table 31: Responsibility and direction for inventory management of Inventory

Responsible

personnel


tendency

Dispersion

Responsible

personnel assigned

lonely to Inventory

Management

Practice issues

Yes 47 56% Mean

= 1.5595

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 37 44%

Total 84 100%

47 | P a g e

Working manual


tendency

Dispersion

There is a formal

and written working

manual for

Inventory

Management

Practice

Yes 50 59.5% Mean

= 1.5952

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 34 40.5%

Total 84 100%


Table 31 showed that 47 (56%) of target companies lonely assign a responsible personnel for their

Inventory management practice, but 37(44%) of them did not assigned. And 50(59.5%) have a formal

and written working manual for inventory management practices, but 34(40.5%) of them have not

working manual. The responses were then coded as 2 and 1 respectively from 2(highest score) to

1(lowest score). Therefore, the mean values (1.5595) for responsible person and (1.5952) for working

manual indicates the average score. And the median (2.0000) indicates majority of the respondents saw

for both issues. This result indicates that the needed considerable attention is not given by several

companies for both issues.

Table 32: Views on Inventory management practice of the company

Response

Frequency & Percentage (%) Central

tendency

dispersion SA A N DA SD Total

Management

correlates raw

materials

holding level

with the

volume of

production.

8

(9.5 %)

29

(34.5%)

21

(25%)

21

(25%)

5

(5.6%)

84

(100%)

Mean

= 3.7262

Maximum

= 5.00

Median

= 4.0000

Minimum

= 1.00

48 | P a g e


Production of

the Company

is led by

market

demand.

20

(23.8 %)

39

(46.4%)

4

(4.8%)

11

(13.1%)

10

(11.9%)

84

(100%)

Mean

= 3.9524

Maximum

= 5.00

Median

= 4.0000

Minimum

= 1.00

The Company

does not have

obsolete stock

22

(26.2 %)

44

(52.4%)

6

(7.1%)

9

(10.7%)

3

(3.6%)

84

(100%)

Mean

= 4.1667

Maximum

= 5.00

Median

= 5.0000

Minimum

= 1.00

The Company

has an

economic

order level for

raw materials

new order and

delivery

27

(32.1 %)

30

(35.7%)

13

(15.5%)

10

(11.9%)

4

(4.7%)

84

(100%)

Mean

= 3.8214

Maximum

= 5.00

Median

= 4.0000

Minimum

= 1.00

The Company

has a practice

by which it

produces age

analysis of its

inventories

and reports to

the top

management

15

(17.9%)

18

(21.4%)

11

(13.1%)

21

(25%)

19

(22.6%)

84

(100%)

Mean

= 3.2857

Maximum

= 5.00

Median

= 3.0000

Minimum

= 1.00

49 | P a g e

As depicted in Table 32, views on Inventory management practice of the company analyzed as follows. The

five Likert scale responses were then coded as, 5,4,3,2, and 1 respectively from 5(highest score) to 1(lowest

score). To begin with, ―Management correlates raw materials holding level with the volume of production‖,

frequency & percentage of the respondents feeling examined as Strongly agree 8(9.5%), Agree 29(34.5%),

Neutral 21(25%), Disagree 21(25%), and Strongly dis-agree 5(5.6%) with a value of mean (3.7262) and

median (4.0000). Next, ―Production of the Company is led by market demand‖ is scrutinized as strongly

agree 20(23.8%), Agree 39(46.4%), Neutral 4(4.8%), Disagree 11(13.1%), and strongly dis-agree

10(11.9%) with a value of mean (3.9524) and median (4.0000).Thirdly, ―The Company does not have

obsolete stock‖ opinion observed as strongly agree 22 (26.2%), Agree 44 (52.4%), Neutral 6 (7.1%),

Disagree 9 (10.7%), and strongly dis-agree 3 (3.6%%) with a value of mean (4.1667) and median

(5.0000).The fourth View on ―The Company has an economic order level for raw materials new order and

delivery‖ considered as strongly agree 27 (32.1%), Agree 30 (35.7%), Neutral 13 (15.5%), Disagree 10

(11.9%), and strongly dis-agree 4 (4.7%) with a value of mean (3.8214) and median (4.0000).The fifth

attitude is ―The Company has a practice by which it produces age analysis of its Inventories and reports to

the top management‖ ordered as strongly agree 15 (17.9%), Agree 18 (21.4%), Neutral 11 (13.1%),

Disagree 21 (25%), and strongly dis-agree 19 (22.6%) with a value of mean (3.2857) and median

(3.0000).The composite mean(3.7905) and median(4.0000) implicate on high level. The results indicate that

many of the respondents are agreed to put their company practice of inventory management at a good

position.

