Economic subjects | Studies, essays, thesises » Impact of Cash Management on Companys Survival, A Case Study of the Nigeria Bottling Company

Source: http://www.doksinet IMPACT OF CASH MANAGEMENT ON COMPANY’S SURVIVAL A Case Study of the Nigeria Bottling Company You agree to have received this material only as a reference for your research. The source or website where you downloaded this material will therefore not be held liable for how you intend to use of this material. This project should be used as a guide or framework for your own project. The contents of this project should be able to help you in generating new ideas and thoughts for your own project. Please do not present a copy of this actual project work, word for word to your supervisor and ensure you read through the entire material to proof-read it. You are therefore required to remove this message and generate your own TITLE PAGE, CERTIFICATION, APPROVAL, DEDICATION AND ACKNOWLEDGE PAGES as required. You can get more project works, research materials and past questions at www.myschoolcomng Goodluck. 1 Source: http://www.doksinet TABLE OF CONTENTS Title

Page Certification Declaration Dedication Acknowledgement Table of Contents CHAPTER ONE 1.1 Preamble 1.2 Brief History of the Company 1.3 Statement of Problem 1.4 Objectives of the Study 1.5 Scope of the Study 1.6 Research Methodology 1.7 Relevance of the Study 2 Source: http://www.doksinet 1.8 Statement of Hypothesis 1.9 Limitation 1.10 Definition of some Terms CHAPTER TWO: INTRODUCTION 2.11 Objectives of Cash Management 2.12 Survival 2.2 Functions of Cash Management 2.3 The Need to Manage Cash 2.4 Why Hold Cash 2.5 Pre-requisite for Effective Cash Management 2.6 Process of Cash Management 2.7 Managing the Cash Flows 2.8 Ascertainment of Minimum and Maximum Cash Holding 2.9 Investment of Excess or Idle Cash 2.10 Responsibility for Cash Management 3 Source: http://www.doksinet 2.11 Financial Ratios Associated with Survival 2.12 Limitations of Financial Ratio CHAPTER THREE 3.1 Introduction 3.2 Research Sampling 3.3 Source of Data 3.4 Data Analysis CHAPTER FOUR: DATA

PRESENTATION AND ANALYSIS 4.1 Data Presentation 4.2 Test of Hypothesis 4.3 Evaluating the Effectiveness and Efficiency of Cash Management CHAPTER FIVE: FINDINGS, RECOMMENDATIONS AND CONCLUSION 5.1 Findings 4 Source: http://www.doksinet 5.2 Recommendations 5.3 Conclusion Bibliography Appendix ABSTRACTS Nigeria Bottling Company PLC (NBC), like any other organization requires adequate cash at all times to meet different needs. Cash adequacy derived from the proper planning, monitoring and control of its cash resources is vital for the smooth operation of the organization. The planning, monitoring and control of cash resources are quiet important when we have to consider the topic of the research work under review, the effectiveness of which is crucial to the attainment of the set objectives and survival of the company. Poor cash management has some negative implications for the firm with regards to such factors as the disruption of production activities and diminishing profit. 5

Source: http://www.doksinet It is on this premise that this study is aimed at evaluating the effectiveness of the cash management efforts of NBC PLC and also to validate the long established theory by economists that profitability has a significant impact on company’s survival. The study comprise of five chapters. The chapter one is about the background information, defines the problem the study was aimed to address and states the objectives, relevance, scope, limitation and hypothesis. Chapter two focused on the relevant literature on cash management. Chapter three reviewed the research methodology adopted in the study. Data collected through different means are presented and analyzed in chapter four including the test of hypothesis. In Chapter five, we evaluated our findings, and made the due recommendations. 6 Source: http://www.doksinet It is hoped however, that the outcome of this study particularly the findings and recommendations will be of benefit to companies that seek

to improve on their cash management activities. ABSTRACTS Nigeria Bottling Company PLC (NBC), like any other organization requires adequate cash at all times to meet different needs. Cash adequacy derived from the proper planning, monitoring and control of its cash resources is vital for the smooth operation of the organization. The planning, monitoring and control of cash resources are quiet important when we have to consider the topic of the research work under review, the effectiveness of which is crucial to the attainment of the set objectives and survival of the company. Poor cash management has some negative 7 Source: http://www.doksinet implications for the firm with regards to such factors as the disruption of production activities and diminishing profit. It is on this premise that this study is aimed at evaluating the effectiveness of the cash management efforts of NBC PLC and also to validate the long established theory by economists that profitability has a significant

impact on company’s survival. The study comprise of five chapters. The chapter one is about the background information, defines the problem the study was aimed to address and states the objectives, relevance, scope, limitation and hypothesis. Chapter two focused on the relevant literature on cash management. Chapter three reviewed the research methodology adopted in the study. Data collected through different means are presented and analyzed in chapter four including the test of 8 Source: http://www.doksinet hypothesis. In Chapter five, we evaluated our findings, and made the due recommendations. It is hoped however, that the outcome of this study particularly the findings and recommendations will be of benefit to companies that seek to improve on their cash management activities. 9 Source: http://www.doksinet CHAPTER ONE 1.1 PREAMBLE The efficient and effective utilization of the resources of an organization is important if such an organization is to achieve its set goals

and objectives. As it is the case that resources are known to be scarce relative to demand, organizations and indeed all consumers strive to maximize the benefits that can be derived from the usage of the resources. Thus, organizations manage key resources required in their day-to-day operations to ensure ready availability, proper utilization and avoidance of waste. Cash is one of such resources that has to be handled adequately if organizational activities are to be carried out without disruptions. Cash is the money which a firm holds to operate its business and also to meet its obligations as they fall due. 10 Source: http://www.doksinet Cash includes coins, money in an organization’s bank account as well as cheque. Non availability of cash and its components simply implies that there is no cash. It is the most liquid, significant current asset and also the basic liquid, significant current asset and also the basic input that an organization needs to keep the business

