CHAPTER ONE

1.0. INTRODUCTION
This chapter deals with the background of the study, statement of the problem, research
objectives and hypothesis, significance of the study, limitation, scope of the study and
organization of the study.

1.1 BACKGROUND OF THE STUDY

Every business in this world no matter its size and nature needs adequate liquid resource
to maintain cash flow for daily operation. It needs sufficient cash to pay its expenses and
pay creditors if it is to maintain its working force and ensure constant and continuous
supplies. Normal operating activities create and liquidate the elements of working capital
thus working capital deals with the current assets and current liabilities of a business
organization.

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 that he actually sold or ‘turned over’ to produce
his profits. The wagon and horse were his fixed assets. He generally owned the horse and
wagon, so they were financed with “equity” capital but to buy the merchandise, he
borrowed fund, which were called working capital loans that had to be repaid after each
trip to demonstrate to the bank that the credit was sound. It is important to know that
working capital management is an absolute necessity to the operation of all kinds of
business organization thus Electricity Company of Ghana cannot do business without
working capital just as they cannot without building or equipment.

Working capital require funds just like fixed assets thus providing working capital takes
more or less permanent investment fund, for example, suppose a company operates with
ten thousand Ghana cedi (GH10,000) of inventory, even though individual inventory
being bought and sold, approximately ten thousand Ghana cedi is always required to
support total inventory. Therefore, in effect, the firm buys an inventory level like it buys a
machine. The machine is true receivables although it is more difficult to visualize. Thus
when a product is sold on credit a receivable is created which will not be realized in cash
until the customer pays the debt.

Meanwhile the receivables represent money the Electricity Company of Ghana has
recognized from sales but does not have. Keeping cash in bank is another example. Even
though money is constantly flowing in and out of the company’s bank account; average
balance has to be maintained to pay bills and conduct day to day operations. That money

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has come from somewhere and it represents funding requirement. In effect the Electricity
Company of Ghana buys cash balance in the bank account. On the other hand; operating
activities also create payables and receivables’ for example when inventory is purchased
that can be used without temporarily paying and which has been received but yet to pay is
reflected as an accrual. These liabilities provide an offset to the funding requirement of
gross working capital (Current asset).These liabilities come automatically with the
associated assets and operating activities and they are sometimes referred to as
spontaneous financing.

Maintaining adequate working capital is not just important in the short term but also
sufficient liquidity must be maintained in order to ensure the survival of a business
organization in the long term. Even a profitable business may fail if it does not have
adequate cash flow to meet its obligations when they fall due. Ensuring that sufficient
liquid resources are maintained and control is a matter of working capital management
and it involves the administration of current asset and current liabilities. Therefore the
question then is how Electricity Company of Ghana goes about managing working capital
to achieve maximum profitability.

1.2 STATEMENT OF THE PROBLEM

All activities and the operations of business organization which require the commitment
of fund must be managed to ensure maximum returns and profitability. Therefore,
working capital must be treated the same with respect to its elements. Mismanagement of
working capital can effectively bring to a halt the operation of what might otherwise be a
successful and profitable company. Various inefficiencies that occur in public institutions
may be as a result of inefficient working capital management. Some institutions do not
generate enough revenue to meet their operational costs. In effect the government keeps
on drawing money from the taxpayer’s money to meet some of the operational costs of
such institutions, thus justifying the fact that they cannot be in operation.

In recent times there have been hues and cries from Electricity Company of Ghana over
their inability to recover cost. ECG is of the view that the problem is as a result of
consumers failing to pay economic prices for the power they consume, dwelling mainly
on the issue of lack of proper financial management and specifically working capital
management.

This therefore creates the environment for one to undertake a critical study into finding
out, how effective working capital management can help improve the performance of
ECG .for it to overcome the challenges of turbulent macro-economic environment.

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1.3 HYPOTHESIS

NULL;
Effective and efficient management of working capital is necessary to the success of
Electricity Company of Ghana.

ALTERNATE;
Effective and efficient management of working capital is not necessary to the success of
Electricity Company of Ghana.

1.4 RESEARCH OBJECTIVES

The objectives of the study are as follows;
1 To identify the role and responsibility of working capital management in Electricity
Company of Ghana.
2 To assess the credit management policy in electricity company of Ghana.
3 To assess the cash management and debt collection of the company.
4 To examine whether Electricity Company of Ghana’s revenue is adequate for
its operations.
5. To assess the procedure the company employs in the management of its
inventory including cables, insulators, transformer and meters
6. To examine the measures that is being employed by the company to reduce its cost of
operations.

1.5 SIGNIFICANCE OF THE STUDY

The study is of significant importance to the individual researchers, the academic
community and policy makers of Electricity Company of Ghana.

To the researchers, it is required for the partial fulfillment of the condition necessary for
the award of the Higher National Diploma Certificate in Accountancy. Also conducting
the research at the polytechnic level provides us with the skills to undertake other
research in the future.

To the academic community, students taking courses in finance may use the report as a
reference material. It may want to provide a basis for other researchers who may want to
pursue any research to the subject or a related issue in the future

Policy makers in the electricity company of Ghana and the management of other business
organization may use the findings as a guide in formulating policies to ensure efficient
working capital management.

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1.6 SCOPE OF THE STUDY
This research study is limited in scope to working capital management in Electricity
Company of Ghana.

1.7 LIMITATIONS
In the course of the study, few problems were encountered which affected the conduct
and findings of the study.

One obvious problem is finance. The researchers had no regular source of income. Aside
the project attracted no donor support or sponsorship from anywhere; this means the
researchers had no option than to use their meager loan in financing the study.

Another problem is that of time. The research was undertaken alongside our academic
work in the semester and we had limited time of about four months to complete the work,
with pressure from other academic duties. This affected the extent and the depth of issues
considered under study.

Access to relevant literature on the subject was a problem that affected the study and also
problems associated with the collection of information. Information gathered from the
internet and library books were not enough.

1.8 ORGANIZATION OF THE STUDY

This study is categorized into five chapters, thus;

The first chapter covers the background of the research study, significance of the study,
statement of the problem, hypothesis, research objectives, and scope of the study,
limitations and organization of the study.

The second chapter covers the literature review.

The third chapter embraces the methodology.

Chapter four also covers the data analysis.

