THE IMPACT OF CASH MANAGEMENT ON THE PROFITABILITY OF MANUFACTURING FIRMS (A CASE STUDY OF DANGOTE CEMENT, BENUE STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Cash management is a concept that is receiving serious attention all over the world especially with the current financial situations and the state of the world economy. The concern of business owners and managers all over the world is to devise a strategy of managing their day to day operations in order to meet their obligations as they fall due and increase profitability and shareholder’s wealth. Cash management, in most cases, are considered from the perspective of working capital management as most of the indices used for measuring corporate cash are a function of the components of working capital (Eljelly, 2013). Cash Management is essential to every business that designs to meet up with its financial obligations. No business operation is isolative of cash management. Olowe (1998) said that cash is regarded as the most important current asset for the operations of businesses. Cash is the basic input required to keep the business running on continuous basis and it is also ultimate output expected to be realized by selling the services or products manufactured by firm (Pandey, 2013). Cash Management in imperative in every business organization as cash is said to be the life blood of any business. The essence of cash management is to ensure positive cash flow for smooth business operation. According to Ross et.al (2011) said and as stated by Atrill (2012) that efficient cash management involved the determination of the optimal cash to hold by considering the trade- off between the opportunity cost of holding too much cash and trading cost of holding too little. Therefore there is the need for careful planning and monitoring of cash flows overtime as to determine the optimal cash to hold. According to Gitman (2009) it is objectively used to manage and determine the optimal level of cash required for business operation and the investment in marketable securities, which is suitable for the nature of the business operation cycle. 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, 2012). The success of any business venture is predicted on how the management has planned and controlled it cash flows (Akinsulire, 2012). 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 (2012) said that cash management is an important source of competitive advantage of businesses. Uwuigbe, Uwalomwa and Egbide (2011) carried out an investigation on cash management and corporate profitability in some selected listed manufacturing firms in Nigeria. Cash conversion cycle was used as the measure for cash management. Meanwhile, current ratio, debt ratio and sales growth were used as control variables. The study suggested that managers could create positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level and also accounts receivables should be kept at an optimal level. The importance of cash management as it affects corporate profitability in today’s business cannot be over emphasis. The crucial part in managing working capital is required maintaining its liquidity in day-to-day operation to ensure its smooth running and meets its obligation (Eljelly, 2013). Cash plays a significant role in the successful functioning of a business firm. A firm should ensure that it does not suffer from lack-of or excess cash to meet its short-term compulsions. Therefore the success and failure of a business firm depends on the efficiency of cash management practices.

STATEMENT OF PROBLEM

Despite the fact that cash management in manufacturing firms involves managing money to maximise cash availability and profitability which involves synchronization of business cash receipts perfectly with cash payments bearing abroad aspect of maximising profits, manufacturing firms have failed to attain the desired levels of profitability (Van Horne, 2006) 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 & Anders, 2007; Akinyomi & Tasie, 2011). Since smaller firms experience difficulties in accessing external finance, they rely more strongly on internally generated funds than large firms. Given the increased competitive environment in Rwanda as a result of a good investment climate guaranteed by the government, most private companies are facing increased competition with some realizing a decline in profitability, with such trends, it is important for any company to ask and try to answer the question on how cash management could be enhanced. Many companies have negative cash flows which result in difficulties in funding business commitments such as paying suppliers, meeting payroll demands and paying taxes. Holding inadequate amount of cash or cash equivalent interrupts the normal flow of most business activities (Van Horne, 2006). This study has answered that question by investigating the relationship between cash management and profitability of manufacturing firms using Dangote Cement Industries, Benue state.

AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine the impact of cash management on the profitability of manufacturing firms. Other specific objectives of the study include;

1. To examine the extent to which cash management can affect profitability management in manufacturing firms.
2. To examine the effect of credit policy on profitability of manufacturing firms.
3. To examine the impact of cash management on the profitability of manufacturing firms.
4. To examine the cash management practices of manufacturing firms.
5. To examine the relationship between cash management and profitability of manufacturing firms.
6. To recommend policies and procedures that will improve profits, reduce the risk of corporate failure and Management.

RESEARCH QUESTIONS

1. To what extent does cash management affect profitability management in manufacturing firms?
2. What is the effect of credit policy on profitability of manufacturing firms?
3. What are the impacts of cash management on the profitability of manufacturing firms?
4. What are the cash management practices of manufacturing firms?
5. What is the relationship between cash management and profitability of manufacturing firms?
6. What are the recommended policies and procedures that will improve profits reduce the risk of corporate failure and Management.

RESEARCH HYPOTHESES

HYPOTHESIS 1

1. There is no significant impact of cash management on the profitability of manufacturing firms.
2. There is a significant impact of cash management on the profitability of manufacturing firms.

HYPOTHESIS 2

H0: There is no significant relationship between cash management and profitability of manufacturing firms

H1: There is a significant relationship between cash management and profitability of manufacturing firms

SIGNIFICANCE OF THE STUDY

The importance of this study may have implications for other sector companies in Nigeria who are trying to make decisions regarding cash management reform model and further finding of study would help to develop an understanding in the advantages and disadvantages of financial practices and techniques of managing cash management strategies such as policies, practices and techniques of managing cash management components in manufacturing companies and globally. A general conceptual framework model will provide basic guidelines for researchers, Accountants and professionals financial managers and policy makers of the manufacturing companies’ environment. Further this study would suggest various cash management techniques which manufacturing companies can use to measure their performance in terms of cash ratio and cash turnover ratio. In Nigeria manufacturing companies faced challenges of financial performance they may defer their payments to creditors which is a harmful for the manufacturing companies and co results in several consequences such as worse credit term in future. This will affect their profitability in the long run. Therefore this research will help manufacturing companies to solve cash management practices problem in future. Therefore the study will be help manufacturing companies to maintain suitable level of cash and cash equality to keep its manufacturing activities smoothly. Further study would be useful not only to manufacturing companies, but also to all business firms throughout the country and other developing economy also. This will also help the stakeholders in business to formulate and implement better cash management policies as well as practices that will help than to manage cash better. It will also be useful for policy makers in the country.

SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the impact of cash management on the profitability of manufacturing firms, case study of Dangote cement, Benue state.

1. LIMITATION OF THE 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, questionnaire and interview)

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.

DEFINITION OF TERMS

Cash Management: Is the corporate process of collecting and managing cash, as well as using it for short-term investing. It is a key component of a company's financial stability and solvency.

Profitability: Is one of four building blocks for analyzing financial statements and company performance as a whole. The other three are efficiency, solvency, and market prospects. Investors, creditors, and managers use these key concepts to analyze how well a company is doing and the future potential it could have if operations were managed properly.

Manufacturing Firm: Is any business that uses components, parts or raw materials to make a finished good. These finished goods can be sold directly to consumers or to other manufacturing businesses that use them for making a different product.