running on a continuous basis. It determines the survival of an organization. Practically, companies do go bankrupt and sometimes even go out of business not because they are not making profit but rather as a result of non availability of cash and/or its components. Cash is however subject to more frequent changes than any other assets and therefore poses more problems of control. Hence, the need for effective and efficient cash management especially in this period of inflation to ensure survival. 11 Source: http://www.doksinet Cash management has to do with “managing the monies of the firm in order to attain maximum cash availability and invest idle funds” – Van Horn (1983:356). Cash management activity is usually carried out by the treasures office. It involves the management of cash flows into and out of the firm, cash flows within the firm and cash balances held by the firm at any point in time by financing deficit on investing surplus fund. Hence cash planning

and control as well its effect on the organization’s survival is an important issue to almost any type of organization. The ideal cash management system will depend on the firm’s products, competition, organizational structure and options available. It is pertinent to state at this juncture that cash could be held for precautionary motive, speculative motive and transactionary motive. The 12 main objective of cash Source: http://www.doksinet management is to maintain adequate control over cash position, to keep the business sufficiently liquid and to use excess cash in some profitable venture. Alternatively, the aim of cash management is to ensure that just the right amount of cash is held at any particular time to meet its various usages. Thus a firm should emphasize efficiency in the management of cash so as to overcome the difficulty in the economy which now prevail in Nigeria in particular and the developing countries in general. 1.2 BRIEF HISTORY OF THE COMPANY The

Nigerian Bottling Company (NBC) Plc was registered in 1953 and had its first plant in Nigeria in Lagos precisely at Oyingbo, Ebute-Metta, which is where we now have Mainland Hotel. The need for more markets for their 13 Source: http://www.doksinet products which would invariably lead to more profit, raw materials and exchange of technical know-how by Leventis Group in London which lead to the creation of a Bottling Company in Nigeria which was to be called Nigerian Bottling Company (NBC). The Nigerian Bottling Company is the largest group in the private sector in terms of size and geographical spread of operations. Its main objective is to make profit which can only be achieved by making the products available in large quantities. 1.21 Production and Marketing Activities of the Company Nigerian Bottling Company is Nigeria’s number one bottler and manufacturer of soft drinks. Its brands include Fanta, Sprite, Bitter Lemon, Fanta Lemon, Coca-Cola, Fanta Apple, Eva Table

Water, Linger Ale, Fanta Tonic, Fanta 14 Source: http://www.doksinet Soda, five Alive etc. Although NBC Plc has stopped the production of some of these brands. The major raw materials used by NBC Plc are carbonated water, sugar, phosphoric acid, sodium benzoate, caramel colour, flavouring, ascorbic acid, sunset yellow etc some of these materials are imported. The company has production stages ranging from sorting, washing, inspecting bottles to the production of syrup, warehousing and dispatching of the products to the consumers. NBC Plc is the only bottler of Coca-Cola products in Nigeria and one of the largest in the world. It is also the largest manufacturer of carbon-dioxide (Co 2 ) used to carbonate the favourite soft drinks. The taste and quality of these products are the same all over the world. Nigerian Bottling Company (NBC) Plc is a market leader in the soft drink industry. 15 Source: http://www.doksinet 1.3 STATEMENT OF PROBLEM It is almost impossible to have a

manufacturing concern that does not encounter cash problem. This problems are aggravated today in Nigeria by the economic crisis and various government policies which directly or indirectly affect the cash that a firm holds at any point in time. This makes it mandatory for firms to manage their cash efficiently to ensure an optimal level of cash. Firms are always faced with the problem of how much cash to hold in a particular period and when to hold small or large amount of cash. This however, is as a result of the fact that holding too much cash makes the organization loose the profit that would have accrued if such excess cash was invested. Similarly, insufficient cash can disrupt the activities of the firm. It is in light of this that the study is 16 Source: http://www.doksinet being carried out to strike a balance between holding too little cash and holding too large amount of cash, in other words we are trying to determine the optimum cash balance or level which is the point

where cash management is efficient. Following from the above the study seeks to answer the following questions. 1. What is the cash policy of Nigeria Bottling Company (NBC) Plc. 2. Is there an optimal cash level? 3. Does this optimal cash level ensure profitability of companies? 1.4 OBJECTIVES OF THE STUDY As it was mentioned earlier, the business environment is quite dynamic. The success or failure of any firm depends 17 Source: http://www.doksinet to a large extent on the cash position of the organization. Since it is true that the importance of cash cannot be overemphasized as cash is used to meet obligations as they fall due and also transact business on a day-to-day basis. The objectives of this study therefore are a. To draw conclusion and make recommendations for improvement on the company’s cash management where necessary. b. To determine whether there is a relationship between profitability and survival of the business. c. To determine whether there is any

relationship between liquidity and survival of the business. d. To establish and evaluate the efficiency and effectiveness of cash management in the organization. 18 Source: http://www.doksinet e. To assist management in establishing the optimum cash balance because it is the point where cash management is efficient. 1.5 SCOPE OF THE STUDY As a result of the limited time available for this research work and the insufficient fund at the disposal of the researcher, this study will cover relevant literature on cash management with the aim of determining its relevance to the survival of the organization. The evaluation of cash management using Nigeria Bottling Company Plc as a case study in order to validate the theory that the level of survival of a company depends largely on the effectiveness management of cash. 19 and efficiency of the Source: http://www.doksinet 1.6 RESEARCH METHODOLOGY The study utilizes questionnaire designed to collect necessary