The final chapter covers the summary of findings, conclusion and recommendations of
the research study.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION
Working capital has been given various definitions and explanations by different school
of thought. It is therefore important that the works of such scholars be reviewed to give a
better and in-depth understanding of working capital. The chapter reviews literature on
the meaning of working capital, the components of working capital management, etc.

2.1 MEANING OF WORKING CAPITAL

According to Hill (1993) management of capital relates to the finance and investment of
non-human resource: that is physical and monetary assets for the purpose of benefits in
terms of profitability.

Pandey (1991) explains that working capital is the sum of stocks, account receivable,
cash and marketable securities. This focuses attention on two aspects of current asset
management; optimum investment of current asset and financing of current asset.

According to Easking (1997) working capital is define as the current asset which
represents the portion of investment that circulates from one firm to another in the
ordinary conduct of the business.

Choyal (1991) goes on further to describe the concept of working capital and its
importance as follows; “Working capital of a corporation is the lifeblood which flows
through the veins and arteries of the business structure. It engages every parts of the
structure, gives courage and morale to the brain (management) and muscles (personnel),
digest to the best degree the raw materials used by its constraints and regular flow and
returns to the heart (cash flow) for another journey and so on. When working capital is
lacking or slows up the financial bodies have value only as junk”.

Howard (1971) defines working capital as constituting those assets held for current use
within a business less the amount that is due to those await settlement in the short-term
for value supplied in whatever form. He also goes further to explain working capital as
the lifeblood of any business and the result ensuring from and dependent upon its
management not only has a definitive effect on the profitability but also may even be a
decisive factor in the firms continued existence.

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Arnold (1998) also defines working capital as the difference between current assets and
current liabilities. Working capital thus means net currents assets or net current
liabilities(if current liabilities exceeds current assets).It is the investment a company
makes in assets which are in continual use and are turned over many times in a year.
Working capital encompasses the following: short term resources (inventory, debtors,
investment, and cash) less short term liabilities (trade creditors, short term borrowing,
other credit payable within a year).

From the various definitions and explanations, it could be deduced that net working
capital being the difference between current assets and current liabilities is a qualitative
concept. It indicates the liquidity position of the firm and the extent to which working
capital needs may be financed by permanent sources of funds.

In this study, working capital deals with current assets and current liabilities. The current
assets comprises of cash, stock of raw materials, finished goods and work in progress
(inventory), account receivables or debtors. Current liabilities however involve trade
creditors, taxations payable, dividend payable, short term loans, and long term loans
maturing within the particular year. This study focuses on assets that one easily converts
into cash and the study is based on mainly how the firm will be able to meet its short term
obligations.

2.2. THE COMPONENTS OF WORKING CAPITAL MANAGEMENT

Working capital management is generally defined as the administration of current assets

and current liabilities. It can also be described as ensuring that sufficient liquid resources
are maintained which will help to achieve a balance between the requirement to minimize
the risk of insolvency and the requirements to maximize the returns on assets. (Arnold
1998).

Numerous factors have their influence on the composition of working capital

management. The nature of the business itself, economic factors, government influences
on credit control, the bank rates and the supply of money, the availability of materials and
the company’s own internal policies all have their effect from time to time and in varying
degrees on what may constitute working capital of a firm

Westerfied et al (1988) stated that working capital management is made up of two main
components namely: current asset management (.cash, inventory, debtors) and current
liabilities management (creditors, bank overdraft).

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2.2.1 CURRENT ASSETS MANAGEMENT

Wood (1999) defines current assets as assets normally converted into cash within one
accounting year. Current assets are the administration of cash in hand and at bank,
account receivables and inventory. The profitability of retaining current assets in a firm
can be measured roughly as an inverse ratio to their realisability; the greater their
liquidity, the lower the risk involved in holding them and so the smaller the returns they
render. Consequently, the greater the proportion of current assets held other than in liquid
form the greater the profitability.

The short term liquidity of a firm or a business enterprise (Electricity Company of

Ghana) is subject to the availability of enough current assets that the firm uses to pay its
short term financial commitment. A moderately large amount of current asset may imply
a better liquidity position of the firm. This is based on the assumption that there is enough
cash at hand, stock of goods can be readily sold out and the amount due from debtors can
be realized within a short notice.

2.2.1.0 CASH MANAGEMENT

Arnold (1998) has defined cash management as the fiscal amount of money that firms use
for their daily activities. Cash management involves managing the money of a firm in
order to maximize cash available and interest income on any idle fund. It encompasses
the management of the firm’s cash flows, maintenance of appropriate cash balance,
decision regarding investment in securities and short term borrowings.

Cash is the lifeblood of every organization, without which, an organization ceases to

function; therefore, all efforts and time needed must be geared towards cash management.

Brealey et al (1991) pointed out three (3) main motives for holding cash; the
precautionary, transactional and speculative motives.

1) The transactional motives

This is the need to hold cash to meet payment arising in the ordinary course of business.
For example; purchase, labor, tax and dividend.

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2) The precautionary motives;

This has got to do with maintaining a cushion or buffer to meet unexpected

contingencies. The more predictable the cash flow of the firm, the fewer the
precautionary cash balances are needed and also ready borrowing power to meet
emergency cash needs drains the need to hold precautionary cash balances.

3) The speculative motives;

This relates to holding cash in order to take advantage of unexpected changes in security
prices. When a company expects interest rate to rise and security prices to fall, the
speculative motive will suggest that the company should hold cash until the rise in
interest rate ceases.

Cash management also involve the analysis of certain financial instruments thus cash
flow statement, cash budgets, cash cycle (cash payment and collection cycle). (Besley et
al 2000)

Jensen (1989) defines cash budget as an organizational monetary plan and it identifies the
resource and commitment require to fulfill the organizational goals for the period
identified,

A cash budget brings together anticipated effect of all budgeted activities on cash. Cash
budget delineates the expected cash receipts and disbursement during the budget period.
Cash budget analysis ensure management that there is sufficient cash on hand to carry out
planned activities, arrange finance in advance to curb high cost of emergency borrowing
and plan investment to earn the highest possible return on cash in hand. It ensures smooth
operations and avoids crises in smaller and seasonal business.

