Working Capital Management and Financial Performance of Deposit Money Banks in Nigeria

Abstract

Working capital is regarded as the lifeblood and nerve of a business concern, it is therefore essential to accommodate the smooth operations of any organization, but Studies in working capital management have provided inconclusive results. The objective of this study is to examine the effect of working capital management of Deposit Money Banks in Nigeria. The study covers the period of six years 2007 to 2013. Data for the study were extracted from the firms’ annual reports and accounts. After running the OLS regression, a robustness test was conducted for validity of statistical inferences, the data was empirically tested between the regressors and the regressed, A multiple regression was employed to test the model of the study using OLS. The results from the analysis revealed a strong positive relationship between current ratio and quick ratio and ROA of Listed Deposit Money Banks in Nigeria, while cash ratio was found to be inversely but significantly related to ROA of Listed Deposit Money Banks in Nigeria. In line with the above findings, the study recommended that the management should put more attention on their liquidity in order to maintain an adequate liquidity as the study has empirically proved that higher liquidity signifies more profitability, the listed Deposit Money Banks in Nigeria should try and maintain a higher quick ratio as it will have a positive impact on their profitability. Finally, the management should reduce the amount held in cash as current asset and concentrate more in investing them, so that it could yield higher return rather than tie down the idle cash.

Keywords: Current ratio, Quick ratio, Cash ratio, Firm size, Return on asset and Trade-off theory