The Role Of Cash Management In The Success Of A Business

Project and Seminar Material for Accountancy / Accounting

Abstract

The success of any business venture is predicated on how the management has planned and controlled its cash flows. Cash shortage will disrupts the firm’s smooth 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. Thus, cash management assumes more significance than other current assets because cash is the most important asset that a firm holds. However, literature revealed that only limited studies have investigated the relationship between cash management and business success in Nigeria. Therefore, this study examined the role of cash management in the success of a business. It found that the management of cash is pertinent in any to-be successful business venture because it helps in cash planning, managing cashflows and maintaining optimal cash level in an organization.

Chapter One

Introduction

1.1 Background to the Study

Cash management constitute a fundamental function of the firms management so as to ensure all financial obligations are met as at when due. If a firm fails to pay its obligation when it is due as a result of lack of cash, the firm is insolvent. Insolvency then leads the firm to bankruptcy. Consequently it is important the firm manage their cash well. The need for efficient cash management is to prevent bankruptcy, improves the profitability and mitigate the firms risk.

Cash management is particularly important as cash flow problems could arise even in the midst of the firm having many clients, and offering superior products with superior image. Firms with cash flow problems do not have a margin of safety to meet unplanned emergencies, fund innovations and expansion and hire and retain staffs.

Cash is therefore the lifeblood of the business. Many firms make the mistake of spending all of their funds as soon as it is received for the obligations of the firm without any leverage for the future Successful cash management, therefore requires making realistic projections, monitoring ,collections and disbursements of cash , adopt effective billing and collection measures, and adhere to budgetary restrictions.

1.2 Statement of the Problem

The fundamental problem confronting many organizations is the issue of cash to meet its obligations and stay afloat in business profitably. This is the desire of all organization but the real situation shows that majority of firms are only managing to meet its obligations within tight available cash flow.

Cash management is the collection, concentration, and disbursement of cash. With the aim of managing the cash balances of a firm so as to maximize the availability of cash not invested in fixed assets or inventories in such a manner as to avoid the risk of insolvency. Cash management involves the monitoring of the firm’s level of liquidity, its management of cash balances, and its short-term investment strategies. Cash management constitute a fundamental function of the firms management so as to ensure all financial obligations are met as at when due. If a firm fails to pay its obligation when it is due as a result of lack of cash, the firm is insolvent. Insolvency then leads the firm to bankruptcy. Consequently it is important the firm manage their cash well. The need for efficient cash management is to prevent bankruptcy, improves the profitability and mitigate the firms risk. Therefore, the problem confronting the research is to determine the the role of cash management in the success of a business (A Study of ECO Bank).

1.3 Objectives of the Study

To determine the roles of cash management in the success of a business.
To examine how effective cash management system is in Eco Bank Nigeria PLC.
To examine the challenges of effective cash management in Eco Bank Nigeria PLC.

1.4 Research Questions

What are the roles of cash management in the success of a business?
How effective is the cash management system in Eco Bank Nigeria PLC?
What are the challenges to effective cash management in Eco Bank Nigeria PLC?

1.5 Research Hypothesis

Ho: The role of cash management for the attainment of business success in ecobank is not effective.
Hi: The role of cash management for the attainment of business success in ecobank is effective.

1.6 Scope of the Study

The study focuses on the appraisal of the role of cash management in the success of a business a case study of Ecobank.

1.7 Limitations of the Study

The study was confronted by some constraint including logistic and geographical factor.

1.8 Definition of Terms

Cash Management Defined

Cash management is a broad term that refers to the collection, concentration, and disbursement of cash. The goal is to manage the cash balances of an enterprise in such a way as to maximize the availability of cash not invested in fixed assets or inventories and to do so in such a way as to avoid the risk of insolvency. Factors monitored as a part of cash management include a company’s level of liquidity, its management of cash balances, and its shortterm investment strategies.

Liquidity Defined

A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. 2. Accounting: The ability of current assets to meet current liabilities. 3. Investing: The ability to quickly convert an investment portfolio to cash with little or no loss in value.

Solvency Defined

Solvency is the ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business as it asserts a company’s ability to continue operations into the foreseeable future. While a company also needs liquidity to thrive, liquidity should not be confused with solvency. A company that is insolvent must often enter bankruptcy.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to reiterate that the objective of this study was to examine the role of cash management in the success of a business.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given.

