The Impact Of Cash Management In The Manufacturing Industry

Project and Seminar Material for Business Administration and Management BAM

Abstract

This study was carried out to examine the effect of advertising on sale volume of manufacturing industry using Federal Polytechnic Water Ado-Ekiti as a case study.The study was carried out to determine the effectiveness of cash management in the manufacturing industry, analyze the relationship between cash management and the financial performance of the manufacturing industry, and investigate the factors which influences the cash management practices in the manufacturing industry. To validate the relationships between cash management and financial performance, 36 companies listed in Muscat Securities Market (MSM) had been chosen over time, starting from 2015 ending to 2020. For this, the study used cash management ratios, which were the Cash Ratio (CR), Operating Cash to Debt Ratio (OC-DR), and the financial performance ratios are Return on Assets (ROA), Return on Equity (ROE) and Net Profit Ratio (NPR). The CR has a statistically significant positive correlation with ROA of 0.176, ROE of 0.103 and NPR of 0.193 values. The OC-DR also has a statistically significant positive relationship with ROA (0.471), ROE (0.133), and NPR (0.422). The R-square value was 17.8%, where NPR is a dependent variable. When Return on Asset has been taken as a dependent variable, the R-square value was identified as 22.2%. But ROE has a limited impact on the independent variables with 2%. Overall, the main conclusion drawn is that cash management practices used by the Omani manufacturing firms are explaining a significant amount of the financial performance However other relevant factors such as the amount of manufacturing sales contracts received, the social development status of the business, impact of the financial crisis within the economy on the demand of the goods or commodities etc. may influence the cash management practices and draw a better conclusion. The findings can be helpful for policy makers in understanding the main factors that impact cash management and how these factors can be regulated.

Chapter One

Introduction

1.1 Background of the Study

No business operation is isolative of cash management. Cash is regarded as the most important current asset for the operation of business (Olowe, 1998). Cash is the basic input required to keep the business running on a continuous basis and it is also the ultimate output expected to be realized by selling the services or products manufactured by the firm (Pandey, 2010). Cash management is imperative in every business organization as cash is said to be the life blood of any business (Chartered Institute of Management Accountant (CIMA), 2002). The essence of cash management is to ensure positive cash flow for smooth business operation. Adetifa (2005) argued that cash management has been professionalized because of the importance of managing corporate cash. The question that will then come to mind will be, how important is cash management to the running of a company or an organization? Or of what importance is cash management in ensuring an effective, reliable and positive fund flow system of a manufacturing company?

Basically, the process of managing cash today has been significantly influenced by the growing developments in the business world over the years (Kesseven, 2006). These developments include; the change in the corporate banking relationship from buyer’s to a seller’s market, the globalization of the world business which includes the creation of the economic monetary union in Europe with its single currency and the proposed adoption of a single currency in the west region of Africa; the emphasis on new treasury structures to better manage resources on a worldwide basis; the developing interest in e-commerce for business-to-business transactions which changes how data and funds flow greatly reduces working capital cycle time; the emergence of the “new economy” with its orientation to information and cash, driving finance into every area of a company (Marsh, 2009). Based on all these developments, effective cash management has become fundamental to business survival and success.However, for the sake of simplicity, cash management centres on how a firm manages its cash flow cycle or operating cycles as this defines the timing of cash inflows and cash outflows. The pattern of the cash and operating cycles varies per industry but in a general term, the pattern involves the provision of cash as capital for firm’s initial outlay, the procurement of raw material in manufacturing companies and finished goods in marketing companies, distribution of the finished goods to obtain immediate cash or create debtors when goods are sold on credit term. (Akinbuli, 2009). Furthermore, the process of managing corporate cash has become a major challenge for most companies, because of its significant impact on the results of a company (Ekwere, 1993). The determination of problems in cash management involves identifying areas that are unique to solving cash problems in an organization.

1.2 Statement of the Problem

The term cash management is usually described as the management of cash and the cash equivalents of the business to ensure that sufficient cash isavailable to sustain its operations, finance investments, and meet all other financial commitments. Cash management invariably involves managing inflows and outflows of cash based on the business’s different operations and activities. The main goal is pursued by cash management is to manage the cash resources of the business in a way that ensures an optimal cash balance in hand that is not in excess or short of the requirements (Sinclair & McPherson, 2017; Zunairoh & Fatkhurrohman, 2019).

One of the problems faced by finance managers in managing cash is determination of appropriate source of fund for the company either to be used as the initial or working capital. Other challenges are identification of right investment opportunity for idle funds, non-cash planning, and determination of the optimal level of cash to be maintained by the company. Kesseven (2006) submitted that most managers are faced with the challenge of achieving a desired trade-off between liquidity and profitability in maximizing the value of the firm. He therefore warned that too much focus on profitability may cause asset–liability mis-match resulting in increased profitability in the short run at a risk of insolvency. Pandey (2010) however, is of the opinion that finding a trade off between sufficient and insufficient cash to be held has been a major problem faced by many organizations, while Olowe (2008) advised that cash must be obtained from appropriate source in order to avoid the problem of fund mismatch in investment decisions. In the light of the above, this study seek to examine the impact of cash management on the performance of manufacturing industry.

