CHAPTER ONE

INTRODUCTION

1.1.        Background to the Study

All organizations keep one inventory or the other. The word “inventory” had been defined in various ways by different scholars. Inventory management is a vital aspect of working capital management (Shardeo, 2015).  Muller (2013) described inventory as an organization’s processed and unprocessed supplies, work-in-progress supplies, used in operations and completed produce. Ballou (2014), all defined inventory as piles of supplies provisions which forms completed produce, which becomes visible at various points all the way through a company’s manufacturing and production channels.

Inventory constitutes a substantial proportion of the current asset group. It represents investments made for obtaining a return (Duru, Oleka & Okpe, 2014). Excessive inventory is not desirable for longer periods because high inventory levels increase carrying cost and as inventory is increases; the profitability decreases (Priyank & Hemant, 2015). Hence, a suitable inventory control strategy will help in ensuring that the firms always keep an optimal amount of assets. Freeing frozen amounts in the form of stocks or inventories increases the firm’s efficiency in the use of its resource (Ziukov, 2015). As such, a well-functioning inventory system has a great effect on total firm’s performance as well as that of the firm’s managers (Akindipe, 2014).

Inventories are part of current assets, which are convertible to other forms of working capital (cash and other receivables) in less than one year (Milicevic, Davidovic & Stefanovic, 2015). The theory of inventory management involves making decisions that are in line with basic trade off among firm’s objectives, costs and other constraint (Mathuva, 2013). The economic order quantity theory, suggests that firms should maintain the quantity of inventory which provides the lowest total holding cost and acquiring cost (Milicevic, Davidovic & Stefanovic, 2015). Thus, inventory management is vital to for an effective and efficient firm. It is also important since it helps the firm in determination of the optimal amount of materials and goods a firm can hold at any given time (Kumar & Bahl, 2014).

Profit of an organization can easily be maximized with the help of an effective inventory management system in places. Profit maximization is all about cost minimization and revenue maximization. An effective inventory management improves the firm’s total performance through matching inventory management practices and a competitive advantages especially now that most organizations operates in a more competitive industries or sectors all over the world (Mahidin, Jeanet, Kagwisagye1, & Patrick Mulyungi., 2015). The main goal and objective of inventory management system is to keep at the necessary required inventory at any time so that production runs smoothly without interruption whatsoever (Panigrahi, 2013). Inventory is the second largest assets as shown in the statement of financial position in brewery industry. It’s only exceeded by equipment and the physical facilities (Eneje, Nweze, & Udeh, 2012).

If inventories are not managed properly, it can result in profitability and liquidity crisis, which may eventually lead to corporate crisis. Thus, this study aimed at evaluating the Effect of Inventory Management on the Financial Performance of brewery companies in Cameroon.

According to Nwankwo and Chuks (2015), Cameroon is Africa’s largest alcohol consumer, accounting for 36% of Africa’s formal alcohol market according to Deutsche Bank Market Research. Driven largely by one of the huge consumer market and a growing middle class with a large number of drinking-age consumers, beer demand and intense competition amongst other driving factors; the Cameroon brewery Industry has recently evolved from a duopoly to an oligopoly with brewing multinationals battling for position in a market that has plenty of room for expansion. The industry has metamorphosed over the years from mere production of bottled drinks to a diversified industry which constitutes a large segment of the food and beverages sub-sector currently accounting for 35.9% of the growth in the industrial sector.

1.2. Statement of the Problem

In the past decade, some of the Cameroonian brewery companies have been liquidated due to poor management of working capital and its policies, while some that are still in business are ineligible to pay their workers as well as pay dividend to its shareholders. Some Cameroonian brewery companies that are still in operation cannot pay dividend to their shareholders. However, most managers ignore the saving potential that arise from proper management of inventories, trying to treat inventories as a necessary evil and not as an asset that require to be managed. As such, some firms do not or ignore to control their inventory holding and failure to account or monitor inventory turnover, this usually leads to under stocking and causing the firm to stop or slow its production. This finally results to firm’s ineffectiveness.

There is a need for proper and adequate measures to be taken in the analysis of firm’s financial performance due to its size of the firm, its capital structure, Level of resources required such as technology, labor and materials. However, the main challenge today among firms in Cameroon is about the need to enhance of efficiency and improving on effectiveness at the same time.  It is because of this crisis that the researcher deemed it necessary to evaluate the effect of inventory management on the Financial Performance of brewery companies in Cameroon.