EVALUATING THE IMPACT OF RISK MANAGEMENT ON PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA
This study focused on investigating the impact of risk management on performance of firms in manufacturing sector in Nigeria within the period of 2007 to 2015. This study was carried out to investigate the impact of working capital management and investment capital management on firm’s performance in the manufacturing sector in Nigeria and to also ascertain which of working capital or investment capital is managed more, using working capital and investment capital as proxies for risk management while using return on asset and return on equity as proxies for performance.
Secondary data were collected from the publicly available audited financial statement of the companies selected. Ordinary least Squares Regression was adopted in testing the relationship between risk management and performance of the seven companies respectively while descriptive analysis was done with the use of graph in analyzing changes in the variables over time.
The result from the ordinary least squares (OLS) regression analysis showed that four of the seven companies have significant relationship between investment capital and return on asset while three have significant relationship between working capital and return on asset, and on the other hand there was significant relationship between investment capital management and return on equity of three companies while the other four have no significant relationship between working capital and return on equity.
The study therefore concluded that risk management have impact on performance of firms in the manufacturing sector and also that firms in the manufacturing sector tend to manage their investment capital more than their working capital.
Keywords: Risk, Risk management, Working capital, Investment capital and Performance
Word Count: 253
1.1 Background to the Study
Risk may be defined as the probability of occurrence of an adverse event. Risk refers to the uncertainty that surrounds forthcoming events and outcomes. It is the expression of the likelihood and impact of an event with the potential to affect the achievement of an organization’s goals (Heinz, 2010). Risk can be seen as a state where there is a likelihood of a loss but also a hope of gain (Emma & Gabriel 2012). The term risk can also be defined and elucidated in many different ways depending on the aim and perspective of a discussion. Kaplan and Garrick (1981) stated that a risk is a doubt joint with damage or a loss. They mean that something that is indeterminate does not have to incur a risk; however, if an event is considered as both indeterminate and a loss is included, it can be defined as a risk. The Society for Risk Analysis (2012), defines as “The potential for realization of unwelcome, adverse consequences to human life, health, property, or the environment”. Since one would never jeopardize the loss if there were no chance of a win. To realize the existence of a risk, one must be aware of both the gains and losses incurred and therefore a risk can be reflected as individual and relative to the observer (Kaplan & Garrick, 1981). All these definitions seek to make known that risk is to be seen as part of daily life, and the presence of risk in any environment should not be a problem but the focus should be on how those risks are being managed and in turn minimizing their potential effect.
Risk management on the other hand deals with the process of identifying and controlling potential risks that can be faced by an organization. Risk management is about identifying the risk to be managed, risk to leave unattended and risk that need to be hedged. Risk management is recognized in today’s business world as an integral part of good management practice. In its broadest sense, it entails the systematic use of management policies, procedures and practices to the tasks of identifying, analyzing, assessing, treating and monitoring risk. Risk management refers to a practice of identifying loss exposures faced by an organization and selecting the most appropriate procedures for treating these particular spotlights effectively (Rejda, 2003). Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to mitigate, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities (Wenk, 2005).
Effective risk management can bring far payoffs to the company irrespective of what type it is. These paybacks include, superior financial performance, better basis for strategy setting, improved service delivery, better competitive advantage, less time spent firefighting and fewer unwanted surprises, increased likelihood of change initiative being achieved, closer internal focus on doing the right things properly, more efficient use of resources, reduced waste and fraud, and better value for money, improved innovation and better management of contingent and maintenance activities (Wenk, 2005). Risk management in manufacturing sector is about the categories and types of risks that can be opened to companies in the manufacturing industries and the approach which the companies adopt in managing those risks. The ways and manners which companies adopt in managing their risks can have either of positive or negative effect on their performance. Here are some of the risks that manufacturing companies can be exposed to; environmental risk, reputational risk, technological risk, and legal risk.
1.2 Statement of the Problem
The effect of risk management on the performance of firms is a vital and an important issue to be examined especially when there have been cases of companies failing after spending huge amount as a result of their failure in managing their potential risks in an adequate and efficient manner. Thus, this study focuses on how sound organizations manage their working capital, investment capital or both as the case may be. Also to know which of the two (either of working capital or investment capital) is managed more and what effect do their choices have on the performance. Managing both working capital and investment capital is a key factor as to how well every organization will perform and this in turn will limit their risk exposure and also reduce the amount that could be lost as a result of their failure in managing their risk. Working capital management talks about how well a company manage it current asset as well as current liabilities, examples of current asset are cash at hand, cash at bank, debtors, receivables, creditors. It must be known that failure in managing the working capital can expose the company to liquidity risk (the risk of not having enough money in meeting their short term obligations as at when due). Investment capital on the other hand talks about the organization’s approach in managing their long term asset and long term liabilities examples of investment capital are. equity, debenture, plant and machineries, buildings, and failure in managing their investment capital can also expose the organization to different types of risk e.g. leverage risk (the risk of their debt rising to a very critical point that can increase the probability of the company having financial distress and also increase in bankruptcy cost). Mismanagement of both working capital and investment capital can expose a company to reputation risk (the risk that a company’s reputation with the general public (stakeholders) or the reputation its product will suffer damage).