In general, to conclude the findings on the company‘s management of inventory practice: the results show

that majority of manufacturing companies used Inventory turnover and Average Inventory Period

techniques for monitoring level of Inventory and Materials requirement planning method is commonly

employed in replenishing Inventory. At the time of inventory purchase most of the companies given priority

to availability of material, possible discount, and credit term of suppliers correspondingly. Companies

highly consider production schedule as a factor in production of Inventory followed by Seasonality of

demand. Inventory Level and Inventory Cost are the major reasons to change Inventory Policy and most of

the companies undertaking Inventory counting annually and the major types of Inventory systems applied

relatively in all target companies. And most of the respondents placed their company inventory management

practice on better stage. However, in defining the level of Inventory use & hold practice most of the

companies place on moderate level. In relation to the practice, assigning responsible personnel and having

written working manual is slightly better than other components of working capital management practices,

but not ample.

50 | P a g e

2.3.1.2 Account payables Management Practice

This section presents the result and discussion of data analysis related to account payables management

practice that includes credit policy, paying short-term debt earlier and brings cash discount with it,

advantage associated with the company‘s account payables, estimated annualized cost of trade credit, and

account payables management practice responsible personnel and written working manual.

Table 33: Credit policy

The Company

have a written

credit policy


tendency

Dispersion

Yes 22 26.2% Mean

= 1.7381

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 62 73.8%

Total 84 100%


Regarding the Credit policy of the company, 26(26.2%) of respondents stated that there is a written

policy, and the majority 62(73.8%) of them Confirmed that no written document related to the

specified policy. The responses were then coded as 2 and 1 respectively from 2(highest score) to

1(lowest score). Therefore, the mean values (1.7381) indicates the average score. And the median

(2.0000) indicates majority of the respondents‘ reply. Thus the result revealed that Most of the

Manufacturing companies in north Shewa Zone have not a written Credit Policy.

Table 34: Paying short-term debt earlier and brings cash discount with it


tendency

Dispersion

Never take discount 54 64.3% Mean

= 3.4881

Median

= 4.0000

Maximum

= 4.00

Minimum

= 1.00

Sometimes take discount 19 22.6%

Always take discount 9 10.7%

Pay latter but take discount 2 2.4%

Total 84 100%

51 | P a g e


As it can be seen from Table 34, the response given about with respect to Paying short-term debt

earlier and cash discount offered, 9(10.7%) of respondents replied that companies always take

discount, 19(22.6%) sometimes take discount, 2(2.4%) pay later but still take discount, and the

majority 54 (12.4%) respondents stated never take discount. The responses were then coded as 4, 3, 2,

and 1 respectively from 4(highest score) to 1(lowest score). Therefore, mean (3.4881) declares the

average response on sometimes take discount and median (3.0000) indicates on the highest response.

The result shows that more than half of target manufacturing companies never take discount offered

by suppliers due to slothfully paying their short term debt earlier.

Table 35: Advantage associated with the company’s account payables


As per table 35, the advantage associated with the company‘s account payables, the frequency &

percentage of responses shows that, 61(72.6%) respondents replied to get more supplies from the

suppliers, and remaining 23(27.4%) declared the advantage as earlier payment can bring cash discount

with it. The responses were then coded as 2 and 1 respectively from 2(highest score) to 1(lowest

score). Therefore, the mean values (1.7262) indicates the average of both. And the median (2.0000)

indicates majority of the respondents answer. This result indicates that most of the companies used

account payables for the purpose of getting more supplies from the suppliers.

Table 36: Estimated Annualized cost of trade credit


tendency

Dispersion

1-5.9% 43 51.2% Mean

= 2.4643

Maximum

= 3.00

6-10.9% 37 44%


(%)

Central

tendency

Dispersion

Earlier payment can bring cash discount with it 23 27.4% Mean

= 1.7262

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

To get more supplies from the suppliers 61 72.6%

Total 84 100%

52 | P a g e

11-14.9% 4 4.8% Median

= 3.0000

Minimum

= 1.00 Total

84 100%


As presented in Table 36, Respondents were estimate the annualized cost of trade credit as follows; 43

(51.2%) reply ―1.0 – 5.9%‖, 37 (44%) selected ―6 – 10.9%‖ option, and the rest 4 (4.8%) tick on ―11.0

– 14.9%‖ option. There were no firms whose annualized cost of trade discount is 15% & above. The


Therefore, the mean (2.4643) value indicates 6 – 10.9% discount on average and median (3.0000)

shows the higher response rate. The result reveals that majority of manufacturing companies have 1-

5.9% followed by 6-10.9% annual cost of trade credit that are incurred due to lost discount or financing

cost related to payment of trade credits.