Cash budget provides a basis for companies with actual and expected and to identify
unplanned occurrences. However the following decision could be made with regards to
cash budget thus how much cash should be held in hand or at bank, how much should be
invested in money market securities and what portfolio of securities should be held.

Ross et al (2000) define cash conversion cycle (collection and payment cycle) or
operating cycle as the cycle that reflects the net time interval between actual cash

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expenditure on the firms purchase of productive resource and ultimate recovery of cash
receives from product sale, establishes the period of time require to convert cash
disbursements back into cash inflow from a firm regular cost of operation. The cash
conversion cycle is made up of cash collection cycle and cash payment cycle.

1) Cash collection cycle

In managing cash, the company will attempt to control the flow of cash in and out of the
business, The Company will wish to delay payment for as long as it is advantageous and
collect cash as quickly as possible.

The cash collection cycle can be expressed in terms of length of time between the
acquisition of raw material and other inputs and the inflow of cash from the sale of
goods. It focuses much on the receipts of money from the sale of goods.

For manufacturing firms, it is the average time raw materials remain in stocks, plus the
time taken to produce the company’s output plus the length of time finished goods stay
within the company as a firm of inventory, plus the time taken for debtors to pay, less the
credit period granted by suppliers. The shorter this cycle, the fewer resources the
company needs to tie up.

2) Cash payment cycle

The cash management consists of placing an order, credit control (deciding on the
priority invoices to be paid quickly and calculating the benefit of discounts), and method
of payment (cheques, credit debit or standing orders), payment frequency, timing policy
and past with the creditor.

Brealey et al (1991) have pointed out that the time taken to pay is referred to as the
reverse float and it is as a result of policy decision, taking into consideration the
availability of funds, discount on offer and relationship with suppliers. The final stage of
collection and payment of cash is the movement of cash analysis which can earn for
companies by the use of certain financial techniques r3eferred to as cash transmission
techniques such as netting, cash pooling and direct debiting.

2.2.1.1 MANAGEMENT OF ACCOUNT RECEIVABLES

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Nyavor (2005) define account receivables as short term credits given to customers of a
company. This is to say a company which grants trade credits to its customers create
current asset in the form of account receivable or trade debtor. Customers or trade debtors
of the company are supplied with the goods and are given a reasonable time to settle their
debts. A generous credit policy towards our customers should increase sales, but it will
also increase the level of investment in working capital which must be financed.

When firms allow credit facilities, this tends to serve as a marketing tool and can partially
increase or decrease the firm’s total sales. If a firm is to offer credit to its customers at a
rate that is higher than what other competitive firms offer, such companies tend to loose
customers to their competitors who might be granting credit at lower rate and longer
granting periods. There would therefore be the need for the firm to consider change in
credit term or credit granting standings.

Arnold (1998) ascribe several sources of information that are available to help in setting
a credit rating; the experience of the salesforce:trade references; reference from the firm
banker; reference from the firm auditor; analysis of published account from companies
house; statistics provided by credit rating agencies.

Traditional financial management texts suggest that credit managers should take note of
the five Cs; character, capacity, capital, collateral and conditions. Character relates to the
customers willingness to pay. capacity to his her ability to pay, capital to his or her
financial position, collateral to any security available and conditions to the effect of
economic trends on the customers position.

Besley et al (2000) said assessing a firms (customers) ability to pay its debt is a complex
judgment, because many factors can affect creditworthiness. One tool that many firm use
is credit scoring. Credit scoring combines several financial variables to create a single
score, or index, that measures creditworthiness. The score is often a linear combination of
several variables. A score based on four financial variables could be;

S= w1X1+w2X2+w3X3+w4X4=2X1-0.3X2+0.1X3+0.6X4

Where X1 = net working capital/sales (expressed as a percent)

X2 = debt/assets (%)

X3 = assets/sales (%)

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 X4 = net profit margin (%)

The Ws are the (coefficients) or weights) that are multiplied by Xs (financial

characteristics) to create score. The positive coefficient for X1, X2, X3, and X4 mean that a
higher value results in a higher credit score. The negative coefficient for X 2 means that a
higher debt or assets ratio reduces the credit score.

Brealey et al (2000) further indicated that when a customer fails to pay an invoice on the
due date; it is often our natural reaction to think in terms of solicitor or legal action. It
must be emphasized that this is a last resort, since we do not want to lose our customers.
We recommend that companies should establish a procedure for late collection along the
following lines; a reminder; personal letter; several telephone calls; personal visit; visit
from the salesperson responsible for the customer; use of collection agencies etc.

In addition to the regular preparation of an age analysis of debtors, companies can use
ratio analysis to analyze the success or failure of their credit policies;

Debtors *365*52*12

Sales

Average credit period in days, weeks and months

Debtors/currents=proportion of current accounted for by debtors

These ratios can be plotted over time to demonstrate any trends. They can be compared
with other firms in the same industry. The actual achieved can be compared with targets
or standard. In addition, financial ratios can be used as an aid to business forecasting.

2.2.1.2 INVENTORY MANAGEMENT

Arnold (1998) has classified inventory into three types depending on the stages of
manufacturing at which it is held. Generally distinguished are; pre production inventory,
work in progress inventory, finished goods inventory. This applies in a typical
manufacturing concern. Other types of business organization might have other forms of
inventory depending on their business operations.

Ross et al (2000) ascribe that inventories are maintained for some reasons among which
are;

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a) To maintain inventory facilities for smooth production and sales operation.

b) To guard against risk of unpredictable changes in demand and supply forces and other
factors

c) To take advantage of price fluctuations.

They further said that, the main purpose of inventory is to allow each stage of production
and sale process to operate economically. A stock control policy is a rule which determine
the following; the size of stock replenishment; the timing of replenishment and stock-out
consequences.

2.2.1.2.1 INVENTORY CONTROL MODELS

Ross et al (2000) said economics theory suggest that to maximize the market value of the
firm we require the minimum cash invested in raw materials, work-in-progress and
finished goods for any given set of operational cash flow. Managers are of the view to
maximize the investment in raw materials, work-in-progress and finished goods for any
given level of sales with a view to maximizing returns on capital employed.

They further said the basic objective of stock control is to minimize cost. The financial
manager seeks to control total costs and this can be difficult because attempt to reduce
purchasing costs drives up carrying costs, reduces stock out cost and increase disposal
cost. Cost under inventory management falls under two categories: holding and
replenishment cost.

