Full Project – An appraisal of cash management techniques in manufacturing companies

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Ever since the biblical edition of man, from the Garden of Eden by God, man has been involved in the production of goods and services for himself.  This production of goods and services by man is what had transformed the human society into a family place of living.

Different people are engaged in different human activities, producing one form of goods and services for and the other for exchange. The services of any business entity depend largely, if not wholly, on the efficient management of resources input considered to be scarce.

However, the essential input to a business activity is known in the financial as working capital. Working capital is the “life blood” of any business and it consists of short-term assets such as invention, cash in hand and cash in bank. These short-term assets can readily be converted into cash, therefore is the most liquid part of capita. It is turned over repetitive circle for cash to inventory, from inventory to account receivable and to bank or cash again, Organization, whether profit oriented or not, like companies, government, multi nationals, charitable homes or clubs requires cash for their day to day running of their organization and execution of project that have long-term duration. (For example, the acquisition of an item of plant and machinery) lack of cash in an organization brings the smooth running of operation to halt.

Also, excess cash not profitable employed, would result in westage of funds, so it is not a prudent financial policy to hold too much cash or too little cash for the level of activity of a business set-up. There is also the necessary to institute technique and procedures that will establish a good cash management culture in order to the availability of adequate cash at all time in the business.

According to Brigham “cash” is the oil that lubricates the wheel of any business. Many writers have given different bur related definition of the term “cash”. These definitions by different writers are different because the writer explains it in different ways but in nut shell, they all means the same thing.

Hampton, in financial sense defines cash as all the money, items and different sources that are immediately available to help pay a firm bill.

Keoron et al has this to say, that currency and coin that the firm has at mind in petty cash drawers or in checking account at various commercial bank where its demand deposit are maintained.

Pandey, also defines cash as the money which the firm can disburse immediately with restriction. The term cash include the coins, currency and cheques built by the firm balance in banks. The definition advanced by different writers could go on and on because if one wants to put them down they are exhibit. But a close look at these definition shows that the entire writer agrees that cash does not only include money, but also include claims on money postal order, money order and cheques and bank deposit which are available for use by the enterprise.

The availability or non-availability in a distant future of any of this component of cash means that there is shortage of cash, on the other hand, cash is available when any of the components or all the components of cash is present for use.

Management of cash should not be left to chance in any organization but serious effort should be made to properly plan and control the resources “cash” to avoid wastage, low returns and liquidity problems.

The practice of management is based on knowledge and responsibility. It is an organ of direction and discussion in our society especially in business enterprises.

Management as defined by Bakewel is the designed art of securing the result of deliberate activities through people by planning, organizing, co-ordinating and controlling.

Also Rule and Byars defined management as a process of form of works that involves guidance and directing a group of people or activity towards achieving organizational goals and objectives.

There is also an element of agreement in the definition cited above. This agreement stems from that fact that they both agree that management is about planning, directing, co-ordinating and controlling organizational activities and resources towards achieving set goals.

A combination of the meaning of cash and management as explained above give a very good picture of what cash management is all about.

It can be deduced that the two words cash and management entails that these must exist the activity of planning for money (cash) and controlling of money (cash). Therefore, management is concerned with the management of:

• Cash flow into and out of firm
• Cash flow within the firm
• Cash balance held y the firm at any point in time in trying to minimize the risk of loss of saving or purchase wastage and low returns, over due bills firm should try to purchase the two goals of cash management which are:
• LIQUIDITY: By predicting cash surplus and shortage the firms achieves liquidity with the sufficient money in hand or at hand to pay bills as they fall due.
• Profitability: Accurate cash management achieve profit by allowing the firm take profitable discount on purchase, invest surplus fund or refuse the cost of maintaining idle cash balance.

1.2 STATEMENT OF THE PROBLEM

In the era of harsh economic conditions and constant changes in the business world, finance managers has to constantly plan, monitor and control financial activities of their companies and make sure that available resources are used efficiently to achieve their company’s set goals and objectives. Although, many business firms usually have surplus cash, some do not put the cash into efficient and profitable use.

The real effect of this is that the wealth of the firm declines. Thereby making business that ought to be successful to fall. This is a result of in-efficient cash management procedures and techniques.

1.3 PURPOSE OF THE STUDY

The purpose of this study includes:

• To appraise cash management procedures and techniques in some manufacturing companies.
• To provide a thorough and detailed providing in the theoretical techniques and importance of cash management and provide an exhaustive study of the application of these techniques within the framework of the manufacturing industries.
• To verify the relationship between cash management, liquidity and profitability.
• To recommend necessary steps or measures to better the improvement of a companies wide cash management policy or procedure

1.4 RESEARCH QUESTIONS

In order to accurately analyze the problem. The research tends to address the following questions below:

1. Do manufacturing companies adopt procedures and techniques to manage cash flow?
2. If the answer to the question above is yes, are the cash management avenues, channel or procedure correct and adequate?
3. Is cash management technique vital in manufacturing companies?

1.5 HYPOTHESIS

This research work is focused on the appraisal of cash management procedures and the techniques and its application, in the manufacturing industry, hence the following hypothesis are formulated:

1. Ho: Management of cash flow in a firm does not enhance liquidity and does not promote operational efficiency.

Hi: Management of cash flow in a firm encourages liquidity and promotes operational efficiency.

2. Ho: Cash management techniques are not vital in manufacturing companies.

Hi: cash management is vital in manufacturing companies.

1.6 DELIMITATION OF THE STUDY

This research work is limited to select manufacturing industries in Ibadan as a matter of fact; the following are some of the limiting factors:

Time: The regulated time for carrying out this research work could not permit the researcher to carry out this study on a wider scope.

INFORMATION: Access to information relating to cash flow are considered in most firms as business secret hence respondents hesitated in  the release of information considered very important for the completion of the work.

FINANCE: the availability of finance to the researcher is one of the greatest limiting factors it disturb the transportation cost and from manufacturing industries to source information as well as carry it out.

1.7 SIGNIFICANCE OF THE STUDY

It is my desired intention to analyze the appraisal of cash management technique practices and after suggestion on how to improve for efficiency and effectiveness in order to reduce the alarming rate of cash management resulting to fraud in organization.

It will equally sense as a useful information to other researchers, managers of going concerns, entrepreneurs and partnership on the importance of internal auditing. Also, this study could act as a guide for decision making in respect of internal audit in business organizations.

1.8 ASSUMPTION OF THE STUDY

Assumption is very necessary in order to allow the use of research work to move forward.

In this case, assumption of this study focused our attention on the cash management techniques in manufacturing industries a survey of selected manufacturing companies in Ibadan.

Notwithstanding, companies, more especially manufacturing companies should adopt the need of cash management techniques.

The research is recommending this, because it will be of help to management mostly manufacturing companies.

1.9 DEFINITION OF TERMS

These are only but a few terms here to be defined which are:

Firm: According to Oxford learners dictionary “Firm” is a business company. And this research work focuses on the large firms not the small-scale business or entrepreneurship.

Cash: Cash means currency (coins and bank notes) in the firm possession and demand deposits.

Cash management: This is the ability of a company (or an individual) to arrange holdings of cash balances in such a way that excess holdings and shortage of cash are minimized.

Management: According to Fedrick Taylor sees management as knowing man should do and evolving ways in which it can be accomplished cheaply.

It is also seen as a process of planning, leading and controlling an organization.

Disbursement: According to Oxford dictionary, Current English, defines it as paying out money from a fund.

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Full Project – An appraisal of cash management techniques in manufacturing companies