UNIVERSITY OF GHANA BUSINESS SCHOOL

WORKING CAPITAL MANAGEMENT

PRACTICES OF VODAFONE GHANA

ENOCH CLOTTEI TETTEH

Table of content

Content

Page

1.0 Background of the study 1.1 Problem statement 1.2 Objective of the study 1.3 Significance of the study 1.4 Scope of the study 1.5 Limitation of the study 1.6 Organization of the chapters

3 4 4 5 5 5 6

1.0 Background to the study

Globalization offers prospects for companies to enter into new markets in different geographical location, increase profits and growth. Much depends on the company management to develop the capabilities to take advantage of these prospects and become more successful. One of the most important considerations for management is working capital; efficient working capital management can lead to increased company profitability, growth and shareholder value, making the company more competitive and stronger in the market.

Working capital management is an important aspect in the approach of a company to generate shareholder value (Shin and Soenen, 1998). Moreover, working capital has a high influence in the profitability of a company due to the fact that the earnings can be significantly increased given a certain amount of working capital (Lazaridis and Tryfonidis, 2006).

According to Smid (2008), working capital can be defined as the capital invested in operating processes to buy, make and sell. In a mathematical approach, net working capital is defined as the difference between current assets and current liabilities (Vijayakumar, 2001). In this way it can be used as an indicator of the profitability of a company and its ability to pay its short term debts (liquidity).

Working capital management is therefore, focused on how to manage the current assets of the company, like cash, inventories and accounts receivables, in order to improve profitability. However, it must be noted that the measures taken could have an adverse effect on the ability to pay the short term debts (Shin and Soenen, 1998).

An efficient working capital management strategy is necessary to find the right balance between profitability and liquidity. It has been shown that some companies that do not manage working capital in an efficient way can go bankrupt even if they have good profits and operations (Chiou, Cheng and Wu, 2006).

1.1 Problem statement

Many researchers have studied working capital from different views and in different environments. Eljelly (2004) explained the efficient liquidity management involves managing and controlling current assets in such a manner that eliminates the risks of inability to meet due short-term obligations and avoid excessive investment in those assets. An evaluation of the extent of literature in Ghana reveals few researches on working capital management that had been conducted in Ghana. Abor (2004) examines the relationship between working capital and corporate profitability in Ghana whiles Isshaq and Bokpin (2009) considered the corporate liquidity of listed firms in Ghana.

The purpose of this assignment is to discuss how companies set their working capital management policies and the main aspects they consider for this. Firstly, different working capital management policies will be examined along with the principal factors involved. Subsequently, the working capital management policies and practices of Vodafone Ghana in the telecom industry will be analyzed, comparing its performance through time.

1.2 Objective of the study

The objectives of this study are: 1. To identify the components of working capital at Vodafone 2. To examine the working capital management practices of Vodafone 1.3 Significance of the study

This study will add to the existing literature by bridging the gap identified in the problem statement. Secondly, the study will provide an insight to practitioners in the industry on how to manage the version components of working capital in order to increase corporate profitability and hence maximize shareholders wealth.

1.4 Scope of the study

This study will be restricted to or conduct on Vodafone Ghana as an entity in the telecom industry in Ghana. The premise for selecting Vodafone is influenced by easy accessibility to information as and when it is needed.

1.5 Limitation of the study

The major setback that the study anticipates to encounter in conducting a meaningful research will be unavailability of local literature on OFCF and working capital among service related companies like telecom companies. This will however push me to rely on foreign literature for the study, which will not reflect the reality of the situation.

1.6 Organization of the chapters of the study

The study comprises of five chapters, which are organized as follows:

Chapter one covers the background of the study, the problem statement, the limitation and delimitation of the study, the significance of the study and the organization of the study.

Chapter two explores present literature relating to the working capital management.

Chapter three sheds lights on the data collection. Issues discussed include the sample size, sampling technique among others.

Chapter four provides an analysis and discussion of the results.

Chapter five discusses the findings of the study, summary of the entire study and provides salient recommendations for policy makers.

Concept of Working Capital and Working Capital Management There are two concepts of working capital viz. quantitative and qualitative. Some people also define the two concepts as gross concept and net concept. According to quantitative concept, the amount of working capital refers to total of current assets. Adam Smith, (The Wealth of Nations, 1937) referred to current asset as circulating capital. Current assets are considered to be gross working capital in this concept. The qualitative concept gives an idea regarding source of financing capital. According to qualitative concept the amount of working capital refers to excess of current assets overcurrent liabilities. L.J. Guthmann defined working capital as the portion of a firms current assets which are financed from long term funds. The excess of current assets over current liabilities is termed as Net working capital. In this concept net working capital represents the amount of current assets which would remain if all current liabilities were paid. Both the concepts of working capital have their own points of importance. If the objective is to measure the size and extent to which current assets are being used, then gross concept is useful; whereas in evaluating the liquidity position of an undertaking net concept becomes pertinent and preferable. It is necessary to understand the meaning of current assets and current liabilities for learning the meaning of working capital, which is explained below. Current assets According to Parasanna Chandra (1984), current assets have a short life span. These types of assets are engaged in current operation of a business and normally used for short term operations of the firm during an accounting period i.e. within twelve months. The two
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important characteristics of such assets are, (i) short life span, and (ii) swift transformation into other form of assets. Cash balance may be held idle for a week or two, account receivable may have a life span of 30 to 60 days, and inventories may be held for 30 to 100 days. Fitzgerald defined current assets as, cash and other assets which are expected to be converted into cash in the ordinary course of business within one year or within such longer period as constitutes the normal operating cycle of a business. Current liabilities The firm creates a Current Liability towards creditors (sellers) from whom it has purchased raw materials on credit. This liability is also known as accounts payable and shown in the balance sheet till the payment has been made to the creditors. The claims or obligations which are normally expected to mature for payment within an accounting cycle are known as current liabilities. These can be defined as those liabilities where liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current assets, or the creation of other current liabilities. Circulating capital working capital is also known as circulating capital or current capital. The use of the term circulating capital instead of working capital indicates that its flow is circular in nature.