Arnold (1998) admitted that, financial and production managers may wish to operate on a
zero level of investment in inventory, this can rarely be achieved. Raw materials stock
level will be determined by seasonality, the reliability of supply, and the efficiency of
production scheduling. The level of investment in work-in-progress will be largely by the
length of the production cycle, the efficiency of production scheduling and production
control. Investment in finished goods will be determined to a great extent by the co-
ordination of production and marketing, functions and perish ability.

Brealey et al (1991) said in order to regulate the amount of investment in inventory;

companies established stock levels; including re order level, minimum level, maximum
stock level and the optimum quantity of stock refill.

1) Re-order level

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Re-order level is the quantity level set to signal management to initiate procedure
involved in refilling stock. The formula used in the calculation of the re-order is
(maximum consumption * maximum lead time).

2) Minimum stock level

This is the stock level below which stock of a company should not be allowed to fall. It is
referred to as the buffer stock level and it is designed to enable the business meet
emergency situation when they arise.

3) Maximum stock level

Maximum stock level is the level beyond which stocks are not to be held. Holding stocks
beyond the maximum stock level will imply incurring higher holding cost in terms of
storage insurance, evaporation deterioration and cost of capital.

4) Optimum order quantity

The establishment of appropriate optimal ordering level for raw materials is an important
aspect of inventory control. For each manufacturing inputs, there is the need to establish a
figure for base stock and then determine an optimum purchase size called the Economic
Order Quantity (EOQ). The procedure necessitates the specification of costs which rise
and fall with higher levels of inventory. Carrying cost rise with the larger inventories-
warehousing, interest on invested capital, insurance, obsolescence. Ordering costs and
costs of stock out fall with large inventories-loss of sales cost of production delays
purchase size discount.

The calculation of the point at which to order is an important aspect of inventory control
procedure. It affects the level of investment in inventories and the firms ability to satisfy
consumer wants. The order point is equal to the expected usage the lead time (time
between ordering and delivery).

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2.2.1.3 JUST IN TIME PURCHASE MANAGEMENT

According to Ross et al (2004) .just in time purchase or stockless production are terms
used to describe a policy of obtaining goods from suppliers at the latest possible time
(when the goods are needed) and so avoiding the to carry any materials or components as
stock. It is describe as being a Japanese management system applied in manufacturing,
which involves having the right items of the right quantity and quality in the right place at
the right time. It is a customer led production to order approach that has the objectives of
eliminating idle resources through out the company.

Just in time brings the following benefits; reduction in stock holding cost, reduced
manufacturing lead time, improved lab our productivity, price reduction on purchasing
materials and reduction in the number of accounting transaction.

They made emphasized that assuming a machine which forms part of the production line
of a company breaks down several times per day, the traditional solution of doing things
might have been to hold large inventories or safety stock of this machine inputs and
outputs. This tie up capital requires storage facility and occupies floor space. Under the
just in time system, the machine would be redesigned so that it operate more reliably,
therefore eliminating the need for safety stocks. The result is an important in overall
efficiency as well as a reduction in inventory costs. The requirement for effective just in
time operation includes reliable quality of suppliers and transportation, short distance
between suppliers and buyers and frequent delivery of small qualities.

2.2.2. CURRENT LIABILITIES MANAGEMENT

Wood (1999) defines current liabilities as the obligations of a firm to be settled within
one accounting year.

Libey (1971) define current liabilities as probable future sacrifices of economic benefits.

Current liabilities can also be viewed as the amount owing by the business, which will
fall due for payment within one year or existing financial obligation, which the firms
intend to meet within a year. Current liabilities consist of trade creditors for goods
received, Accruals (i.e. expenses incurred but not yet paid for) bank overdraft (these must
be of a temporary nature), bills payable and any outstanding liabilities currently payable.
It can therefore be viewed that current liabilities arise from present obligation of an entity
to transfer assets or provide services to other entities in the future, as a result of past
transactions. Centrally, current liabilities open the firm to the world in terms of financing
and other means of running the business.

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Wood further said that the greater the proportion of current liabilities to total liabilities,
the greater the profitability of the business. This may be based on the fact that short term
liability costs less than either medium or long term finances.
On the other hand, if this argument is to be carried to an extreme, it would seem to
indicate that the lower the working capital figure or if the current liabilities are greater
than current assets, the greater the advantage to the business. Such a position, however
could lead to insolvency, which briefly stated, means that the business would be unable to
meet its current commitments and would be brought to a stand still.

2.2.2.1. TRADE CREDITORS MANAGEMENT

Arnold (1998) said in economics it is taught that nothing is free, there is always an
opportunity cost, i.e., the benefits foregone. In financial management the nearest we get
to free money is trade credit. Trade credit is free until we start to lose discounts. Once we
start to lose discount, then trade credit is expensive source of finance. We generally
suggest that financial manager should pay late and take the discount if possible. We also
recommend that suppliers should be rotated to obtain the best possible credit terms. The
financial manager should regularly prepare an age list of creditors to ascertain a list of
suppliers who take maximum time to collect a debt. Most people have the experience of
paying late; forget to sign the cheque,put the wrong year on the cheque,refuse to pay
other than on statements, refuse to pay other on invoices, lose statements and invoices,
insist that the only person who can sign cheques is “away”. The most common lie in
business is “the cheque is in the post”.

He also said there is another form of short term credit usually referred to as “accrued
expenses”. This can be a substantial source of interest free and discount free credit. It
includes outstanding Pay as You Earn (PAYE) and social security fund (SSF), outstanding
tax, outstanding heat and light bills, outstanding telephone bills and unpaid taxation.
Financial managers should strive to balance accrued expenses and trade credit against
debtors and investment in stock. A useful rule of thumb in the management of working
capital is the acid test, sometimes called quick ratio, the solvency tests, or the liquidity
ratio. It is traditionally suggested that cash plus debtors should equal to current liabilities.
Another traditional rule of thumb is that current assets should be double the amount of
the current liabilities. The current ratio is cash plus debtors plus stock, divided by the
current liabilities. Again, the rule of thumb is that the current ratio should be 2:1.in favor
of current asset. A final traditional rule of thumb is that short-term finance which includes
creditor and overdrafts should only be used to finance short-term assets which include
stock and debtors.