Table 37: Responsibility and direction for management of Account payables

Responsible personnel Response Frequency Percentage (%) Central

tendency

Dispersion

Responsible personnel

assigned lonely to

Account payables

Management Practice

issues

Yes 11 13.1% Mean

= 1.8690

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 73 86.9%

Total 84 100%

Working manual


tendency

Dispersion

There is a formal and

written working

manual for Account

payables Management

Practice

Yes 19 22.6% Mean

= 1.7738

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

No 65 77.4%

Total 84 100%


53 | P a g e

Table 37 shows that 11 (13.1%) of target companies lonely assign a responsible personnel for their

Account payables management practice, but the majority 73(86.9%) of them did not assigned. And

only 19(22.6%) have a formal and written working manual for Inventory management practices, but

greater frequency 65(77.4%) of them have not working manual. The responses were then coded as 2

and 1 respectively from 2(highest score) to 1(lowest score). Therefore, the mean values (1.8690) for

responsible person and (1.7738) for working manual indicates the average score between the two

issues. And the median (2.0000) emphasis on majority of the respondents saw for both issues. This

indicated that not as much of commitment is given by several companies‘ responsibility as well as

direction of Account payables management practice.

In general, the results of the analysis on Account payables management practice précised as: most of

the Manufacturing companies in north Shewa Zone have not a written credit policy and never take

discount offered by suppliers. However, majority of them incurred 1-5.9% annual cost of trade credit.

To get more supplies from the suppliers is the major advantage associated with the company‘s account

payables. Assigning responsible personnel and having written working manual for Account payables

management practice is the limitation of most of the companies.

4.5 Working capital management policy

This section presents the result and discussion of data analysis related to working capital management

policy that includes: nature & type of working capital policy, responsibility for designing and

frequency of review on working capital policy.

Table 38: Over all working capital management policies

Over all WCM

Matters


(%)

Central

tendency

Dispersion

Nature of

working capital

policy

Formal (Written) 38 45.2% Mean

= 1.5476

Median

= 2.0000

Maximum

= 2.00

Minimum

= 1.00

Non formal

(unwritten)

46 54.8%

Total 84 100%

Type of

Working

Conservative 36 42.9% Mean Maximum

Moderate/Matching 29 34.5%

54 | P a g e

Capital

Policy

Aggressive 19 22.6% = 2.2024

Median

= 2.0000

= 3.00

Minimum

= 1.00

Total 84 100%

Responsibility

for designing

working capital

management

policy

Finance manager 41 48.8% Mean

= 2.2738

Median

= 2.0000

Maximum

= 3.00

Minimum

= 1.00

Board of directors 25 29.8%

General Manager 18 21.4%

Total 84 100%

Frequency of

review on

working capital

policy

Annually 51 60.7% Mean

= 3.4405

Median

= 4.0000

Maximum

= 4.00

Minimum

= 1.00

Semi-Annually 21 25%

Quarterly 9 10.7%

Monthly 3 3.6%

Total 84 100%


As depicts in Table 38, the manufacturing companies had a formal policy out of which 38 (45.2%) of

them have a formal working capital policy whereas nearly 46 (54.8) have Informal working capital

policy. The responses were then coded as 2 and 1 respectively from 2(highest score) to 1(lowest

score). Therefore, the mean value (1.5476) indicates the average of both. And the median (2.0000)

shows majority of the respondents answer. This indicates that majority of manufacturing companies in

Ethiopia follows Non formal or unwritten policy of working capital after that formal policy.

Regarding the type of working capital policy adopted by manufacturing companies, 19(22.6%) are

―Aggressive‖, 29 (34.5%) are ―Moderate/Matching‖, and the more of 36(42.9%) responded on

―Conservative‖. The responses were then coded as 3, 2, and 1 respectively from 3(highest score) to

1(lowest score). Therefore, the responses given to policy adopted ranges from 1(aggressive) to

3(conservative). Both mean (2.2024) and median (2.0000) indicates the lower risk and returns policy

of working capital, which is ranked second in the current survey, that the maturity of the sources of

the funds should match the nature of the assets to be financed. The result also implies that many of

manufacturing companies‘ conservative to practice strategies which have the lowest risk/ return ratios.

55 | P a g e

The responses on responsibility for setting the working capital policy in the manufacturing companies

shows that 41 (48.8%) is set by financial managers, 25 (29.8%) by board of directors, and remaining

18(21.4%) says by the General Manager. The responses were then coded as 3, 2, and 1 respectively

from 3(highest score) to 1(lowest score). Therefore, the mean (2.2738) value indicates more of board

of directors on average and median (2.0000) shows the higher response rate on finance manager. As a

result, in most of manufacturing companies finance managers followed by board of directors have the

responsibility of designing WC policy.