information with respect to cash system in the company, the questionnaire is also designed to obtain information that cannot be disclosed in the financial reports. Oral interview will be conducted with top management staff of the organization. Secondary data will be used to obtain information from the company’s books in relevant areas, records, library and journals. 20 Source: http://www.doksinet 1.7 RELEVANCE OF THE STUDY A good number of organizations in Nigeria are currently passing through a period of economic recession as a result of the inflationary trend and particularly too, as a result of cash mismanagement or misappropriation of funds within such organization. In an attempt to restore their survival, this study is conducted to examine benefits of 1. Potential investors who are those capable of putting money for profit into any enterprise, therefore such investors want to be sure that there is proper management of cash in the organization before they invest their

money in such organization. 2. Creditors are those who have provided loan capital, credit facilities and goods to the company with the understanding that payment will be deferred to a future date, they want to be sure that the company is 21 Source: http://www.doksinet liquid enough to meet its short term obligations and still have enough cash to continue in operation. 3. The government needs to know the financial position of the organization for tax purpose, that is to assess the tax liability of the company. 4. Investors are concerned with the value of their investment and the income derivable from the investment. 5. Employees of the company need to know how efficiently and effectively the financial resources of the company is being managed to assess the level of job security as well as their pay. 6. The public needs to know also how the impact of management of cash resources of an organization is managed so as to be able to improve on the conditions 22

Source: http://www.doksinet of the immediate environment where the company operates. 1.8 STATEMENT OF HYPOTHESIS In the course of this study the following hypothesis have been formulated. Hypothesis That there is no positive relationship between profitability/liquidity and survival of a company. That there is a positive relationship profitability/liquidity and survival of a company. 23 between Source: http://www.doksinet 1.9 LIMITATION In the course of carrying out this research work we may encounter some universal factors that may militate against achieving the aim of the project such as financial constraints, time constraint and of course the inability, to have access to some key officials of the company and data termed “classified data”, etc. In addition, we may encounter limitations such as inaccurate statistical data, sample size, standard error etc. 1.10 DEFINITION OF SOME TERMS Cash - This is the standard medium of exchange and basis measuring

for it provides all the other items. Cash consist of currency 24 Source: http://www.doksinet (bank notes and coins) and bank account balances, etc. Cash Management: This is the critical task of deciding the volume speed with of funds which and the they travel through the system. Survival - This relates to the ability of an organization to earn returns on resources or assets invested and ability to honour its obligations as they fall due. 25 debt Source: http://www.doksinet REFERENCES 1. Keown, A. J. et al (1986), “Basic Financial Management” Prentice-Hall, New Delhi, 3rd Edition. 2. Osaze, E. B and Anao, A R (1990), “Management Finance, Uniben Press, Benin City. 3. Pandey, I. M (1993), “Financial Management”, Vikas Publishing House, New Delhi, 6th Revised edition. 4. NBC Plc., “Monthly Newsletter, 19 March, 2008, Special edition. 5. Van Horne, J. C (1983), “Financial Management and Policy”, Princeton-Hall Inc. Englewood,

Cliffs, N J 26 Source: http://www.doksinet CHAPTER TWO INTRODUCTION In discussing the effect of cash management on company’s survival, an understanding of the basic concepts involved in this study are necessary before the relevance can be appreciated. It is pertinent at this juncture to define the significance of management of cash in an organization. Management and organization are like two sides of a coin that cannot be separated since organization structure is the framework within which management must operate. Cash is therefore important to both management and organization in general. Although a good number of definitions have been put forward over the years by some authors to explain management. One of such definitions was given by Stoner et al (1988:3) as “an art of getting things done through 27 Source: http://www.doksinet people”. Ibitoye (1985) define management as “a process involving principally planning and control”. For the purpose of this study,

the definition by Terry et al (1982:4) which sees management “as a distinct process consisting of activities of determining and accomplishing stated objectives with the use of human and other resources” will be adopted. It is an activitiy or process that utilizes disorganized human and physical resources into useful and effective results. According to Kieso et al (1990) “cash is the standard medium of exchange and provides the basis for measuring all other items”. Cash consist of currency (bank notes and coins) and bank account balances. It is generally categorized as current asset. For it to be regard as cash, it must be readily available for the payment of current 28 Source: http://www.doksinet obligations and it must be free from contractual restriction that limits its use in satisfying debts. In view of the definitions above cash management as defined by Van Horne (1983:356) is “the management of the monies of a firm to attain maximum availability and

maximum interest income on idle funds”. According to Armstrong (1991:239) “cash management forecasts cash flow (inflows and outflows) as part of the working capital cycle, prepares cash and financial budgets and fund flow statements, and manages the cashflowing through the company”. The two definitions are in agreement: managing the firm’s financial resources. 2.13 Objectives of Cash Management The main objective of cash management is to reduce all the costs that are associated with holding cash by 29 Source: http://www.doksinet holding it at just an adequate level. The level of cash that is adequate is referred to as the optimum level of cash or the optimum cash balance and it lies at the point where the total costs of holding cash balances is at the minimum. The total cost of holding cash balance consist of opportunity costs of holding a high level of cash balance which the firm would have otherwise invested in interest bearing securities plus transaction costs

such as delays in making payments for stock, which will be incurred by the firm if it maintains a low level of cash balance. Holding cash excessively reduces the value of the enterprise in the financial market place because of the large cost of income foregone, the return on the idle cash balance is zero. Conversely, holding too little amount of cash will further affect negatively the production process. As a result it will impact on the firm’s profitability and its survival, due 30 Source: http://www.doksinet to the fact that the firm’s operation is disrupted. Thus, the financial manager must strike an acceptance balance between holding too much cash and too little amount of cash at any point in time. The question that comes to mind is what is the primary aim of cash management in such a manner so as to avoid excessive and inadequate level of cash by holding just enough cash to dispense effectively the disbursement needs of the business as they arise in the course of doing