Furthermore, long-term finance which includes long-term loans and equity should be
used to finance the fixed or permanent assets.

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2.2.3 SOURCES OF FINANCING WORKING CAPITAL
Ross et al (2004) pointed out the various sources of financing short term working capital
namely factoring, trade credit, bank overdraft, defer tax payment, retained of net profit
earned, invoice discounting and credit insurance etc.

2.2.3.1 FACTORING
Factoring involves raising fund on the security of the company debts so that cash is
received earlier than it the company waited for the debtors to pay. Basically most factor
offer three services; sales ledger accounting, dispatching invoices and making sure the
bills are paid.

Credit management including guarantees or insurance against bad debt, for a fee the
factor can provide and the provision of finance advancing clients up to eighty percent
(80%) of the value of the debt that are to be collected. Debt factoring gives the following
advantages thus; it improves the firm’s liquidity position, it provides ready cash, it
relieves it from all administrative costs, it enables the suppliers to dispose of his goods
before it become obsolete.

2.2.3.2.. TRADE CREDIT

One of the most important forms of short-term finance in the economy is trade credit
extended by one company to another on the purchase and sale of goods and equipments.
To receive goods and delayed payments of the account is a recognized form of short-term
financing. The goods can be used to provide returns or benefits throughout the period that
elapse before the bill has to be settled.

2.2.3.3. BANK OVERDRAFT

Short-term borrowing of the kind made available principally by the clearing bank
(commercial) in the form of overdraft is very flexible. When the borrowed amounts are
no longer required, it can quickly and easily be repaid. It is comparatively cheap because
the risk to the lender is less than on long-term loans and all interest is tax deductible
expense. The banks issue overdraft with the right to call them in at short notices.

2.2.3.4 DEFER TAX PAYMENT

Another source of short-term funds similar in character to trade credit is the credit
supplied by the tax authority. This is created by the internal that elapse between the
earning of the profits by the company and the payment of the taxes due on them. As long

16
as the company continues to earn stable or expanding profit, tax payment deferred in this
way comprises a virtually permanent source of finance.

2.2.3.5. RETAINED EARNED

It is also another source of finance to a company. It has sometimes been suggested that
the retained earnings of a company provided a free source of finance.

2.2.3.6 INVOICE DISCOUNTING AND CREDIT INSSURANCE

Invoice discount is purely a financial arrangement, which benefits the liquidity’s position
of the user; it is designed to overcome the problem of typing up working capital in book
debt. A company can convert an invoice through specialized finance company like First
Atlantic Merchant Bank Ltd. Either a separate invoice or a proportion of a company
books debt can be discounted. Although the full face value of the invoice is not usually
advance, the company makes an offer to the finance house by sending it the respective
invoices and agreeing to guarantee payment of any debt that are purchased. If the finance
house accepts the offer, it makes an immediate first payment of about seventy five
percent (75%) off the value of the invoice. The company then accepts as collected
security, a bill of exchange for this seventy five percent(75%) which means that at a
specify future date, say, after ninety days the loan must be repaid. The company is
responsible for collecting the debt for returning the amount advance, whether the debt is
collected or not.

17
 CHAPTER THREE

METHODOLOGY

3.0 INTRODUCTION
This chapter considers the methods used in conducting the research and discusses issues
involving the population of the study, the sample and the sampling techniques, research
instruments, method of data collection and method of data analysis.

3.1 POPULATION OF THE STUDY

The population is the target group about which gathering information and drawing
conclusions are important. The study has its population the entire staff of Electricity
Company of Ghana including those in the various departments: the account department,
marketing department, purchase and supply department all concerned staffs and also
customers of Electricity Company of Ghana.

3.2 SAMPLE AND SAMPLING TECHNIQUES

Sample is the portion of a population or universe as representative of that population or
universe.

The sample size to be considered under this type of research total twenty five (25 ), out of
these, fifteen (15 ) are management staff of the Electricity company of Ghana and the rest
ten (10) are company’s customers. The sample size is made out five (5) management staff
that is female representing the thirty (30) percent of the population and ten (10) men
constituting seventy (70) percent of the population.

Respondents Sample
Female 5
Male 10
Total 15

For the purpose of efficient and effective research study, the sampling technique used was
purposive sampling. The purposive sampling was selected or chosen because the
individuals selected have certain special characteristics and ultimately to provide the
most relevant and useful information for the purpose for which the study is being done.

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3.3 RESEARCH INSTRUMENTS
For the sake of this type of project, the main instruments used to collect field data was
structured questionnaires and through an interview. The questionnaire was designed by
taking into account the objectives and hypothesis of the study in chapter one.
With respect to the expected answers, open-ended and closed-ended questions were
administered to the respondents.

Open-ended questionnaires were used to make the respondents feel free to respond in
their own way and in their own words.

Close-ended or pre-coded questionnaire were also used to make the respondents to

choose from the option with which they agree most from fixed responses in the
questionnaire.

3.4 METHOD OF DATA COLLECTION

The research study was conducted using two main sources namely; primary source for
primary data and secondary source for secondary data.

Primary data refers to those data collection directly from the fields for the purpose of the
study. This data was collected in their raw or original forms from respondents.

Secondary data on the other hand refers to data, which has been used before for some
other purpose or work and are available and useful for this study. They do not add new
information to the research topic but act as a guide for the methodological soundness.
This information was obtained through the review of literature including relevant text,
books, journals, new letters, reports and other publications. The secondary data was used
to complement the information obtained from the primary sources and are objective and
economical.

The researchers used both data collection sources. We collected data by administering
questionnaire to the selected respondents. The questionnaires were administered
personally to the selected respondents by the researcher in the various departments in the
company.

With regard to the interview, the researcher visited the premises personally and interview
top management of the company for clarification on certain answers made in the
questionnaires.

19
The customers of Electricity Company of Ghana were selected through purposive
sampling and they were interview by the researcher personally.

Available literature was used by the researchers to obtain data from secondary sources for
the project work.

3.5 METHODS OF DATA ANALYSIS

In relation to the research study, data was collected and analyzed using descriptive tools.
The descriptive tools were frequency tables, pie charts, graphs and bar charts together
with relevant and apt narrative expressions and empirical explanations.
The frequency table was used because it facilitates easy interpretation.