The reactions also show the result on the frequency of reviewing working capital policy, where

51(60.7%) review ―annually‖, 21(25%) review ―semi-annually‖, 9 (10.7%) review ―quarterly‖

whereas the rest of 3 (3.6%) manufacturing companies review on monthly basis. The responses were

then coded as 4, 3, 2, and 1 respectively from 4(highest score) to 1(lowest score). Therefore, the

responses given to frequency of policy review ranges from 1(monthly) to 5(annually). The mean

(3.4405) value almost declares semi-annually and median (4.0000) indicates majority of that

respondents near here annually. This result indicates that it takes a year for most manufacturing

companies in North Shewa zone to review their working capital policy on a regular basis.

At the last, concerning the above results on the issues of overall working capital policy, it Shortened

as: the majority of manufacturing companies in north Shewa zone have non-formal (unwritten) and

designed conservative working capital policy that are under the responsibility of financial managers

who make working capital review per year.

56 | P a g e

CHAPTER V: CONCLUSIONS AND RECOMMENDATION

5.1 INTRODUCTION

This chapter presents conclusions drawn out of the analysis, and forward recommendations that can

improve the working capital management practice of the manufacturing companies in North Shewa

Zone.

5.2 CONCLUSIONS

Efficient working capital management practices, particularly in manufacturing firms is vital and

contribute a lot for wealth maximization goal of such firms. According to Horne and Wachowicz

(2009) the current assets of a typical manufacturing firm account for over half of its total assets and

thus it is important to use such resources efficiently. This can be done through placing proper

personnel who give adequate attention in setting working capital policy, reviewing the adequacy of

working capital and employing methods and techniques which are proper to the management of

specific components of working capital.

Regarding to the main data analyzed on over all Working capital management practices, the result

indicated that the most importance of working capital management practice in manufacturing

companies of the target area is accelerating the collection of cash from debtors, and the

Management allotted much of the time for working capital financial Decision.

The objective of most of manufacturing company‘s working capital management practice in north

Shewa zone relies on achieving Liquidity, profitability and efficient use of current assets, and cash

considered as highly sensitive current assets.

Most of the manufacturing companies which are currently on production applied Days sales

outstanding and Cash conversion cycle as a metrics to measure the efficiency of working Capital

management practice.

Taking in to account the activities such as: working capital/cash budget is properly planned and

adequately allocate, Finance manager consume much of his working time to manage and control

short term capital, and Working capital management practice of the company helps to run its day to

day operation smoothly; the companies working capital management practice put on ―Moderate

level‖.

Concerning Cash and short term securities management; objective of the Practice in most of the

manufacturing companies in north Shewa zone relies on keeping an organization functioning, by

57 | P a g e

making the best use of liquid resources. Cash budget forecasting and Past Experience methods

utilized in most of the companies in determining target cash balance than ad-hoc decision. The

companies did not use any type of short term securities to invest their liquid funds.

In determining the level of cash management, the following issues such as: cash budgeting, proper

check preparation, timely cash Receipt, Formal cash disbursement, management and holding cash

voucher, timely cash deposit, and existence of idle cash are well performed. But assigning

responsible personnel and having written working manual for cash management practice is the

limitation of most of the companies.

Concerning accounts receivable management practice: The basis for selling products to customers

in most of the companies is both in cash & credit basis, and increasing/Stimulating Sales as a

reason to sell on account. ―Four c‘s‖ of credit sequential (character, condition, capacity and capital

of their customers) used as a major techniques used to assess customers‘ creditworthiness, and

average collection period & accounts receivable turnover techniques are commonly used in the

target companies to monitor payment behavior of customers. Most of the time the experience to the

change in credit policy is due to affecting sales followed by affects customer relationship. There is

a lack of attention in producing Age Analysis for Long-outstanding receivables and reports to top

management. Assigning responsible personnel and having written working manual for receivable

management practice is the limitation of most of the companies.

Related to the result and discussion on Inventory management practices, the finding shows that

majority of manufacturing companies used Inventory turnover and Average Inventory Period

techniques for monitoring level of Inventory. Materials requirement planning method is commonly

employed in replenishing Inventory. At the time of inventory purchase most of the companies

given priority to availability of material, possible discount, and Credit term of suppliers

correspondingly. Companies highly consider Production Schedule as a factor in production of

Inventory followed by Seasonality of demand. Inventory Level and Inventory Cost are the major

reasons to change Inventory Policy and most of the companies undertaking Inventory counting

annually. The three major types of Inventory systems; raw material, work in progress, and finished

good are applied relatively in all target companies.

