The Impact Of Cash Management On The Profitability Of Manufacturing Companies In Nigeria

Project and Seminar Material for Economics

The Impact Of Cash Management On The Profitability Of Manufacturing Companies In Nigeria


Abstract


Cash management, especially at the at the wake of the global financial crisis, has become a major source of concern for business managers as bank loans are becoming too expensive to maintain as a result of tightening of both the local and international financial market and the reluctance of the public to invest in the share of companies sequel to the crash of the capital market. Thus, cash management assumes more significance than other current assets because cash is the most important asset that a firm holds. The objective of the study is to determine the extent to which cash management can affect profitability management in Dangote Cement, to establish the relationship between cash conversion cycle and corporate profitability, to determine the nature of the relationship between cash management and corporate profitability. However, literature revealed that only limited studies have investigated the relationship between cash management and profitability in firms. Therefore, this study will examine the relationship between cash management and profitability in Dangote Cement Nigeria. The study may help the management of Dangote Cement (R) Limited in determining which cash management technique to use in order to ensure profitability and also know the various factors that affect cash management in the organization. The study may act as a source of literature for the scholars who intend to do research on how cash management affects profitability of any other institution or any aspect related to cash management. The researcher used descriptive research design since the study involved use of census. The study population was a target 50 employees from managers, sales department and accounts department and was conducted through a census. For purposes of sample representation, all the administrators of Dangote Cement were drawn. Questionnaires and interview guide was used. Literature revealed that only limited studies have investigated the relationship between cash management and profitability in Nigeria. Therefore, this study examined the relationship between cash management and profitability in Dangote Cement a manufacturing firm in Nigeria. The results reveal a positive and significant relationship between CCC and ROE on one hand and a non significant negative relationship between CCC and ROA. The researcher was able to achieve the objective that there is a relationship between cash management and profitability of firms. From the results of the study, it is recommended that future researchers should expand the scope of their studies to include multiple sectors of the economy.


Chapter One


1.0 Introduction

1.1 Background of Study

Cash management is essential to every business that desires to meet up with its short-term financial obligations. Akinsulire (2003) asserts that the success of any business venture is predicated on how the management has planned and controlled its cash flows. According to Olowe (2008), cash management is concerned with the efficient management of cash so as to achieve an optimum level of cash in the firm’s working capital. Cash represents the basic input necessary to start and keep a business running.

The pattern of the cash and operating cycle varies per industry., but in 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 obtain immediate cash or create debtors when goods are sold on credit term (Akinbuli,2009). Furthermore, the process of managing cash has become a major challenge for most of the companies, because of its significant impact on the results of a company (Ekwere, 1993).

The success of any business venture is predicted on how the management has planned and controlled it cash flows (Akinsulire, 2003). Effective cash management is the fundamental standing point to ensure that the firm’s finances are in strong position. Further the cash management is very vital for production firms whose assets are mostly composed of current assets (Hornead Wachowity 1998). According Raheman and Nasir (2007) said that cash management directly affects liquidity. Efficient Cash management contributes positively to the performance of firms and their survival. Deloof (2003) said that cash management is an important source of competitive advantage of businesses

A company needs to maintain sufficient cash to keep its business running smoothly. Cash shortage will disrupts the firm’s operation and can even lead to insolvency. Excessive cash will tie down unnecessarily long-term capital with a result that the return on capital employed will be low. A firm thus needs to maintain sound cash position. The study in this regard wishes to examine the impact of cash management on the profitability of manufacturing companies using Dangote cement as the case study.


1.2 Historical Background of Dangote Cement

Established in May 1981 as a trading business with an initial focus on cement, the Group diversified over time into a conglomerate trading cement, sugar, flour, salt and fish. By the early 1990s the Group had grown into one of the largest trading conglomerates operating in the country.

In 1999, following the transition to civilian rule and after an inspirational visit to Brazil to study the emerging manufacturing sector, the Group made a strategic decision to transit from a trading based business into a fully fledged manufacturing operation. In a country where imports constitute the vast majority of consumer goods, a clear gap existed for a manufacturing operation that could meet the ‘basic needs’ of a vast and fast growing population.

The Group embarked on an ambitious construction programme, initially focused on the construction of flour mills, a sugar refinery and a pasta factory. In 2000 the Group acquired the Benue Cement Company Plc from the Nigerian government and in 2003 commissioned the Obajana Cement Plant; the largest cement plant in sub-Saharan Africa.

The Group is now one of the largest manufacturing conglomerates in sub-Saharan Africa and is pursuing further backward integration alongside an expansion programme in existing and new sectors.