business or in the day to day running of the operations of the business and cutting down on the investment of idle fund to ensure the right amount of cash and at the right time. An effective and efficient cash management should ensure a continuous supply of cash for uninterrupted operation. According to Osaze and Anao (1990:94), the major objective of cash management is to trade off corporate 31 Source: http://www.doksinet liquidity with profitability. James Van Horne states the specific aims of managing the monies of the firm as the achievement of maximum cash availability to meet the various financial needs of an organization. Also earning the maximum interest on any idle cash. 2.14 Survival Survival has to do with the ability of an organization to earn returns on resources invested and the ability to meet it debt obligations as they fall due. Alternatively, survival relates to a situation which entails profitability and liquidity (but not one without the other). For a company

to be in operation, that firm must have adequate cash to meet its various needs and must be able to earn returns. Both profitability and liquidity go hand in hand to ensure survival of a company, an organization that is lacking sufficient cash 32 Source: http://www.doksinet would invariably be unable to honour its debts as they fall due, will most likely not be able to continue in business for long, irrespective of the profit that such an organization makes. An organization that does not earn returns on resources invested in the long run will definitely encounter the danger of collapsing even if such a firm has got enough cash. Hence, profitability is just as important as liquidity As a result firms monitor their liquidity position with just as much concern as they do for profitability for the sake of company’s survival. There are a lot of ratios which reveal to management whether an organization is surviving or not and such ratios are the profitability and liquidity ratios. They

include 33 Source: http://www.doksinet Profitability Ratios a. Net Profit Margin b. Return on Assets Managed (ROAM) c. Return on Capital Employed (ROCE) d. Return on Equity (ROE) Liquidity Ratios a. Current ratio b. Quick Assets or Acid Test Ratio 2.7 FUNCTIONS OF CASH MANAGEMENT Cash management is the process of making conscious effort in deciding the volume of funds and the speed with which they travel through the system. It is the management of cash of an entity in such a manner or fashion as to maximize the availability of cash and of 34 Source: http://www.doksinet investment income on cash not invested in fixed assets or inventories so as to avoid the risk of insolvency. Effective management of cash enables an organization to: a. Ensure that surplus cash resources are invested profitability both in the short run and in the long run. b. Pre-determine revenue and expenditure through forecasts. c. Control credits and bad debts in order to speed up

and maximize cash inflow. d. Ensure that the total resources of the company are sufficient to meet current future levels of activities. e. Ensure that inflows and outflows are continuously monitored in order that actions listed above may be taken whenever necessary. f. Ensure that cash inflows and outflows are balanced as far as possible for an appropriate degree of liquidity to 35 Source: http://www.doksinet be maintained, thus avoiding excessive deficits that cannot be financed internally. g. Ensure that cost of financing short term deficits is minimized such means negotiating beneficial over draft facilities. Rayburn (1979) views cash management as very crucial in today’s economy as evidenced by the fact that failure to provide for adequate cash resources to meet liabilities as they fall due. It has become one of the most reasons of business failure. He states the functions of cash management as follows: 1. Collection of accounts receivable and making

disbursement. 2. Cash control and safe keeping. 3. Cash utilization which involves evaluation cost of money or its ability to earn return. 36 Source: http://www.doksinet Collections Information and control Borrow and invest Payments Fig. 21: Cash Management Cycle Source: Pandey 1993:697 2.8 THE NEED TO MANAGE CASH The management of cash is a big problem for most manufacturing concerns. A good number of statistics show clearly the current significance of effective management of cash. As a result the financial manager should give a continuous and considerable amount of attention to its management. Because of this high cost of investment 37 Source: http://www.doksinet commitments imperative to which plan cash and requires, control it cash is absolutely efficiently and effectively in order to minimize the cost associated with it. It is pertinent to state that cash makes possible smooth and efficient operation of an organization by decoupling the individual segments

of the whole operation. Alternatively, the availability of cash in the desired quantity and at the right time ensures continuity in the chain of production and the organization as a whole. Without cash, it would be impossible for the business to buy machines and the raw materials needed for production, in other words smooth operating or running of the organization cannot be achieved, the organization cannot pay creditors. It is practically impossible for any business to operate smoothly or remain in business for long without cash as such an organization cannot even pay its workers. 38 Source: http://www.doksinet In a situation whereby the cash of an organization is efficiently and effectively planned, the survival of such an organization can be enhanced significantly. 2.9 WHY HOLD CASH If the receipts and disbursements of cash were synchronized, there would be no need for holding cash, where enough cash is received and the payment has to be made. Cash must be maintained so that the

organization will be able to meet its obligations as they become due and also transact business so that the organization does not turn to another source of supply which attracts interest. Although, there are both advantages and disadvantages of holding cash but these have to be weighed against each other to arrive at an opinion. Three general motives have 39 Source: http://www.doksinet been given for holding cash and these motives are as follows. Speculative Motive: This is when cash is held for investing in profit making ventures as such opportunities occur. Transaction Motive: This is the primary motive for holding cash and requires a firm to hold cash to carrying its business ordinarily. It refers mainly to holding cash to meet anticipated payments whose timing is not perfectly matched with receipts. Precautionary Motive: This is also a primary motive for holding cash to meet contingencies in the future. It provides buffer to withstand some unforeseen

contingencies. It depends on the predictability of cash flows 40 Source: http://www.doksinet and the firm’s ability to borrow at short notice when the need arises. Order of Need for Cash Figure 2.2: Ordering of Cash Needs Priority Speculative 3rd Precautionary 2nd Transactionary 1st Source: Osaze and Anao (1990:93) Inspite of these advantages, there is a cost which is associated with holding cash. This is the loss of profit or interest which would have been accrued if it were invested. Thus, it could be seen that management is faced with a problem of finding an optimum extremes. 41 position within two Source: http://www.doksinet 2.41 Guides to How Much Cash to Hold If an entity wants to know how much money to carry at any point in time, such organization must examine over some time the use of cash in running of its business activities. It is possible for management to use various ratios to examine cash use. Turnover or velocity ratio is a typical example of