20
 CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.0. INTRODUCTION
This chapter deals with the findings revealed principally through the administration of
questionnaire.

In all, fifteen (15) questionnaires were given out to selected members of management
staff of the electricity company of Ghana, to sample their views on the working capital
management of the electricity company of Ghana. Out of the fifteen (15) questionnaires
given out only eight (8) were received.

The results obtained through the questionnaire have been analyzed below using tables
and figures.

4.1 ACADEMIC QUALIFICATION

The table below shows the educational status of management staff of Electricity
Company of Ghana surveyed for the study.

Table 4.1

Educational status of respondents

Educational levels No. of respondents Percentages (%)

Diploma 2 25
First degree 2 25
Masters 0 -
Professional qualification 4 50
Total 8 100

From the table 4.1 above, out of eight (8) questionnaires received, two(2) were diploma
holders forming 25%, two (2) were first degree holders constituting 25% and four were
professional qualification holders representing 50%. None of the respondent were
masters degree holders.

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4.2 NUMBERS OF YEARS SPENT IN THE COMPANY
The table presented below shows the number of years the respondents have been with the
company.

Table 4.2

No. of years No. of respondents Percentages (%)

1-5 years 1 12.5
6-10 years 4 50
11-15 years 2 25
16-20 years 1 12.5
Totals 8 100

From table 4.2 above, it could be deduced that 12.5% of the respondents have been with
the company for about 1-5 years. It could be identified that, 4 respondents constituting
50% fall within the range of 6-10 years,2 respondents representing 25% are within the
range of 11-15 years and 1 forming 12.5% is in the range of 16-20 years. The result in
table 4.2 is represented graphically.
A bar chart showing the distribution of years spent in ECG by its management staff

22
FIG 1 YEARS SPENNT IN ECG

No. of respondents

NO. OF YEARS
.

The graph above displays the duration for which the management staff covered in the
study has been with the company.
The X-axis shows the number of years spent in the company and Y-axis represent the
number of respondents.

23
4.3 SOURCES OF REVENUE
Table 4.3 beneath shows the main sources of revenue to the electricity company of
Ghana.

Table 4.3

Sources No. of respondents Percentage (%)

Revenue received from
power supply
Revenue from investment
Revenue from other sources
totals
6 75
2 25
0 -
8 100

In table 4.3 above, it was revealed that even though the company has other sources of
revenue such as revenue from investment, the revenue received from power supply best
describes the company’s main sources of revenue. The numbers of responses received for
power supply were six (6) representing 75 % of the number of questionnaires received.
From the table 4.3, more than half of the sample indicated that the revenue the company
received from power supply is the main source of revenue to the company. Two (2) of the
respondents also admitted that the company receives some amount of revenue from
investment.

4.4 RELIABILITY OF SOURCES OF REVENUE

Table 4.4 below shows how reliable the company’s sources of revenue are to its
operation.

Table 4.4

Sources Very Percentage reliable Percentage Not Percentage Totals

reliable (%) (%) reliable (%) (%)
Revenue 8
from 5 62.5 2 25 1 12.5
power
supply 100%
Revenue 8
from 1 12.5 1 12.5 6 75
investment 100%
Revenue 8
from other _ _ _ _ 8 100
sources 100%

From the questionnaire received from respondents and summary in the table above, five
(5) respondents representing 62.5% described the revenue received reliable, two (2)

24
responses representing 25% of the respondents described the revenue received from
power supply as reliable and one (1) representing 12.5% described it as being not
reliable.

One of the eight (8) respondents representing 12.5% described the revenue from
investment very reliable, one (1) respondent representing 12.5% described revenue from
investment reliable and six (6) out of eight respondents constituting 75% described
revenue from investment as not reliable.
All the respondents, eight (8) constituting 100% described revenue from other sources as
not reliable.

4.5 ADEQUANCY OF REVENUE COLLECTED

Table 4.5 below shows the distribution of the management staff opinion on the adequacy
of the revenue collected by the company.

Table 4.5

Adequacy of revenue generated

Responses No. of respondents Percentage (%)
Yes 0 0
No 8 100
Total 8 100

From the table 4.5 above, all of the respondents were of the opinion that the revenue
generated by the company over the years is inadequate.

4.6. MEASURES BEING PUT IN PLACE BY THE COMPANY TO IMPROVE

UPON REVENUE GENERATION.
With reference to the information collected from the questionnaire given out to the
management staff of Electricity Company of Ghana, they suggested in their own opinion
measures put in place by the company to improve upon revenue generation.

One of such measures put in place is the installation of prepaid meters in place of the
energy meter to reduce the operational costs of the company.

Disconnection of customers who owe electricity company of Ghana and proposing to the
public utility regulatory commission (PURC) to come out with economic tariffs so that
the company will be able to recover cost.

25
Lastly, third party debt collections should be contracted to collect outstanding debts owed
to the company and formation of task forces to check debtors and illegal connections.

4.7 PAYMENT OF ECONOMIC PRICES FOR POWER SUPPLIED

The data below shows the views by the management staff of the company on whether
there is the need for consumers to pay economic prices for power supply and whether it is
not an attempt by Electricity Company of Ghana to push the cost of the company’s
inefficiency to the poor consumer.

Table 4.6

Responses of payment of economic prices

Responses No. of respondents Percentage (%)
True 3 37.5
False 5 62.5
total 8 100

From the table above, the “true “ responses represent those who think asking the
customers to pay a higher price than they are paying now amounts to pushing the
company’s cost of inefficiencies to the consumer. The true responses were three (3)
representing 37.5% and those who indicated “false “were of a contrary view with five (5)
responses representing 62.5%.
Table 4.6 above shows that 37.5% of the respondent shares the opinion that there are
inefficiencies in the company, which amounts to high costs of operation, hence the
company’s inability to recover cost.

4.8 BILLS COLLECTION

The distribution below shows the opinion the company uses in the collection of bills
owed by customers.

Table 4.7

Ways of collecting bills

Options
Bonded cashiers (A)
Cashiers of the company (B
Both (A) and (B)
total
No. of respondents Percentage (%)
_ _
_ _
8 100
8 100

26
From the above illustration, it is realized the company uses both bonded cashiers and
cashiers of the company in the collection of bills owed by customers.
Apart from the options indicated above, some of the respondents specified other options
being used by the company in the collection of its bills. This includes the use of
designated post offices in the country, private sector participation and direct payments by
government institutions.