Concerning the Thoughts on Inventory Management Practice of the Companies most of the

respondents agreed up on the following activities such as; Management correlates raw materials

holding level with the volume of production, Production of the Company is led by market demand,

the Company does not have obsolete stock, and the Company has an economic order level for raw

58 | P a g e

materials new order and delivery. However according to their opinion, they are not agreed on the

Company has a practice by which it produces age analysis of its inventories and reports to the top

management.

In defining the level of Inventory use & hold practice most of the companies place on moderate

level. In relation to the practice, assigning responsible personnel and having written working

manual is somewhat better than other components of working capital management practices, but

not sufficient.

Concerning Account Payables Management practice; results affirmed that Most of the

Manufacturing companies in north Shewa Zone have not a written Credit Policy, and more than

half of a target companies never take discount offered by suppliers due to slothfully paying their

short term debt earlier. To get more supplies from the suppliers is the major advantage associated

with the company‘s account payables, and majority of companies have 1-5.9% followed by 6-

10.9% annual cost of trade credit that are incurred due to lost discount or financing cost related to

payment of trade credits. Assigning responsible personnel and having written working manual for

Account payables management practice is the limitation of most of the companies.

Regarding the overall working capital policy, the majority of manufacturing companies have Non

formal (unwritten) and Conservative working capital policy that are under the responsibility of

financial managers who make working capital review per year.

5.3 RECOMMENDATION

Managing working capital effectively is critical to the company‘s long-term success, and it is

essential in assessing the organizations over all financial health. Standing from the conclusion on

the findings and results above to strengthen the best practices and overcome the constraints the

following suggestions are recommended by the Researcher.

The companies should utilize all the importance‘s delivered from working capital management

practice, to run its day to day operation smoothly; through achieving the setting objectives,

finance manager consume much of his working time to manage and control short term capital

and the management may sustain in allotting much of the time for working capital financial

decision and for proper planning and adequate allocation of working capital/cash budget.

The Basic metrics must apply to measure the efficiency of working Capital management

practices, and the companies should use all the necessary techniques to enhance the level of

their working capital management practice.

59 | P a g e

Companies must carry out a practice by which producing Age Analysis for Inventories &

Long-outstanding receivables, and reports to top management for decision making.

Companies should have a written Credit policy. In paying their short term debt earlier and take

discount offered by suppliers, they can reduce annual cost of trade credit. Therefore, it is

recommended to compare the benefits and costs of taking discounts offered by suppliers.

Without the right person at the right position and job description, the effectiveness and

sustainability of the organizations is in danger.

Regarding working Capital policy, it should be written and there is a seasonal review as when

it is necessary.

5.4 SCOPE FOR FUTURE RESEARCH

This study has a limitation just like any other studies. Assessments are made only on the

manufacturing companies of north Shewa zone. Thus, interested researchers can study further in

the area by incorporating merchandise and service firms to see if any difference exists in the

working capital management practices. And may investigate how some company specific issues

like size, profitability and other factors affect the working capital management practices.

60 | P a g e

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Appendix -1: Questionnaire

Debrebirhan University

College of Business and Economics

Department of Accounting and Finance

Research Questionnaire

Objective: -The main objective of this inquiry form is obtaining the essential data to investigate the

working capital management practices of manufacturing companies in north Shewa zone. The research

will be conducted at industry level not of comparative between individual firms. Therefore; I kindly

request for your decisive response, which contribute to the success of my thesis in partial fulfillment of

MSc in Accounting and Finance.

Instructions: -1) No need of writing your name; instead, give your response using sign or fill

in the blank space left for this purpose.

2) If necessary, the respondent can put more than one tick sign for each question.

Thank you in advance, for your cooperation!

Part -① General Information

1. Your status/job position

2. Your Work Experience in the industry

3. Your Educational Level

√

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Part -② Main Information

I.Over all Working capital management Questions:

1. Which importance is achieved through the company working capital management practice?

Speeding up collections slowing down payments

Minimizing inventory level increasing inventory level

Minimizing bank account Increasing bank account

Other activities (please specify) --------------------------------------------------------------------------

2. To which financial management decision more time is allotted in the company?

Capital Structure Capital Budgeting Working Capital

Dividend Decision Valuation Decision

3. What is the objective of Working Capital Management practice in your Company?

Efficient use of current assets Liquidity profitability and efficient use of current assets

Liquidity and profitability Profitability Confer strictly to Gov‘t regulation

Any other (Please Specify) -----------------------------------------------------------------------------

4. Which Current asset(s) is/are highly sensitive to management of your Company?

Cash and Short-term securities Inventories Account receivable

any other (Please Specify) -------------------------------------------------------------------------------

5. Which metrics of working capital management practice are applied in the company?

Day‘s sales outstanding Days payables outstanding expenses

Days inventory outstanding Cash conversion cycle

Net Trade Cycle Other Metrics (Please Specify) -------------------

6. Level of working capital management practice:

No.