1.3 Objective of the Study
The specific objectives are to:
- determine whether working capital or investment capital management have impact on the performance of firms in manufacturing sector and
- determine which of working capital management or investment capital is managed more by manufacturing firms within the context of risk management.
1.4 Research Questions
This study seeks to answer the following questions:
- Does either of working capital management or investment capital management have any impact on manufacturing firm’s performance?
- Which of working capital and investment capital is managed more by firms in manufacturing sector in Nigeria?
The hypotheses of this study are structured to examine if good risk management process affect the performance of companies in manufacturing sector in Nigeria. To offer useful answers to the research questions and realize the study objectives, the following null hypotheses are proposed.
Ho1: Working capital and investment capital management have no impact on the performance of firms in the manufacturing sector in Nigeria.
Ho2: There is no difference in the risk management of working capital and investment capital of manufacturing firms in Nigeria.
1.6 Justification for the Study
Risk management was introduced into organizations so as to make known to the company as well as it various stakeholders what risk the company is exposed to also find adequate measure of managing and controlling the various types of risk they are exposed to. This research was examined in order to study and understand the risk management process and how it contributes to the value of listed companies in Nigeria. Manufacturing industry is one of major key players in every economy as they serve as an important aid in the process of economic growth and development. So therefore this study was studied to know how they manage their risk and to understand what the effect of their risk management is on their performance.
1.7 Significance of the Study
It is important to know the impact of risk management on the performance of firms in the manufacturing sector in Nigeria. This study was carried out to ascertain the effectiveness of risk management process. It is well believed that good risk management process and implementation have large impact on the performance of firms and in turn on the economy as a whole. Thus this would make all stakeholders to have a good understanding of how the risk management process affect firms in manufacturing sector in Nigeria. Also the study would be a contribution to the existing knowledge concerning risk management process and firm performance by examining some organizations in the manufacturing sector in Nigeria.
1.8 Scope of the Study
The study examined the impact of risk management on firm performance and to also provide additional insight into the relationship between risk management process and firms performance in Nigeria. The variables employed in this study to measure Firm performance include return on asset and return on equity. A total of 7 manufacturing firms were examined between year 2007 and 2015 to investigate what way the companies manage their working capital and investment and what the effect is on the respective companies. The data used for this research were gotten from the audited financial statement of the firms listed on the Nigerian stock exchange (NSE).
1.9 Operational Definition of Terms
Risk: Risk may be defined as the probability of occurrence of an adverse event. Risk refers to the uncertainty that surrounds forthcoming events and outcomes. Also risk work along with uncertainty i.e. when there is possibility of more than one outcome in a particular situation.
Risk Management: Risk management is defined as the culture, structures and processes that are focused on achieving possible opportunities yet at the same time control unwanted results. The Cadbury Report (1992) described risk management as the process by which executive management, under board supervision, identifies the risk arising from business and establishes the priorities for the control and particular objectives.
Liquidity Risk: liquidity risk is the risk that the company will be unable to make payment to settle liabilities when payment is due. It can occur when a company has no money in the bank, is unable to borrow more money quickly, and has no assets that it can sell quickly in the market to obtain cash.
Reputation Risk: Reputation risk is the risk that a company’s reputation with the general public, or the reputation of its product ‘brand’ will suffer damages. Damages can arise in many different ways: incidents that damage reputation are often reported by the media. Companies that might suffer losses from damage to their reputation need to be vigilant and alert for any incident that could create adverse publicity. Public relation consultants might be used to assist with the task.
Working Capital: Working capital refers to the use of short term financing method on carry out the activities of the organization and it is divided into current asset and current liabilities. Working capital is defined as the investment of the firm in the current or short-term assets such as cash, short-term securities, accounts receivable and inventories (Ghahderijani, 2006).
Investment Capital: This can be otherwise called capital structureand it is said to be the mix of long term finances for carrying on organization operations and it usually the mix of debt and equity as sources of financing