THE IMPACT OF CASH MANAGEMENT ON THE PROFITABILITY OF MANUFACTURING COMPANIES IN NIGERIA

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:

 Examine the relationship between cash management and return on assets of Nigerian manufacturing companies. Investigate the relationship between cash management and return on equity in Nigerian manufacturing companies s. 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:

What is the relationship between cash management and return on assets of Nigerian manufacturing companies? What is the relationship between cash management and return on equity in Nigerian manufacturing companies? 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