Questions

Level

Very

High

High Neut

ral

Low Very

Low

1. To what extent working capital/cash budget properly planned

and adequately allocate?

2. To what degree the financial manager consume his working time

to manage and control short term capital?

3. At which level Working capital management practice of the

company helps to run its day to day operation smoothly?

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II. Cash and short term securities management Practice of the company:

1.What is the objective of cash management in your company?

To keep an organization functioning, by making the best use of liquid resources.

To Eliminates idle cash balance To deposit collections on timely basis.

To hold as big as possible cash so as to highly liquid.

Any other (Please Specify) --------------------------------------------------------------------------

2. What kind of method is used by your Cash Management Practices in determining target cash balance?

Cash budget and forecasting Past Experience Ad-hoc Decision

Any other (Please Specify) ---------------------------------------------

3. Is there a short term security that the company can invest its liquid funds? Yes No

4. If your answer is yes, on which short term securities that the company can invest its liquid funds?

Commercial papers mutual funds corporate notes

Mortgage - backed securities any other (Please Specify) --------------------------------

5. What type of Strategy your Company Preferred to Manage the Portfolio of Marketable Securities?

Buy and hold to maturity Portfolio perspective Play the yield curve

Ad-hoc decision other strategies (Please Specify) --------------------------------

6. The Average time for Maturity of Portfolio Marketable Securities in your company is?

One week to one month One month to three months three months to six month

More than six months any other (Please Specify) --------------------------------------------

7. Is responsible personnel assigned lonely to cash and short term security practice issues?

Yes No

8. Is there a formal and written working manual for cash and short term security practices?

Yes No

9. Level of Cash & short term securities management practice:

No.

Questions

Level

Very High High Neutral Low Very Low

1. Cash budgeting

2. proper Check preparation

3. Timely cash Receipt

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4. Formal cash disbursement

5. Management and Holding cash voucher

6. Timely cash deposit

7. Existence of Idle cash

III. Accounts Receivable Management Practice of the company:

1.What is the Company‘s basis for selling its Products to Customers?

Cash basis Credit basis only Mixed

2.What is the Company‘s motive to sell on Account?

Increasing/Stimulating Sales Supporting customers‘ liquidity

Increasing customer base because it is industry practice

Other reason (Please Specify) -------------------------------------------------------------------------------

3.What technique the Company uses to Assess Customers‘ Creditworthiness?

―Four C‘s‖ of Credit Sequential (character, condition, capacity and capital of their customers)

Credit Analysis Credit Scoring

Any other (Please Specify) ---------------------------------------------------------------------------------

4.What technique the Company Uses to Monitor Payment behavior of Customers?

Accounts Receivable Turnover Average Collection Period

Aging of Receivable Schedule Others Technique (Please Specify) ---------

5.What is your experience as to the change in credit policy?

It affects our sales it affects our customer relationship

It affects our profit level

Any other (Please Specify) -------------------------------------------------------------------------

6. Does the Company have long-outstanding receivables? Yes No

7. Has the Company a practice by which it produces age analysis of its receivables and reports to the

top management? Yes No

8. Is responsible personnel assigned lonely to Accounts Receivable Management Practice issues?

Yes No

9. Is there a formal and written working manual for Accounts Receivable Management Practice?

Yes No

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IV. Inventory Management Practice of the company:

1. What technique used in monitoring the level of inventory? Inventory turnover

Average Inventory Period Others Technique (Please Specify) ------------

2. Which technique is employed in Replenishing Inventory? Economic Order Quantity

Material Requirement Planning Just in Time

Others Technique (Please Specify) ---------------------------------------------------------------

3. What factors considered in inventory purchase? Availability of material

Possible discount Credit term of suppliers Shortage cost

Inflation Effect Other factors (Please Specify) --------------------------

4. What factors considered in production of inventory? Seasonality of demand

Shortage cost production schedule Inflation Effect

Other factors (Please Specify) --------------------------------------------------------------------------

5. Which criteria to be considered up on a proposed change in inventory policy?

Inventory level Inventory Cost Profit Return on Investment

6. What about the frequency of Inventory counting period?

Monthly Quarterly semi-Annually annually

Any other (Please Specify) ----------------------------------------------------------------------------

7. Which type of inventory is available in your company?

Raw material Inventory work-in-progress Inventory finished goods Inventory

8. Which is the level of Inventory use & hold practice of the company?

Very high High moderate Low Very low

9. Is responsible personnel assigned lonely to Inventory Management Practice issues?

Yes No

10. Is there a formal and written working manual for Inventory Management Practice?

Yes No

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11. What are you thought on the following?