4.9 BILLING SYSTEM

The illustration below shows the options the company uses in the billing of the
customers.

Table 4.8

Billing system used

Options
Prepaid meters (A)
Energy meters (B)
Both (A) and (B)
total
No. of respondents Percentage (%)
_ _
_ _
8 100
8 100

From table 4.8 above, it is revealed that the billing system used by the company is
predominantly the energy meter with the prepaid meter used in few selected areas.

4.10 CREDIT PERIODS GRANTED TO CUSTOMERS

Table 4.9 presentations below shoes the credit period granted to customers for the
settlement of their bills owed to the company.

Table 4.9

Credit period granted

Days / period No. of respondents Percentage (%0
1 week-2 weeks 4 50
3 weeks- 4 weeks 2 25
5 weeks-6 weeks 1 12.5
7 weeks and above 1 12.5
total 8 100

From the above presentation, four (4) respondents representing 50% indicated that the
credit period granted to the customers of the company was within the range of 1-2 weeks,
two (2) respondents representing 25% indicated that 3-4 weeks are the credit period
granted to customers. One (!) out of the eight (8) respondents indicated that a credit

27
period of 5-6 weeks is granted to customers and one (1) response constituting 12.5% also
indicated that the credit period granted fell within the range of 7 weeks and above.

4.11 SETTLEMENT OF BILLS

The table below presents the staff opinion on the settlement of bills by customers.

Table 4.10

Responses for the settlement of bills

responses No. of respondents Percentage (%)
Very encouraging _ _
Encouraging 5 62.5
Poor 3 37.5
Very poor _ _
total 8 100

From table 4.10, it is revealed that five (5) respondents representing 62.5% had the view
that the manner in which customer settles their bills is encouraging, three (3) respondents
constituting 37.5% had the option or opinion that the way in which customers settles their
bill was poor.

4.12 PREPARATION OF CASH FORECAST

The data presented in the table 4.11 below shows whether the company prepares cash
forecast or not.

Table 4.11

Responses on cash forecast

Responses No. of respondents Percentage (%)
Yes 8 100
No _ _
total 8 100

The research data with summary in table 4.11 above revealed that the company prepares
cash forecast since all the respondents indicated in the affirmative to the question posed
them as to whether the company prepares cash forecast or not.

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4.13 FINANCING OF CASH SHORTAGES
The data illustrated below shows how Electricity Company of Ghana finances its cash
shortages in the company.

Table 4.12

Sources No, of respondents Percentage (%)

Arranging for bank
overdraft 5 62.5
Government loans 2 25
Loans 1 12.5
total 8 100

From table 4.12 above, five (5) respondents representing 62.5% expressed that the
company finance its cash shortages by arranging for bank overdraft. Two (2w)
respondents constituting 25% said that the company finance it cash shortages through
government loans and one (1) respondent constituting 12.5% indicated that the company
finance it cash shortages through loans.

4.14 USES OF EXCESS CASH

Table 4.13 presented below shows how Electricity Company of Ghana sues its excess
cash.

.Table 4.13

Excess cash No. of respondents Percentage (%)

Investment in government
bonds 6 75
Investment in share and
other long term projects _ _
Retained earning in the
organization 2 25
Total 8 100

From table 4.13 above, six (6) out of eight (8) respondents constituting 75% indicated
that the excess cash of the company are being invested in government bond. Two (2) out
of the eight (8) respondents indicated that the excess cash was invested or retained in the
organization.

29
4.15 PROCUREMENT OF MATERIALS
The data illustrated below shows the period materials such as cables, transformers and
others are meant to last in the company.

Table 4.14

Responses on material procurement

Period No. of respondents Percentage (%)
6months_1 year _ _
1 year _ 1.5 years 1 12.5
1.5 years_ 2 years 2 25
2 years and above 5 62.5
Total 8 100

Fig 2
No. of respondents

Period spent

From table 4.14 and the graphical bar chart above, the research data revealed the material
bought by the company for the use of its operation are meant to last for about 2years and
above depending on how fast the materials are used in the operations of the company.

30
4.16 CREDIT PURCHASE
The table illustrated below shows whether electricity company of Ghana obtain major
supplies on credit or not.

Table 4.15

Credit supplies
Responses No. of respondents Percentage (%)
Yes 7 87.5
No 1 12.5
Total 8 100

From table 4.15 above, the research data indicated that seven (7) respondents
representing 87.5% intimated that the company obtain much of its supplies on credit and
one (1) respondent constituting 12.5% indicated that the company does not obtain its
supplies on credit.

4.17 CREDIT PERIOD GRANTED

Table 4.16 below shows the credit period enjoyed by Electricity Company of Ghana from
their supplies.

Table 4.16

Credit period enjoyed

Period No, of respondents Percentage (%)
6months_1year 1 12.5
1year _ 1.5years 1 12.5
1.5years_2years 1 12.5
2years and above 5 62.5
Total 8 100

From table 4.16 illustrated above, one (1) out of eight (8) respondents subscribed that the
credit period granted by the supplies was within 6months_1year, one (1) respondent
representing 12.5% indicated that 1year-1.5years is granted as a credits period, one (1)
respondent constituting 12.5% also admitted that the credit period given was 1.5 -2years
and majority of five (5) respondents representing 62.5% stated that the credit period
granted to the company was 2years and above.

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4.18 ADEQUACY OF CREDIT PERIOD
Table 4.17 illustrated below shows how adequate the credit period granted to the
company.

Table 4.17

Responses No. of respondents Percentage (%)

Yes 2 25
No 6 75
Total 8 100

From the above table, it is revealed that 2 respondents representing 25% held that the
view that the credit period granted to the company is adequate. Six (6) representing 75%
had the view that the credit period granted to the company is inadequate.

4.19 INSURANCE POLICY ON MATERIAL PROCURED

The data presented below shows how the company takes insurance policy covering the
materials procured stock in the warehouse.

Table 4.18

Insurance on materials
Responses No. of respondents Percentage (%)
Yes 8 100
No - -
Total 8 100

From table 4.18above, it was revealed that 8respondents representing 100% indicated that
the company takes insurance policy covering materials purchased and are stocked in the
warehouse of the company since such material held in stock by the company are prone to
disaster such as fire outbreaks, flooding and thefts.

