Working capital management in trading and manufacturing firms in Accra and its effect on liquidity and profitability - a focus on inventory and trade receivables

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Even though, the SME sector plays a major role in the development of the Ghanaian economy, yet they are faced with huge challenges including inadequate financing and poor working capital management. Working capital management is expected to enhance the profitability and liquidity of enterprises. The aim of this study is to explore the working capital management practices of SMEs using inventory and trade credit as factors. The study was qualitative (descriptive) using structured questionnaires and interviews to gather data from thirty (30) participants, and also quantitative, using accounting ratios as a measure of liquidity and profitability. The five C's were used as a standard practice for trade receivables management. Formal record keeping on inventory, stock take, the use of cash and sales budgets, the application of inventory management tools and order cycle delivery time were discussed as practices for managing inventory. Dependent variables; gross profit ratio, operating profit margin and return on total assets were used as measures of profitability, whiles current ratio, quick/acid test ratio, cash ratio and net working capital were used as measures for liquidity for a three year period. The findings showed that SMEs make a good attempt at managing working capital well through the adoption of effective inventory and trade receivables management practices. The firms selected show signs of stable profitability and adequate liquidity. The firms exhibited a high recovery on debt and also recorded high levels of inventory which increased their current assets relative to current liabilities.
Thesis submitted to the Department of Business Administration, Ashesi University College, in partial fulfillment of Bachelor of Science degree in Business Administration, April 2013
Ghana, small and medium enterprises (SMEs), working capital, inventory