1.3 Objectives of the Study

The general aim of this study is focus on examining the impact of cash management on the performance of manufacturing industry. Specifically, this study will;

Determine the effectiveness of cash management in the manufacturing industry.
Analyze the relationship between cash management and the financial performance of the manufacturing industry.
Investigate the factors which influences the cash management practices in the manufacturing industry.

1.4 Research Questions

The study will be guided by the following questions;

How is the effectiveness of cash management in the manufacturing industry?
What is the relationship between cash management and the financial performance of the manufacturing industry?
What are the factors which influences the cash management practices in the manufacturing industry?

1.5 Research Hypotheses

Ho: There is a statistically significant positive relationship between cash management and the financial performance of the manufacturing industry.

Ha: There is a statistically significant positive relationship between cash management and the financial performance of the manufacturing industry.

1.6 significance of the Study

In the recent time due to changes in business generally, greater emphasis have been placed on cash management. The important of this study is that it will highlight the consequences of not having and operating an efficient cash management system in business organizations. This research work will also expose the management of manufacturing organization to effective way to manage cash towards the achievement of organizational goals.

1.7 Scope of the Study

This study is structured to generally examine the impact of cash management on the performance of manufacturing industry. The study will examine the cash management of the industry with specific focus on its impact on performance of the industry. The cash management will be represented with Cash Ratio(CR) and Operating Cash to Debt Ratio(OC-DR), while performance will be represented with Return on Equity and Net Profit Ratio. The study will cover the period of 6years – from 2015 – 2020. About 20 listed manufacturing companies will be used as a case study for this work.

1.8 Limitation of the Study

The major limitation experienced in this study is the Pension Fund Administrators itself. Most of the information provided by the Legacy Pension Manager required explanation as to the reason behind such activities and actions. Nevertheless, there is always solution to a problem the problems were to an extent surmounted. There is also a limitation to textbooks, Journals and other materials in the library which are relevant to this study. I have to source for some materials outside the library. In addition, there was insufficient time for the study. In fact, it is very difficult for a student to go for a research work at the detriment of his lectures. This affects the expected quality of the research work. Furthermore, inadequate finance has an effect on this research work due to the current situation of the economy which makes prices of things very high viz-avis the cost of transportation the pension fund administrator to obtain relevant materials to this research work were very expensive.

1.9 Definition of Terms

Cash Management

Cash management is a broad term that refers to the collection, concentration, and disbursement of cash.

Cash flows

Cash flows from operations are the amount of cash a firm generates in a measured time from its operation.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on the impact of cash management in the manufacturing industry. The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary

In this study, our focus was on the impact of cash management on the performance of manufacturing industry. The study is was specifically carried out to determine the effectiveness of cash management in the manufacturing industry, analyze the relationship between cash management and the financial performance of the manufacturing industry, and investigate the factors which influences the cash management practices in the manufacturing industry. In the study, cash management was represented with Cash Ratio(CR) and Operating Cash to Debt Ratio(OC-DR), while performance was represented with Return on Equity and Net Profit Ratio. The study covered the period of 6years – from 2015 – 2020. and used 20 listed manufacturing companies in Nigeria as a case study. Th multiple regression was used in analyzing the data obtained from the secondary sources.

5.3 Conclusions

Cash management has been identified as one of the most important aspects to be effectively managed. A business firm with a sound set of policies regarding liquidity management will certainly improve the returns and reduce bankruptcy chances. This study outcome has revealed that manufacturing companies CR and financial performance have a positive relationship. In continuation to that, Debt Ratio and financial performance have a negative relationship with each other. CCC Ratio and financial performance do not have any relationship with each other. All the alternative hypotheses have been accepted as the statistical tools indicate one hypothesis where the null has been accepted, and the alternative is rejected. Therefore management of manufacturing companies needs to confirm an adequate cash management control to ensure that there is optimal cash where there are strategies to be in place during minimal cash in hand and surplus cash in hand.

5.4 Recommendation

Based on the findings the researcher recommends that;

Financial managers of manufacturing Companies should focus on cash position at all time. A stable cash position should be maintained by the manufacturing companies that can easily meet its current liabilities with cash or cash equivalents it has on hand.
Effective cash management programs should be constituted, by which the finance manager should prepare a cash budget and cash flow statement for effective cash planning and control.
The cash management process should agree with appropriate laws, regulations and professional, ethical standards to follow that going concern of business firms will be attained. More qualified accounting professionals should be recruited to get adequate support in managing cash to augment further and maintain the consistent financial performance of manufacturing companies.
The ultimate goal of any firm is to balance cash inflow and outflow to safeguard the firm against the liquidity crisis. A key feature of liquidity management is the effective management of cash.

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