LIQUIDITY, FOREIGN EXCHANGE FLUNCTUATION AND FINANCIAL PERFORMANCE IN NIGERIA’S MANUFACTURING INDUSTRY

LIQUIDITY, FOREIGN EXCHANGE FLUNCTUATION AND FINANCIAL PERFORMANCE IN NIGERIA’S MANUFACTURING INDUSTRY

Abstract

The study examines the liquidity, exchange rate fluctuations, and financial performance of the manufacturing industry in Nigeria. The survey begins with a brief introduction to the content, background, and scope of the work. Objectives, research questions, hypotheses, review of relevant literature, and applicable theories are explained in detail. The study is based on using secondary data from his 5 years (2006-2016) of his 10 manufacturing companies listed on the Nigerian Stock Exchange. Relevant data were extracted from publicly available financial reports, CBN Bulletins, and National Statistics Office corporate websites. In order to achieve the purpose of the investigation, the post-investigation law is applied. Panel data is applied to the survey to capture spatial and temporal dimensions. Descriptive and inferential statistical analyzes were employed.

In addition to independent variables (fluctuations in liquidity and exchange rates), financial performance indicators (dependent variables) are used. Regressions on panel data were subjected to the Hausman test to make a good choice between fixed-effects and random-effects estimators.

The result stated that considering the result of the empirical analysis, there are different patterns of relationship that were displayed between the dependent variables and independent variables in our model; there is a significant relationship between liquidity and foreign exchange fluctuation as proxy by current asset ratio, acid test ratio, cash and cash equivalent ratio, inflation rate, interest rate, exchange rate of manufacturing firms, all the independent variables show a significant relationship with dependent variable.

The study concludes that there is a significant relationship between liquidity, foreign exchange fluctuation and performance.

The study recommended that; Government should ensure that capital expenditure and recurrent expenditure are properly managed in a manner that it will raise the nation’s production capacity; Government should direct its expenditure towards the productive sectors like manufacturing sector as it would reduce the cost of doing business as well as raise the standard living of poor ones in the country; There is need for efficient management of exchange, inflation and liqudity rates in such a way to stimulate the economy to grow; That foreign exchange rate could be maintained at a low rate if there is a consistent growth in corporate earnings.

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Over the years, it has been observed that the financial performance of any business can be assessed using the concept of liquidity. Liquidity is a major concept that has been a source of worry to the management of firms about the uncertainty of the future. When we talk about the liquidity of an asset, it means how quickly it can be converted into cash. It is the company’s ability to convert assets into cash.

When we talk about a company’s liquidity, we usually mean its ability to repay its current debt and is usually measured using various financial metrics (www.investorwords.com). According to Reider and Heyler (2003), liquidity is adequate cash flow to enable a company to make necessary payments and ensure business continuity. Liquidity refers to the solvency of a company’s overall financial position. Also, the concept of liquidity management should be kept in mind when discussing liquidity. This requires maintaining liquidity in day-to-day operations, ensuring smooth operations, and meeting obligations when due (Eljelly, 2004). Therefore, the goal of business owners and managers is to develop strategies for managing all day-to-day operations in order to meet their obligations on time, increase profitability and increase shareholder value. The Importance and Impact of Liquidity Management

Following Naira fluctuations due to the Structural Adjustment Program (SAP) in 1986, the issue of exchange rate fluctuations in Nigeria has been a hot topic. The goal of all economies is to stabilize exchange rates with trading partners. This target was not met in Nigeria, which has started devaluing to boost exports and stabilize its exchange rate. Failure to meet this target has left Nigeria’s manufacturing sector challenged by constantly fluctuating exchange rates. This was not only necessitated by the devaluation of the naira, but was also supported by the sector’s weak and narrow production base and rising import bills. To curb this development and ensure a stable exchange rate, the FSA has introduced a number of exchange rate measures. However, little has been achieved in terms of exchange rate stabilization. As a result, exchange rate fluctuation problems persisted throughout the study period.

In developed countries, manufacturing is in many ways a major sector. This will lead to the substitution of imports and the expansion of exports, the creation of foreign exchange earning capacity, the increase of employment, the promotion of investment growth at a higher rate than any other sector of the economy, and the broader and more efficient expansion of economic growth between different sectors. It is a way to increase productivity in terms of collaboration (Fakiesi, 2005). However, the Nigerian economy is not industrialized and has a low capacity utilization rate. This is despite manufacturing being the fastest growing sector since his 1973/74 (Obadan, 1994). The sector has become increasingly dependent on external sectors for the importation of non-labor services (Okigbo, 1993). Impossibility of imports could therefore have a negative impact on manufacturing output.

In Nigeria, the exchange rate changed from regulated to unregulated within a time frame. The impact of exchange rate fluctuations on output has not been fully considered. This paper seeks to draw attention to this issue.

Fluctuations in exchange rates affect operating cash flows and goodwill through the translation, trading and economic impact of foreign exchange risk. (Choi and Prasad, 1995). Ever since Bretton Woods abolished his fixed exchange rate regime in 1971, exchange rate volatility has been a major concern for investors, analysts, managers and shareholders. This system has been replaced by a floating exchange rate system.The price of a currency is determined by the supply and demand of money. Exchange rates can affect companies through various business models.
Firms can produce domestically for both export and domestic sale, firms can produce with both imported and domestic parts, and firms can produce the same or different products in factories abroad. can. Your business model should be broad enough to cover all these channels. The company described below is a multinational company (manufacturing and selling domestically and internationally) that uses both foreign and domestic components.

