THE FINANCIAL MANAGEMENT PRACTICE AND PERFORMANCE OF LISTED MANUFACTURING COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

Companies use financial management practice techniques to assess their operations. These include budgeting, variance analysis and breakeven analysis. These methods help organizations to plan, direct and control operating costs and to achieve profitability and performance. It is recognized that financial management practices are important to the success of the organization (Obasi, 2008). Financial management practice is the application of appropriate techniques and concepts in processing the historical and projected economic data of an entity to assist management in establishing a plan for reasonable economic objectives and in the making of rational decisions with a view towards achieving these objectives.

Financial managerial practice is a set of practices and techniques aimed at providing organizations with financial information to help them make decisions and maintain effective control over corporate resources. These include the methods and concepts necessary for effective planning, decision making (choosing among alternative business actions and controlling through the evaluation and interpretation of performance (Ikeagwu, 2010). 

According to Osuala, (2005), financial management practice helps an organization to survive in the competitive, ever-changing world, because it provides an important competitive advantage for an organization that guides managerial action, motivates behaviors, supports and creates the cultural values necessary to achieve an organization’s strategic objectives.

Financial management practice is concerned primarily with the internal needs of management. It is oriented toward evaluation of performance and development of estimates of the future as opposed to traditional financial accounting which emphasizes historical data related to such legal financial matters as ownership, investment, credit granting, taxation, regulation, and the building of foundations for consistent and conservative external reporting, “in accordance with generally accepted accounting principles.”  Flexibility is an essential characteristic of financial management practice since it presupposes that careful attention has been given to determine the important needs of management, many of which cannot be precisely identified in advance (Lawrence, 2009).

 

Financial management practice provides information from its environment to management to facilitate decision-making. Good financial management information has three attributes: (1) Technical-it enhances the understanding of the phenomena measured and provides relevant information for strategic decisions, (2) Behavioral-it encourages actions that are consistent with an organization’s strategic objectives, and (3) Cultural-it supports and/or creates a set of shared cultural values, beliefs, and mindsets in an organization and society (Ubesie, 2003).

The development of management accounting is responsive to the demands of management and the environment. Financial management practice  adapts to organizational change and three major forces cause organizations to evolve: technological change, globalization, and customer needs (Ofoegbu, 2003).

In order to remain competitive in today’s global market, business must continually improve. Good financial management practices help the organization to improve continually. Due to these all over the world there are so many financial management practices tools & techniques developed and practiced. Financial performance can be defined as a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues (Igben, 2003).

This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.  There are many different ways to measure financial, but all measures should be taken in aggregation. Some of the indicators of financial performance are return on equity, liquidity ratios, asset management ratios, profitability ratios, leverage ratios and market value ratios.

Brown, (2006), defined financial management practices as a variety of methods specially considered for manufacturing businesses so as to support the organization’s infrastructure and management accounting processes.  Financial management practices can include budgeting, performance evaluation, information for decision-making and strategic analyses, among many others.

Financial management practices enable management to obtain relevant information for meaningful decision making (Ezeamama, 2002). Onodugo, (2006) noted that the perceived importance of cost accounting is driven by decreasing profitability, increasing costs and competition, and economic crises.  The author also noted that while companies still perceive traditional financial management practice  tools as still important, new financial management practices such as strategic planning, and transfer pricing are perceived less important than traditional ones. A number of factors influence the changes in financial management practices within some organizations and it is against this background that this study will be carried out to investigate the financial management practice and performance of listed manufacturing companies in Nigeria.  

1.2       Statement of the Problem

As today’s business environment becomes increasingly competitive, business organizations are becoming more aggressive and dynamic in identifying strategies that will ensure performance and profitable existence.

Competition may be attributed to business innovations, advancement in technology and the changing demand of customers. Competition amongst business organizations may compel the management to develop business techniques and strategies that would guide an organization towards great performance and the maximization of profits. This may be achieved through increased sales and reduced cost of production.  

The optimization of profits and minimization of costs may enable an organization to create a competitive advantage in its industry. Certain financial management practices provide strategies that can influence a large number of customers to have a lasting preference for a company’s products.

Onah and Igemba (2000) are of the view that the adoption of financial management practice techniques may provide an organization with a sustainable competitive advantage over its rivals. 

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