such. Cash velocity = Sales per period initial cash balance The higher the turnover, the lower the cash balance required for any given level of sales. Other such factors that can be used to determine the level of cash to hold are as follows: a. Company Expected Cash Flows: It is possible to obtain this from the financial forecasts and cash budget and depends on the turnover size and the 42 Source: http://www.doksinet stage in the life cycle of the organization. If it is in its growth stage, it will require large sums of cash to support the expansion. If the organization has reached maturity then the ratio of cash to turnover will be almost constant and at the decline stage, turnover profit and cash will drop since transactions and speculations have reduced considerably. b. The Company’s Borrowing Capacity: If the organization’s borrowing capacity during emergencies is favourable then it would need to keep very little cash balances for transactions and precaution. c.

The Organization’s Management Attitude to Risk: Where an organization has a conservative management, highly averse to the risk of running out 43 Source: http://www.doksinet of cash, then it would need to keep large cash balance to forestall possible liquidity crisis. d. The Debt Repayment Schedule of the Company: A firm with a major part of its outstanding debt maturing shortly or within the year and cannot either reschedule it or refinance. It would need to set aside some large sums of cash to honour its debt obligations as they fall due except it can easily liquidate some of its idle assets. e. Major non-recurring expenditure f. The degree of deviation between the expected and actual net cash flows. g. The efficient planning and control of cash. 44 Source: http://www.doksinet 2.42 Disadvantages of Running Out of Cash However, should an organization run out of cash, one or a combination of the following might occur: a. The company’s suppliers would cut

off further supplies. b. Production process would grind to a halt. c. The firm would be unable to take advantage of discounts offered it. d. The entity will not be able to honour its debt obligations as and when due and the effects would be the following: i. Suppliers making slow and unreliable delivery schedules. ii. There would be high interest rate on borrowed funds. 45 Source: http://www.doksinet iii. It would lead to a higher cost of purchasing from suppliers to compensate for slow or non payments in the past. iv. The suppliers will be reluctant to grant further credits. e. Its financial performance ratios will be very low. 2.10 PRE-REQUISITE FOR EFFECTIVE CASH MANAGEMENT The underlisted points are considered important for a firm to manage its cash resources effectively. 1. Frequent reports – preferably more often on cash balances in bank account. 2. Marketing securities or other investments position of the firm as well as detailed report of

changes. 46 Source: http://www.doksinet 3. Prescribed accounting flows for cash receipts and disbursements. 4. The firm must have cash policies. 5. Periodic reports on cash receipts as well as bank lodgements and maintain a dual record of cash with the bank. 6. Cash disbursements. 7. Average daily cash balances. 8. Prescribe accounting flows for cash receipts and disbursements. 9. The firm should employ full time professional cash manager instead of a clerk. 10. The firm should clarify authority for handling cash payments and receipts, that is, segregation of duties. However, an effective and efficient cash management involves the preparation of cash budget which is a 47 Source: http://www.doksinet projection of future cash receipts and cash disbursements of an enterprise over a period of time. It reveals to the financial manager the timing and amount of expected cash inflows and outflows over the period under review. The management of cash also involves a strong

system of internal control. The system of internal control consist of all the measures employed by a firm for the purpose of safeguarding its resources against waste, fraud, error and inefficiency, promote accuracy and reliability in accounting policy and efficiency of the management. It could be seen therefore that the effectiveness of the management of cash in an organization depends on the speed and ease with which relevant information about cash transactions can be obtained on a regular basis. 48 Source: http://www.doksinet 2.51 Cash Policies Policy could be defined as “a general statement or understanding which guides the action in decision making”. It is also seen as “the boundaries within which decisions can be made. Management is often faced with a basic problem of planning and controlling cash. Hence, the existence of cash problems necessitate the establishment of cash policies. A key factor in cash policy is that of computing the optimum cash balance. It is based

on this that management has to decide on. a. The appropriate time to hold large or less amount of cash. b. How much cash to hold at a point in time. Cash as a resource has an important role to play in the planning and control activity of any firm. It has a direct relationship with the organization’s goals. Holding too little 49 Source: http://www.doksinet or too much cash has its various negative impact on the firm. When too much cash is held it involves loss of profit or interest that could have accrued if such excess cash was invested and holding insufficient amount of cash has its own cost such as loss of goodwill as a result of disruption in operation. Management has the responsibility of balancing these costs and finding an equilibrium so as to decide the amount to be held at any given point in time. The issue of knowing the appropriate time to hold large or less amount of cash is another major cash decision facing the financial manager. When in a particular period cash

is not held when cash is actually needed it will cost the firm some disruption in the day to day running of business. Also when cash is held when it is not needed there will be the problem of too much cash being held. 50 Source: http://www.doksinet Consequently, cash policy can be viewed as a statement that guides action in decision making as to the appropriate time and how much cash to hold at a time. 2.11 PROCESS OF CASH MANAGEMENT Armstrong’s management (1991:239) highlights four definition activities in of cash the cash management process: i. Management of cash flowing through the firm. ii. Forecast of cash flows. iii. Preparation of cash and financial budget iv. Preparation of funds flow statement. Pandey (1993:698) gave four management: a. Managing the cash flows b. Determining the optimum cash level 51 facets of cash Source: http://www.doksinet c. Investing surplus cash d. Cash planning. 2.61 Cash Planning The technique that

