WORKING CAPITAL MANAGEMENT AND PROFITABILITY OF LISTED PHARMACEUTICAL FIRMS IN NIGERIA.
Working capital management is an important aspect of financial management that deals with the management of a company's short-term assets and liabilities. Effective working capital management is crucial for the profitability and sustainability of any business, including pharmaceutical firms in Nigeria.
Pharmaceutical firms in Nigeria are faced with several challenges such as high inflation rates, foreign exchange risks, regulatory challenges, and poor infrastructure, which can affect their profitability. Effective working capital management can help these firms to overcome these challenges and improve their profitability.
One of the key factors that affect the profitability of pharmaceutical firms in Nigeria is their ability to manage their inventory effectively. Effective inventory management involves striking a balance between ensuring that there is enough inventory to meet customer demand while minimizing the cost of holding inventory. Pharmaceutical firms can achieve this by implementing inventory control policies, such as the economic order quantity (EOQ) model, just-in-time (JIT) inventory system, and ABC analysis.
Another important aspect of working capital management is the management of receivables and payables. Effective management of receivables involves monitoring the creditworthiness of customers, setting credit policies, and collecting receivables on time. On the other hand, effective management of payables involves negotiating favorable payment terms with suppliers, monitoring payment deadlines, and taking advantage of early payment discounts.
The relationship between working capital management and profitability of pharmaceutical firms in Nigeria can be examined through various financial ratios, such as the current ratio, quick ratio, and cash conversion cycle (CCC). The current ratio measures the ability of the firm to meet its short-term obligations, while the quick ratio measures the firm's ability to meet its short-term obligations using its most liquid assets. The CCC measures the length of time it takes for the firm to convert its inventory and receivables into cash.
In conclusion, effective working capital management is essential for the profitability and sustainability of pharmaceutical firms in Nigeria. By implementing effective inventory management, receivables and payables management, and monitoring key financial ratios, these firms can improve their profitability and overcome the challenges they face.
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