4.20 SUGGESTIONS MADE TO MANAGEMENT BY EMPLOYEES ON HOW TO

PERFORM BETTER IN TERMS OF COST RECOVERY AND PROFIT
MAXIMATIONS.
In an attempt to seek the employee’s opinion on what best must be done to improve the
company performance in terms of cost recovery and profit maximization, the information
gathered through the questionnaire revealed the following suggestions made by the
employees in the company:

32
1) Intensify the introduction of prepaid meters to replace credit meters and to ensure
to cut down recurrent expenditure.

2) Expenditure control measures must be put in place to ensure that expenditure is

incurred on things that are pressing to the company. This will in effect reduce the
cost of operation of the company.

3) Tightening of debt collection and stringent laws and procedures put in place to
arrest the debt collection problem.

4) Mechanization of some the company’s operation and this will in effect reduce the
number of staff to reduce labor cost.

5). Pursue and convince the public utility and regulatory commission (PURC) to grant
and approve economic tariffs that will enable the company recover cost or make
reasonable profit.

6). Restructuring of labor and more opening of customer service centers

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 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1. SUMMARY OF FINDINGS.

The objectives of the study were to find out the credit management policies, cash
management and debt collection, inventory management policies of ECG, whether
company’s revenue is adequate and measure being put in place to reduce its cost of
operations and to recommend effective and efficient management of working capital.

The study revealed that most of the respondents are employees of ECG, most of the
employees have been in the company for six (6) years and above and this gives an
indication that the people covered in the research have stayed enough with the company
and have adequate information about the company.

The study also identified that its main sources of revenue is from the revenue received
from the sale of electric power. This implies that the company depends mainly on revenue
from power supply and that anything that affects revenue flow from this source is likely
to affect the survival of the company. The revenue generated from the sale of electric
power was identified as inadequate This has serious implications on the company’s
working capital, including the following:

1). The company may not have enough revenue to pay its short-term debts including
the purchase of power.

2). The company may have to arrange for short –term loans at a cost in order for it to
meet its working capital needs.

It was also revealed that the company operates with the prepaid meter and energy meters
but relies much on the energy meters; the system poses high risk of debt defaults from
customers who may after consumption fails to pay their bills. This implies that the
company is likely to record high bad debt. In effect the company may record high failures
for debtors mainly because it sells most of its services on credit.

The study identified that the debt settlement of the customers is encouraging. Due to the
installation of the prepaid meters, customers have been able to provide the company with
enough revenue to help in settling its short-term obligations.

The study further revealed that the company’s materials are procured to last for two years
and above and how long the materials last depend on the rate of consumption. One could
interpret that holding stocks for a long period will have the effect of holding the

34
company’s capital and this could have serious repercussion on the liquidity position of
the company. Majority of the respondents admitted that the procured materials in the
warehouse have been insured against disaster such as fire outbreak, flood and theft.

5.2 CONCLUSION
It is clear from the analysis and the result of the study that the following conclusion can
be made. First, it is clear that in order to reduce the cost of electricity company of Ghana,
they must maintain the stock level needed by the company to serve its operations within a
reasonable time (holding optimum stock), maintaining cash balance just sufficient for the
company’s needs at a given time period, administering the installation of prepaid meters
to generate adequate revenue for the company.

Again, from the analysis, in order to increase profitability, management of cash and debt
collection, credit management and the management of inventory in ECG should remain
their priority. It is therefore important for a company like Electricity Company of Ghana
to establish a unit or department responsible for the management of working capital,
competent management of working capital and the claims of it may lead to increased
profitability which will also lead to growth and survival of the firm.

Lastly, it is clear from the analysis that the role and responsibility of working capital
management is very germane to the electricity company of Ghana. The management of
working capital has been described as the “life blood of a business”. .
The study therefore concludes that efficient and effective management of working capital
is necessary to the success of an Electricity Company of Ghana (Business Organization).

5.3 RECOMMENDATIONS
On the basis of findings, it is being recommended that electricity company of Ghana
should take measures to improve upon their working capital management since working
capital is the “ the life blood of any business” and therefore essentials to the survival of
every organization.

The maintenance of adequate working capital is a necessary condition for sound liquidity
position and optimum profitability in the firm. Therefore for a firm to achieve maximum
profitability on their investment in working capital, they must try to keep their working
capital at the optimum level. This is the level of working capital that gives the bet trade
off between return and cost and conventionally it emphasized that the ratio between
current assets and current liability should be 2: in favors of current assets.

35
Most important recommendation is that Electricity Company of Ghana must establish
stock level to take care of the company’s operations within the shortest possible time.
Where possible just in time purchase could be operated where stocks are delivered as and
when they are needed. This will help avoid holding up excessive funds in inventory,
hence making money available to meet the company’s short term liabilities or short term
investment.

Aside, it is recommended that, efforts must be made by the government to ensure that
qualified personnel’s with expertise knowledge in financial management are employed
into public companies including electricity company of Ghana to take care of the
management of the company’s finances. Since such expertise is likely to devise prudent
financial policies that will help ensure efficiency in the management of the company’s
working capital.

Again, seminars and workshops should be regularly organized for staffs of such
companies including those in the accounts, store, etc, to equip them with up-to-date skills
in the management of the company’s resources.

It is also recommended to the electricity company of Ghana that it provides educational

programmes aimed at re-orienting the consuming public towards the payment of
economic prices for power usage. Where possible differential rates could be establish for
consumers in which case tariffs charged will be based on the consumer’s ability to pay.
I.e. charging higher rate for consumers who are wealthier in the society.

The electricity company of Ghana should adopt more stringent measures in dealing with
defaults. People who fail to pay their bills after a specified period should be prosecuted in
the court of law. This will serve as a deterrent to others that might wish to defaults.

Finally, in order to ensure efficient control in the management of the company’s

resources, it is advised that other government institutions that are serviced by other public
institutions like Electricity Company of Ghana should pay economic price for the service
they enjoy. For example, the other government institutions that obtain power supply from
ECG must pay a fair rate just as other consumers. In order to ensure that such services are
duly paid for, it is recommended that the public institutions like the individual should also
be supplied power on the prepaid system.

36
.

37