N

o.

Statements

Strongly

agree

Agree

Neut

ral

Dis-

agree

Strongly

disagree

1. Management correlates raw materials holding level with

the volume of production.

2. Production of the Company is led by market demand.

3. The Company does not have obsolete stock

4. The Company has an economic order level for raw

materials new order and delivery

5. The Company has a practice by which it produces age

analysis of its inventories and reports to the top

management

V. Account payables Management Practices of the company:

1. Does the Company have a written credit policy? Yes No

2. How the company practice respect to pay its short-term debt earlier and brings cash discount with it?

Always take discount sometimes take discount

Pay latter but take discount never take discount

3.What is the advantage associated with the company‘s account payables?

Earlier payment can bring cash discount with it.

To get more supplies from the suppliers. Any other (Please Specify) ------------------

4. How much is the Estimated Annualized cost of trade credit of the company?

1-5.9% 6-10.9% 11-14.9% 15% and above

5. Is responsible person assigned lonely to Account Payables Management Practice issues?

Yes No

6. Is there a formal and written working manual for Account Payables Management Practice?

Yes No

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VI. Working capital management policy of the company:

1. What is the nature of working capital policy of the company?

Formal (Written) Non formal (unwritten)

2. If the nature of working capital policy of the company is formal, which type of it practiced in the

Company?

The firm decides to finance a part of the permanent working capital by the short term sources to

minimize exceed liquidity while meeting the short term requirements

Long-term funds should be used to finance the fixed portion of current assets requirements in a

manner similar to the financial of fixed assets.

The use of short-term funds should be restricted to only emergency situations or when there is an

unexpected outflow of funds.

If any other (please specify) ------------------------------------------------------------------------------

3. Who is responsible for designing working capital management policy?

Board of directors General Manager

Finance manager If any other (please specify) -----------------------------

4. What about the frequency of review on working capital policy?

Monthly Quarterly semi-Annually annually

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Appendex-2: List of NSZ manufacturing industries on production.

No. Name of the company Type of production

Address

Town/District Tell no.

1.

Ruth and Hirut Dairy production

PLC. Dairy production

Angolela Tera

0911547495

2. Kalkidan Flour Factory Flour mill Shewarobit

3. Enat Flour Factory Flour mill Shewarobit

0913452489

4. Non Agro-industry trading PLC.

Packing natural

mineral water

Bassona

Worana 0911663335

5.

National Tobacco farm and

processing S.C.

Tobacco farm and

processing

Ataye

6. Dashen Brewery S.C. Brewing Debrebirhan

911376022

7. Azila Electronics PLC. Cooler Assembly Debrebirhan

930293761

8. Habesha Brewery S.C. Brewing Debrebirhan

912338351

9. Ethal Almunium PLC.

Cookware

manufacturing

Debrebirhan

912042492

10. Sekina Industrial PlC. Flour mill Debrebirhan

911777195

11 Debrebirhan wood processing S.c.

Cheap wood

production

Debrebirhan

920320438

12 Debrebirhan Tannery S.C. Leather tan Debrebirhan

911777285

13 Aqua safe Debrebirhan PLC.

Packing natural

mineral water

Debrebirhan

929167437

14 D.Y. Flour factory Flour mill Debrebirhan

911629065

15 Wodera Union Flour factory PLC. Flour mill Debrebirhan

911388194

16 Tera PLC.

Cosmetic oil

production

Debrebirhan

911219527

17 Debrebirhan Blanket factory PLC. Textile factory Debrebirhan

18 Solomon Fantu milk processing Diary production Debrebirhan

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factory/Happy milk/

19

Amare kelemu /liche/ Garment

Factory Garment

Debrebirhan

20 Finela Plastics PLC

Plastic

Manufacturing

Hageremariam/

Tulofa/ 912643180

21

Human well Pharmaceuticals

Ethio- PLC.

Pharmaceutical

Factory

Hageremariam/

Tulofa/ 944118641

22 Tofic Mariye Compensato Factory

Compensato

production

Hageremariam/

Tulofa/ 911259878

23 Ever Bright PLC.

Plastic

Manufacturing

Hageremariam/

Tulofa/ 911959575

24 Sino Steel PLC. Metal Factory

Hageremariam/

Tulofa/

929288883

25

Metal and Engineering

Technology Corporation/METEC/

Infrastructural

Machineries

Assembly

Debrebirhan

912050481

26 Rorank Business PLC. Alcohol beverage Chacha

913 165668

27 Tamire & families PLC.

Packing natural

mineral water

Chacha

911523164

28 Misale Agro-industry PLC. Diary processing Angolela Tera

935981610

29

Yohannes Aschenaki Diary

processing Factory Diary processing

Angolela Tera

911208154

30 Dera Packaging PLC. Capsule Factory Debrebirhan

930100015

31 Amaira Textile Mills PLC.

Textile & Garment

Factory

Debrebirhan

911889883

32

Nathaniel, Salome & Friends

Partnership.