1.3 Statement Of Problem

Cash management represents an important component of working capital management (Akinyomi & Tasie, 2011; Malik, Waseem & Kifayat, 2011). Literature revealed that several studies on working capital management have been conducted both in the advanced market economies and developing economies (Wongthatsanekorn, 2010; Abbasi & Bosra, 2012). These studies have reported the relationship between working capital management and financial performance (Hutchison, Farris II and Anders, 2007; Akinyomi & Tasie, 2011). However, till date, only limited studies have investigated the relationship between cash management and financial performance especially in the context of developing economies (Raheman & Nasr, 2007). Peavler (2009) observed that most failed businesses (up to sixty percent) were of the opinion that all or most of their failures were due to cash flow problems. Thus the relationship that exists between cash management and profitability in Nigeria remains unresolved and called for investigation.


1.4 Aims and Objectives of Study

The main aim of the research work is to examine the impact of cash management on the profitability of manufacturing companies in Nigeria.

The specific objectives of the study include to:

  1. Examine the relationship between cash management and return on assets of Nigerian manufacturing companies.
  2. Investigate the relationship between cash management and return on equity in Nigerian manufacturing companies.
  3. To investigate on the factors affecting profitability of the manufacturing companies

1.5 Research Question

In order to achieve the objective of this study, the following research question has been posed:

  1. What is the relationship between cash management and return on assets of Nigerian manufacturing companies?
  2. What is the relationship between cash management and return on equity in Nigerian manufacturing companies?
  3. What are the factors affecting the profitability of the manufacturing companies in Nigeria

1.6 Statement of Research Hypothesis

Hypothesis

H0: cash management does not influence profitability of manufacturing companies in Nigeria

H1: cash management influences profitability of manufacturing companies in Nigeria


1.7 Significance of Study

In 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. The research work will also expose the management of manufacturing organization to effective way to manage cash towards the achievement of organizational goals and enhance profitability


1.8 Scope of Study

The study on the impact of cash management on the profitability will be limited to only the Dangote cement Plc. Gboko, Benue state Nigeria (2000-2016)


1.9 Limitation of Study

Financial constraint

Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, statistical bulletin).

Time constraint

The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work


1.10 Definition of Terms

Cash Management:

Is the corporate process of collecting and managing cash, as well as using it for (short-term) investing

Profitability:

The degree to which a business or activity yields profit or financial gain


Chapter Five


Summary Conclusions and Recommendations

5.0 Introduction

The cardinal aim of the study was to look at the influence of cash management on profitability of Dangote Cement. This chapter presents the summary of findings, conclusion and recommendation based on the data from the study. The chapter also gives guidance to researchers on areas of further studies in areas seen to complement the current study.


5.1 Conclusions

Effective cash optimization is critical to all organizations, especially in a tough economy. Cash is the lifeblood of organizations. An organization having a proper set of liquidity management policies and procedures will improve profits, reduce the risk of corporate failure and significantly improve its chances of survival. It also provides a strategic advantage especially in difficult economic times. Effective liquidity management will enable an organization to derive maximum benefits at minimal cost. (KPMG, 2005)

As early stated, the survival of a business entity depend extensively on its ability to meet its current obligations as they fall due. This study has shown relevance degree of relationship between liquidity management and profitability in Dangote Cement Nigeria The finding is investigating liquidity and profitability relationship in Dangote Cement Nigeria and it is concluded that a positive relationship exists between the two variables in processing and manufacturing companies respectively.

Managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables and inventory) to an optimum level.

There is a relationship between cash management and corporate profitability since if cash is managed well the company will earn profits and survive a long period of time,the return on investments will be there, return on equity and return on assets which are all indicators of profitability.


5.2 Recommendations

Profitability is a major factor in the going concern of a business. Managers should strive to achieve a reasonable level of profitability in order to maximize their shareholders wealth.

Cash conversion cycle measures the time lag it takes company’s investment in raw material to be realized. Management should strive to maintain a very low CCC.A longer CCC may have negative effect on the liquidity of the companies because cash will be tied in raw material, inventory or account receivable. Managers can create value for their shareholders by reducing the number of days of accounts receivable and inventories to a reasonable minimum.

Furthermore, companies are capable of gaining sustainable competitive advantage by means of effective and efficient utilization of the resources of the organization through a careful reduction of the cash conversion cycle to its minimum. In doing so, the profitability of the firm is expected to increase. Therefore, managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables and inventory) to an optimum level.


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