The Role of Cash Management in the Success of a Business
Chapter One
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.
CHAPTER TWO
REVIEW OF RELATED AND RELEVANT LITERATURE
Definition of cash management
Cash management refers to the management of an entity’s cash to ensure sufficient cash to sustain the entity’s daily operations, finance continued growth and provide for unexpected payments while not unduly forfeiting profit owing to excess cash holdings (Bartlett et al. 2014:850). According to Pandey (2004), as cited by Akinyomi (2014:32), cash management is defined as a practice of the ability of controlling the cash inflows and outflows in a business. It also entails the ability to establish the cash balances that are held in a business at all times. Uwuigbe, Uwalomwa and Egbide (2011:49) indicated that cash management entails taking the needed precautionary measures to ensure that adequate cash levels are maintained in the business so that the operational requirements could be met. According to Aliet (2012), cash management is the management of cash to maximise the cash held in the business that is not invested in buying inventory or fixed assets. It essentially is the management of cash to avoid the risk of the business becoming insolvent. The author added that cash management is a rather broad term that refers to the collection, management of cash as well as the payment of cash from the business. From these definitions, it is evident that cash management is the ability of controlling the cash in the business by reducing the cash outflows and maximising the cash inflows. Consequently, the business will have sufficient cash available to meet operational requirements and avoid the risk of becoming liquidated. Cash management is the ability to identify and implement precautionary measures to ensure that sufficient cash balances are maintained in the business.
Cash management practices
This study will focus on the following cash management practices:
Inventory management and control Kincaid (2008) emphasised that proper inventory control procedures could enhance a bigger profit in the business. In the slower moving economy, streaming business operations and focusing on what the majority of the business cash is tied up in could mean the difference between much needed profits or unwanted losses. Barrera (2013) stated that it’s easy to turn cash into inventory but it’s not easy to turn inventory into cash. Barrera found that when inventory is sold and floor space is freed up, the business profitability really changes. The slow moving inventory should not increase to more than 5% of all inventory stocked in the business. The author recommended the following strategies to sell slow moving inventory:
– Focus on it: Many business owners tend to not Offer discounts: Pure judgment should be used when setting discounts. From a business owners’ point of view, even if the discounted price is less than the value of the cost, this could be of more value in terms of the business cash flow rather than letting that item remain on the shelf.
– Bundle it with something unexpected: Try bundling that slow moving item with something which is of demand to consumers. This strategy would encourage customers to purchase the blended set at a value price (Barrera 2013).focus on the slow moving inventory. However, that should not be the case. Rather put emphasis on those items to attract sales, e.g., displays the items on a demo stand.
– Control stocking methods: Make sure that the First-in-First-out system for stocking inventory on the shelf is practised by setting the newer stock at the back of the shelf to allow for the older stock to get sold first.
Cohen (2003:1) concurred with Kincaid (2008) by emphasizing the importance of applying inventory control systems in business. Cohen (2003:1) indicated that it is vitally important to keep track of that one has in the business and also be aware of what the customers want. There is no point stocking the shelves with what the owner feels is right. Instead, the owner should determine what the market wants and what will sell. Having a stock take in the business will indicate who the fast sellers are and which items lay on the shelf for lengthy periods of time.
Cohen (2003:1) also reported that the retail industry is really tough in the current economy. When the item is in demand, a retail business owner needs to ensure that the shelves are stocked to meet the consumers’ demand. However, when the item is no longer of interest to consumers, the owners need to sell the inventory in stock.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to examine the role of cash management in the success of a business.
Sources of Data Collection
Data were collected from two main sources namely:
Primary source and Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the Study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information to assess the influence of motivation on the academic performance of students in selected secondary schools. A total of two hundred (200) respondents (staffs) from Eco Bank.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
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.
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.
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.
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.
REFERENCES
- Akinyomi, O. J. 2014. Effect of cash management on profitability of Nigerian Manufacturing firms. International journal of marketing and technology, 4(1):129-140.
- Aliet, N. 2012. Cash management and profitability of corporate firms. A case study: MTN Uganda Ltd. Batchelor’s degree – Business Administration. Of bishop Stuart University. All Africa.com. 2013. Small business Cash Flow Management. (online). Available: http://search.proquest.com/docview/135373019 (Accessed 18 April 2014).
- Amoako, K. O., Marfo, E. O., Gyau, K. E. and Asamoah. F. O. 2013. Cash Budgeting Imperative Element of Effective Financial Management. Canadian Social Science . 9(5 ): 188-191.
- Anas, B. 2008. Layaway makes a comeback. Tribune Business News,November 28:4.
- Anderson, D., Sweeney, D., Williams, T., Freeman, J. and Shoesmith, E. 2010. Statistics for business and economics. 2 nd ed. United Kingdom: South-Western Cengage Learning. Angus, L. 2011. New Experian Report finds smaller firms struggling to pay bills. Daily Bankruptcy Review. February 16:3.