Flexible

manufacturing

workshop

Debrebirhan

33 ZAMG PLC. Diary processing Angolela Tera

911406765

34

Eleni Teklehaymanot Candy

Factory Candy production

Debrebirhan

912160147

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Appendex-3: Cronbach’s alpha reliability statistics

Item-Total Statistics

Scale Mean if Item Deleted

Scale Variance if

Item Deleted

Corrected Item-Total Correlation

Squared Multiple

Correlation

Cronbach's Alpha if Item

Deleted

Importance of WCM 136.5238 166.783 .868 . .773

Time allotted to FM decisions 137.5952 156.822 .959 . .762

Objective of Working Capital Management practice

136.8690 176.693 .843 . .783

Highly sensitive current asset 138.8571 173.642 .915 . .780

Metrics applied in working capital management practice

136.4643 164.444 .926 . .770

WC budget planning and allocation 137.4286 162.007 .938 . .767

Finance manager time consumption for WC 138.0833 156.318 .892 . .762

WC MP for day to day operation 137.5714 158.802 .948 . .764

Objective of cash management practice 137.9048 175.075 .868 . .781

Method used in determining target cash balance

138.9524 176.889 .797 . .784

Responsible Personnel For Cash Management Practice

139.9524 176.889 .797 . .784

Working Manual For Cash Management 139.7857 177.014 .880 . .784

Level Of Cash Budgeting 137.5952 162.653 .912 . .768

Level of Proper Check Preparation 137.5357 162.878 .928 . .768

Level Of Timely Cash Receipt 138.1429 155.040 .891 . .761

Level Of Formal Cash Disbursement 138.7976 225.007 -.895 . .843

Level of Management and Holding cash voucher 138.8690 223.344 -.907 . .840

Level of Timely cash deposit 139.1667 218.454 -.909 . .834

Existence of Idle cash 137.4881 208.711 -.568 . .828

Basis for selling products to customers 138.9167 195.138 -.357 . .808

Motives To Sell On Account

139.2976 221.874 -.920 . .838

Techniques used to Assess Customers Creditworthiness

139.9881 206.422 -.930 . .819

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Techniques Used to Monitor Payment behavior of Customers 139.4762 214.060 -.905 . .829

Experience to the change in credit policy 140.0000 204.747 -.914 . .817

Long outstanding receivables 139.9524 197.709 -.729 . .809

Producing Age Analysis 139.7857 193.375 -.469 . .804

Accounts Receivable Management Responsible personnel

139.6667 190.321 -.272 . .800

Accounts Receivable

Management working

manual

139.8452 195.144 -.577 . .806

Techniques used in monitoring the level of Inventory

139.8214 213.835 -.922 . .828

Techniques employed in Replenishing Inventory 139.6429 209.678 -.897 . .823

Factors considered in Inventory purchase 140.3333 196.466 -.823 . .807

Factors considered in production of Inventory 140.0000 198.458 -.776 . .809

Criteria to change in Inventory policy 140.1548 199.217 -.862 . .810

Frequency of Inventory counting period 137.2143 168.869 .909 . .775

Level of Inventory use and hold practice 138.3571 164.256 .940 . .769

Inventory Management Responsible personnel 139.9524 176.889 .797 . .784

Inventory Management Practice written working manual

139.9167 176.824 .811 . .784

Management correlates raw material with volume of production

137.7857 158.797 .904 . .764

Production of the Company is led by market demand 137.5595 156.442 .966 . .761

The Company does not have obsolete stock 137.3452 159.771 .955 . .765

Company has economic order level for raw materials

137.6905 158.457 .935 . .764

A practice by which produce sage analysis for inventories

138.2262 156.274 .865 . .763

The Company have a written credit policy 139.7738 177.189 .878 . .784

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Paying short term debt earlier and brings cash discount with it

138.0238 168.337 .923 . .774

Advantage associated with the companies account payables

139.7857 177.014 .880 . .784

Estimated Annualized cost of trade credit 139.0476 174.070 .855 . .780

Account payables Management Practice Responsible personnel

139.6429 180.811 .745 . .788

Account payables Management Practice written working manual 139.7381 177.882 .861 . .785

Nature of working capital policy 139.9643 176.926 .792 . .784

Type of Working Capital Policy 139.3095 168.771 .895 . .775

Responsibility for designing working capital management policy

139.2381 168.184 .915 . .774

Frequency of review on working capital policy 138.0714 167.706 .921 . .773

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