is used in planning and controlling the use of cash is what is referred to as cash planning. It s the forecast of cash into and out of the entity’s bank account and it helps in the correction of “poor cash” positioning of the firm. Thus, cash planning helps anticipate future cash flows and needs of the firm and reduces the possibility of idle cash balances which lowers firm’s failure. It protects the financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. Planning cash is important in the operating plans of the firm. 52 Source: http://www.doksinet Conclusively, cash planning may be performed on a daily, weekly or monthly basis depending on the cash policy of the firm as well as the size of the firm and the management philosophy. 2.62 Forecast of Cash Flows According to Keith (1975:523), forecasting means “gathering data, evaluating the data and then making predictions about the

future of the basis of the analysis”. The decisions taken on the basis of the systematically developed forecast could be regarded as a sound decision. Again, the future is uncertain so the result of the forecast is not expected to yield a hundred percent correct result. Though, this problem could be minimized by making numerous forecast based on different assumptions. Bathy (1975:120) says that “cash forecasting is the estimating of cash receipts and payments for a future 53 Source: http://www.doksinet period before any necessary adjustments are made”. The adjustments include the following. a. Investment of excess cash which is in excess of current requirement. b. Action to obtain necessary cash in case of anticipated shortfall. Forecast of cash flows is the foremost step in any effective cash management program, and cash budgets are also needed to be prepared. It should be noted that carefully desired cash forecast helps a firm to select securities with appropriate

maturities and reasonable risk, maximize profits by investing idle monies and avoid over and under investing. It may be carried out on a long run or on a short run basis. 54 Source: http://www.doksinet 2.62(a) Short Term Cash Forecasting Short-term cash forecast is one which covers a period of one year and below. It is very easy to make short forecasts and it helps in determining the operating cash requirement for a stipulated period. It helps to anticipate short term financing and to pinpoint when the money will be needed and when it can be repaid. It helps in the investment of surplus cash in marketable securities. Short term cash forecast by multi-divisional firms like NBC Plc is used as a tool to co-ordinate the use of funds between their various divisions as well as to make financing arrangements for their operations. It may be useful in determining the margins or minimize balances to be maintained with banks. Some other uses of these forecasts are: 1. Scheduling payments

in expenditure programmers. 55 connection with capital Source: http://www.doksinet 2. Guiding credit policies. 3. Planning reductions of short and long term debts 4. Taking advantage of cash discounts offered by suppliers. 5. Checking accuracy of long term cash forecast. 6. Planning forward purchases of inventories. 2.62(b) Long Term Cash Forecasting Long term cash forecasting prepared to give an idea of the firm’s financial requirements for a distant future purposes and are not as detailed as the short term cash forecast. It may range for a period of more than one year and up to five years and it is used to: 1. Evaluate proposed capital projects. 2. Indicate a firm’s future financial needs, especially for its working capital requirements. 56 Source: http://www.doksinet 3. Evaluate the impact of new product development or plant acquisitions on the firm’s financial condition. 4. Improve corporate planning. 2.62(c) Short-Term and Long-Term Cash

Forecasting Methods The two most commonly used methods are: a. The adjusted net income method. b. The receipts and disbursement methods. The Adjusted Net Income Method It is appropriate for longer durations ranging between a few months to a year and is used to show a firm’s working capital and future financing needs by tracing working capital flows. This method is also called the sources and uses approach. The main objectives of this method are to project the firm’s need for cash at some 57 Source: http://www.doksinet future date and to show whether the company can generate this cash internally, and if not, it should be decided how much will have to be borrowed or raised in the capital market. It is a projected cash flow statement based on proforma financial statement. It resembles the cash flow statement which has three sections: sources of cash, issues of cash and adjusted cash balances. This procedure helps in adjusting estimated earnings on an accrual basis to a cash

basis and also in anticipating the working capital movements. Net income depreciation dividend, taxes and others are easily determined from the firm’s annual operating budgets when preparing the adjusted net income cash forecast. The major benefit of the method is that, it helps in keeping control on working capital and anticipating financial requirements. A limitation of the method is that it fails to 58 Source: http://www.doksinet trace the flows of cash and as a result it is not useful in controlling daily cash transactions. The Receipts and Disbursements Method It is preferred for the forecast of a limited period such as a week or a month. In this approach, cash flows can be likened to budgeted income and expense items. The prime aim of this method is to summarize cash inflows and outflows during a specified period. It is advantageous since it gives a complete picture of expected cash flows and also a sound tool used to manage on a daily basis cash operations. It is

limited, in that it fails to highlight the important movement in the firm’s working capital. It cannot be fully relied on because of uncertainty. 59 Source: http://www.doksinet 2.62(d) Planning Cash Forecast It coming up with a cash forecast the first logical point to start from is to develop a sales forecast. Expected receipts from cash sales, debtors and other sources and the estimated expenditure which will be needed to run the firm at the level planned has to be forecast. Cash receipts are added to the balance of cash brought forward from the previous periods and anticipated payments are deducted from the total arrived at to get the net cash balance which will be the net cash balance which will be the opening balance for the following period. The period being forecast could be broken down into monthly quarterly or weekly etc. The shorter the period the more accurate the result of the forecast would be. It is noteworthy that the method mentioned is applicable to NBC Plc. 60