A company’s profitability can be described as its ability to generate revenues that exceed its costs. Profitability is usually measured using various metrics such as ROA2 and ROE. Liquidity management largely determines the amount of resulting profits and stakeholder wealth (Ben, 2008). Businesses need to maintain liquidity to survive. Failure to meet the constraints in a timely manner can result in lower credit ratings from short-term creditors, devalued market positions, and ultimately bankruptcy (Bhavet, 2011).

1.2 Problem Description

Duttweiler (2009) defines liquidity as the ability to meet all payment obligations on time. This is done in cash, so liquidity refers only to cash flow. Insolvency leads to bankruptcy. As Liargovas and Skandalis (2008) argue, firms can use liquid assets to finance their activities and investments when external sources of funding are not available. While high liquidity allows a company to handle contingencies and meet obligations during periods of low earnings, excess liquidity can do more harm than good. Most of the failed businesses were due to liquidity issues. This is largely due to poor management and the company has been forced into liquidation. Over the past decade, many companies have struggled with liquidity issues. One of the main reasons that can lead to liquidation is low liquidity and the inability to make a decent profit. These are some of the fundamental pieces for measuring a company’s going concerns. For these reasons, companies develop various strategies to improve their liquidity position. Strategies that can be adapted within an organization to improve liquidity and cash flow include working capital management. This is an area that is usually neglected in boom times (Pass and Pike, 1984).

Cash management and profitability are critical issues for business growth and survival, and his ability to manage the trade-off between the two is a source of concern for financial managers.

The problem to be addressed in this study is to assess the relationship between cash management and financial performance of several Nigerian listed manufacturing companies and determine the impact of changes in cash levels on the profitability of Nigerian manufacturing companies. Impact of exchange rate fluctuations on Nigerian manufacturing output over the decade 2005-2015.

The argument is that exchange rate fluctuations have a negative impact on manufacturing output. This is because Nigeria’s manufacturing industry relies heavily on imports of intermediate inputs and capital goods. These are paid in currencies with unstable exchange rates. This apparent fluctuation must therefore adversely affect the activities of this sector, which depends on external resources for its productive inputs.

1.3 Purpose of the survey

The main objective of this study is to examine the impact of liquidity and foreign exchange fluctuations on the financial performance of Nigeria’s manufacturing sector.

Other goals are:

This study studies the impact of working capital ratios on the financial performance of the manufacturing industry in Nigeria. A study of the impact of acid test or quick test ratios on the financial performance of the Nigerian manufacturing sector.
To study the impact of cash and cash equivalent ratios on the financial performance of the Nigerian manufacturing sector.
Shows how exchange rates affect the financial performance of manufacturing in Nigeria.
I study the impact of inflation on the financial performance of manufacturing in Nigeria.
1.4 Research question

The purpose of this research is to find solutions to the following questions.

What is the relationship between working capital ratios and financial performance in Nigeria’s manufacturing sector? What is the relationship between acidity test rates and financial performance in the Nigerian manufacturing industry?
How does the liquidity ratio affect the financial performance of the manufacturing industry in Nigeria?
What is the relationship between the exchange rate and the financial performance of the manufacturing sector in Nigeria?
How does the rate of inflation affect the financial performance of the manufacturing industry?

1.9 Working with variables

Therefore, the variables in this study are operational here.

Y=f(X)

Y = Financial Performance (FP)

X = Liquidity (L); Exchange Rate Fluctuation (FEF)

Y = dependent variable

X = independent variable

X = x1, x2, x3, x4, x5

x1 = liquidity ratio (CAR)

x2 = acid test ratio (ATR)

x3 = cash and cash equivalent ratio (CCER)

x4=Exchange rate (ER)

x5= Inflation rate (IR)

Y= f(x1) …………………………………………………….. (1)

Y=f(x2) ……………………………………………………………….. (2)

Y = f(x3) ……………………………………………….. (3)

Y = f(x4) ……………………………………………….. (Four)

Y= f(x5) ……………………………………………….. (5)

1.10 Definitions of Important Terms.

inflation rate

Inflation is the rate at which the general price level of goods and services increases, resulting in a decrease in purchasing power. High inflation rates can have a negative impact on a company’s financial performance.

Short-term asset ratio

Current ratios are primarily used to indicate a company’s ability to repay its liabilities (liabilities and accounts payable) with its assets (cash, marketable securities, inventory, accounts receivable). Therefore, current ratios can be used to make a rough estimate of a company’s financial health.

acid test ratio

In finance, the acid test or quick ratio or liquidity ratio measures the ability of a firm to pay off or repay current liabilities immediately using liquid assets or liquidity. High-speed assets include short-term assets that are close to book value and likely to be readily converted to cash.

Cash and cash equivalent ratio

The liquidity ratio is the ratio of a company’s total cash and cash equivalents to current liabilities. Cash equivalents are highly liquid investments with maturities of three months or less. The risk of changing values ​​should be minimized. Examples of cash equivalents are:
Certificate of Deposit. commercial paper.

Exchange rate

In finance, an exchange rate is the rate at which one currency is exchanged for another. It is also considered the value of a country’s currency relative to another currency. References:

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