In this chapter, certain recommendations are made which in the opinion of the researcher are drawn from the findings of the study.

5.2 Summary

This study was undertaken to examine the role of cash management in the success of a business. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and tested the hypotheses using the chi-square statistical tool. While the fifth chapter gives the study summary and conclusion.

5.3 Conclusion

The research was conducted in the context of low profitability, development and growth of small retail businesses. It seems that poor cash management practices are a contributing factor towards the profitability and sustainability of these small businesses. This study established that this hypothesis was prevalent and that acquisition of knowledge of cash management practices was one of the important elements in the success of a small business. The investigation into the problem revealed that business managers and owners, who have basic knowledge of cash management practices, were more profitable and had sufficient cash to handle business activities. The study also provided sufficient evidence testifying that a greater portion of owners are operating a business without formal financial records in place as well as without any higher qualification on small business management. The study confirmed that the restriction on a loan and poor debtor repayments played a role on the availability of cash in the small business. The implementations of cash management practices are vitally important for any successful business. The commonly used expression, “Cash is king” cannot be contested as its validity is more prevalent in this research study. There should be more emphasis placed on the impact of cash management practices on small retail businesses. The findings of this study could be useful to potential, emerging and established owners of all types of businesses since effective and efficient cash management practices are an integral component of any successful business.

5.3 Recommendation

Based on the research findings, the following suggestions are made to enhance small businesses’ cash management knowledge and practices to enable them to be profitable and sustainable:

Formal Records

The findings of this study have revealed that businesses who indicated that they were able to manage their cash flows also stipulated that they did not have cash to pay for the products they buy. An implementation of basic cash management practices could be beneficial to eliminate this difficulty faced by these businesses. Each business should ensure that there are basic financial records kept in the business to monitor and control the cash inflow and cash outflow. Such a practice will enhance business profitability.

Debtors

Businesses should implement a debtor repayment period for all debtors’ accounts. Regular reminders should be sent to debtors to encourage quick payments. An incentive or a discount should also be implemented to encourage quick repayments. The businesses should employ a policy that doesn’t allow debtors to make additional purchases until their currents accounts are paid in full. Businesses should apply stricter terms when selling items using the lay-by system, and if the product is not paid in full within 60 days, the item should be displayed on the shop floor for sale.

The businesses should offer incentives for early payments of their accounts receivable. Currently, 34.1% of the businesses have implemented this procedure to enhance debtor repayments by offering a discount. This will provide these businesses with the much needed liquidity and customers would gain by saving on their purchases. Businesses should also charge an interest on an overdue account. Currently just 18.6% of the businesses implement this procedure. Therefore, debtors do not see the urgency to settle debts timeously.

Inventory

A monthly stock take should be performed in the business. Re-order levels should be set to ensure that the business does not run out of stock of the fast selling items. A stock take would also identify the slow moving items that are not sold quickly. The 116 selling price of these items should be reduced to attract sales. Businesses should always ensure that the older items on the shelf are sold before the newer stock is put onto the shelf to prevent products from becoming expired or obsolete. Purchases Businesses should negotiate longer credit repayment terms with suppliers so that the former are allowed extra time to repay accounts the business owes without being charged any interest. Moreover, businesses should purchase from those suppliers who offer a discount if the account is repaid within a certain period. Businesses should purchase non-perishable items in bulk to save on cost. Repaying the accounts owing to creditors just before the due date will allow businesses to hold on to the much needed cash for as long as possible. This cash could be used for other business operations to enhance cash inflow. Therefore, if businesses are not offered a settlement discount, they should not make prompt payments to their creditors.

Financing

All businesses should open a business bank account. Depositing earnings in the bank regularly makes it easier to track the business cash inflow. Moreover, debit payments would make it easier to track business cash outflow. A bank account would also increase the business chances of qualifying for a loan if the need arises. Suppliers would also not hesitate to sell on credit to a business with a bank account as a bank account enhances the business authenticity and professionalism. These businesses should investigate different loan options from various financing institutions. A loan will assist in the cash shortage that 75.2% of the businesses incur. This increase in cash availability could assist in the purchase of inventory and payments. By having sufficient inventory in the business, sales will be enhanced.