Source: http://www.doksinet A short term cash forecast to cover a quarter or a month will be necessary if financial difficulties are experienced. It is conventional that cash forecast covers a year, a number of years or less than a year. It is important that receipts and payments are analyzed on weekly, monthly, quarterly or even daily. 2.63 Cash Budget According to Anthony (1983:864) a budget is “a plan expressed in a quantitative usually monetary terms covering a stipulated time period”. However, the definition given by Osaze and Anao will be adopted. Osaze and Anao (1990:78) defined a budget as “a statement of fund flows – inflows and outflows. Though, there are deferent types of budget such as sales budget, 61 production budget, Source: http://www.doksinet purchasing and labour budgets but this study will only focus on cash budget. Betty (1998:120) defined cash budget is the estimation of cash receipts and payments for a future period

after due consideration has been given to expected conditions and the overall budget plan. Pandey 1993: defined it is a summary statement of a firm’s expected cash inflows and outflows over a projected time period. Colin Drury (1985:349) states the objectives of cash budgets as “ensuring that sufficient cash is available at all times to meet the level of operations which are outlined in the various budgets”. Cash budget can help a firm avoid cash balances which exceeds its requirements by enabling management to take actions in advance to invest the excess in short term investments and also cash deficiencies can be observed in advance and appropriate actions taken 62 Source: http://www.doksinet to ensure that bank loans are available to meet temporal cash deficiencies. It is useful for planning liquidity since it helps to determine a firm’s expected receipts from sales and payments made in connection with these sales. It does not only determine the amount of financing that

will be required quarterly periodically, but the that is daily, timing of these weekly, monthly, requirements. It completes the cash cycle since it goes beyond the cycle, turnover and minimum operating cash to give details of cash inflows and outflows periodically. The difference between cash inflows and outflows is the adjustment of cash deficiencies or surpluses in the case of a cash budget. It tells us for how long, when and how much cash we are likely to have. 63 Source: http://www.doksinet It is apparent that the cash budget plays an important role in the cash management effort of an organization. With this it is possible to realize some of the objectives of cash management in terms of cash availability at all times and the investment of idle funds are assured. 2.63(a) Preparation of Cash Budget Pandey (1993:706), a firm can prepare cash budget based three forecast: optimistic, most probable and pessimistic. Thus, we see that cash budget could be prepared

three sales conditions. The preparation of cash budget is straight forward. Osaze and Anao (1990) stated that a firm must first determine its actual and expected sales for the planning period and pattern of receipts from these sales to determine the cash inflow. For the outflow, an estimate of the expenses expected to be incurred must 64 Source: http://www.doksinet be determined and from the inflow and outflow, a net gain or loss is obtained. Hence, the net cash flow equal inflows minus outflows. The net cashflows for each month plus the cash at the beginning of the month result in the cumulative cash for the month which is the ending cash balance for the month. This becomes the beginning cash balance for the following month. If the minimum desired cash level is deducted from the cumulative cash for each month, the company might have negative balance which must result in borrowing for that month to finance its operations. In a situation where the cash balance is positive, it means

that there will be a surplus of cash which can be set aside to offset the negative balance of the following month or put into some profitable use such as investing it in a short term and highly liquid market. 65 Source: http://www.doksinet Anthony (1983:880) has given two approaches to the preparation of cash budget: a. Begin with the budgeted balance sheet and income statement and adjust the amount thereon to reflect the planed sources and uses of cash. b. Analyze the plans having cash flow implications to estimate each of the sources and uses of cash. Adopting the second method, a monthly cash budget can be prepared as follows: 1. State the cash balance at the beginning of the month which is called the opening balance. 2. Add receipts and deduct payments for the month. 3. Ascertain cash balance or deficiency for the month. 4.i If cash balance for the month falls short of the minimum cash holding, arrangement should be made to meet short falls with loans, etc. 66

Source: http://www.doksinet ii. When cash balance goes beyond minimum cash holding, plans should be made to invest surplus funds. 5. Ascertain cash balance for the end of the month which automatically becomes the opening cash balance for the succeeding month. The value of the monthly cash balance should fall between maximum cash holdings. 67 the minimum and Source: http://www.doksinet FORMAT OF CASH BALANCE Total sales Credit sales Cash sales Collections: One month Two month Three month Total receipts (A) Actual Year (1992) Forecast 1993 Oct Nov Dec Jan Feb Mar Apr May A. Cash Receipts x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x Purchases Rent Operating expenses Equipment Interest Dividend Advance tax Wages Total payments(B) Net cash balance A – B Beginning of month cash balance Total cash x x x x x x xx B. Cash Payments xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx C. Cash balance xx xx xx xx xx xx xx xx xx xx

xxx xxx xxx xxx xxx Beginning to month borrowings Interest on borrowings Repayment of borrowings Total end of month cash balance Figure 2.3: Cash Budget Format Source: Pandey (1993:705) 68 x x x xx x x x xx x x x xx x x x xx x x x xx x x x xx x x x xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx x x x xx x x x xx Source: http://www.doksinet 2.7 MANAGING THE CASH FLOWS It is usually concerned with managing cash inflow and outflow in order to avoid significant deviations between projected cash flows and actual cash flows. It entails managing the cash cycle. Achieving this is possible through proper control of cash collections and disbursements. An illustration of cash generation and disbursements process is given below: Irregular Cash Inflows Bond Sales Other debt contracts Prepared Stock Sales, Common Stock Sales Out Purchases Fixed Assets Sales Deprecation Cash balance Purchases Labour and material Sales Inventory Cash Sales Figure 2.4: Cash Generation

and Disposition Process 69 Source: Arthur J. Keown et al, (1986:147) Marketable Securities Receivable Collections Source: http://www.doksinet The main aim of managing the cash flows is to accelerate cash collections and to decelerate cash disbursements as much as possible. The following can be utilized to ensure that this objective is achieved. 2.71 Accelerate Cash Collection In a competitive and dynamic economic environment of today, it is almost impossible to do business totally on cash basis. Transactions are carried out on credit with special terms of payments to attract patronage. Some firms offer discounts to encourage prompt settlement of bills by customers. The fact that most business transactions and trade debts are settled by cheque drawn on close banks which require complicates the different time problems of clearance associated with further accounts receivable. It is most times for this reason that firms 70 Source: http://www.doksinet employ

such procedures as these to accelerate collections of accounts receivables. Business organizations of modern days in the developed world use sophisticated techniques to accelerate collections. The feasibility of some of the techniques in a developing countries like outs and others around the world is quiet questionable due to poor communication, they are nevertheless examined. The acceleration of cash collections in the views of Van Horne (1983:357) means “reducing the delay between the time customers pay their bills and when customers cheques are collected and become usable funds for the firm”. The approaches of accelerating the collection of cash apart from maximizing available cash are designed to achieve the following. 71 Source: http://www.doksinet 1. Speed the movement of funds to the disbursement banks. 2. Reduce the processing float which is caused by the time required for the firm to process remittance checks before they can be deposited in the bank. 3.

Reduce the time during which payments received by the firm remain uncollected funds. 4. Speed the movement of funds to the disbursement banks. Some of the methods of accelerating the collection of account receivables are as follows: 1. The Use of Lock Box System: It entails establishing many centres for collection as a result of widespread of customers and volume of remittances. This eliminates the time between the receipts of cheques and their deposit in the bank. A company that is using 72 Source: http://www.doksinet this system hires a post office box at each centre and instructs its customers to mail their remittances to the box. The firm’s local bank is given authority to pick up the remittances directly from the local box. What the firm does is to pick up the mails and deposit the cheques in the firm’s account. It is the most widely used commercial banking service for expediting cash gathering. It speeds up the conversion of receipts into usable funds by

reducing both mail float, processing and transit float. The two major merits of this system are: a. It allows the bank to handle remittances prior to deposit at a lower cost. b. The cheques are deposited immediately upon receipt of remittances and their collection process starts sooner than 73 if the firm would have Source: http://www.doksinet processed them for internal accounting purposes prior to their deposit. But this system involves high cost and are used if the benefits are expected to exceed the cost. 2. Use of Preauthorized Check System (PACS): Seemingly the more appropriate way of converting receipts into working cash and does not require the signature of the person on whose account it is being drawn. It is created only with the individual’s legal authorization. It is advantageous when the organization regularly receives a large volume of payments of a fixed amount from the same customers. The chief objective of this system is to reduce

significantly both mailing and processing float. The benefits of using this approach are 74 Source: http://www.doksinet i. Customer preference: Some of the customers prefer not to be bothered with a regular billing. The system makes it possible for the cheque to actually be drawn on the customer and payment made even if the customer is on leave or away. ii. Reduced Expenses: Billing and postage cost are eliminated and the clerical processing of customer payment is reduced. iii. Increased working cash mailing and processing floats are reduced in comparison with other payment processing systems. 3. Alternative to the Above System: The methods examined above can only be used if there efficient communication facilities. A system of overcoming problems associated with clearance of cheques drawn on banks at different and distant locations is to make 75 Source: http://www.doksinet bank drafts, the only means of effecting settlements of accounts receivable. Such drafts

should be drawn on the nearest branch of the issuing bank where the firm has its main account. Through this, the long period of clearing intercities or states cheques will be reduced drastically. 4. Decentralized Cash Collections: In situations where the firm operates over a wide geographical area in order to speed up collections. Van Horne, “it is the acceleration of the flow of funds of a firm by establishing strategic collection centers. It is called CONCENTRATION BANKING IN USA and is a system of operating through a number of collection centers instead of a single collection centre centralized at the company’s head office. The main purpose of this method of collection is to minimize the gap between 76 Source: http://www.doksinet the mailing time from customers to the firm and the time when the firm can make use of the cash. Under this method of collections, the firm will have a large number of bank accounts operated in the areas where the firm has its branches and all

branches may or may not have collection centres. The collection centres will be required to collect cheques from customers and deposit in their local bank accounts. The collection centre to be chosen will be based on the volume of bill transfer to the central bank account at the firm’s head office on a daily basis. Concentration bank is one where the firm has a major account funds that can be transferred to concentration bank by wire transfer or telex and depository transfer checks. Decentralized collection procedure is a useful way to reduce float 77 Source: http://www.doksinet which saves mailing and processing time and should be adopted when savings are greater than cost. 2.72 Controlling Cash Disbursements It entails showing down payments to creditors as much as possible. Disbursements arise due to trade credit which is a source of fund. An effective control of disbursement can help the firm conserve cash and reduce the financial requirements. Delaying payment,

the firm makes maximum use of trade credit as a source of fund which is interest free and consequently result in maximum availability of fund. Different methods exist for the control of disbursement, such as; 1. Delaying payment through draft and taking advantage of drafts take longer time to clear than ordinary cheques. 78 Source: http://www.doksinet 2. Since cheques issued at different locations require different clearing time, an organization with multiple bank accounts at different locations in the country could maximize the time a cheque will remain uncleared by making payments through remote banks. 3. Use of float or “playing the float”. Float is the difference between a company bank balance and its cheque book processing balance and and transit is delays. usually It is caused the act by of maintaining a difference between the amount of cheque drawn on a bank account and the balance shown on the bank’s book and such a difference is called

PAYMENT FLOAT. If the financial manager can correctly estimate when the cheques issued will be deposited and collected, he can invest the float to earn 79 Source: http://www.doksinet a return. It should be well considered because of the right that is involved. 4. Centralizing payments into a single account. This permits light control of disbursement by ensuring that payments are made at the appropriate time and when needed as well as taking advantage of discounts that could arise. 2.73 Preparing Accurate and Regular Report of Cash Position Making efforts to prepare accurately and regularly reports of cash positions helps a firm to manage its cash flows. This however, depends on proper documentation of financial transactions in a manner that will facilitate easy extraction of relevant information. Documentation should cover such transaction areas as sales, creditors, purchases, 80 Source: http://www.doksinet debtors, cash receipts, cheques received for the settlement of debt

or sales, bank lodgments, cash placed on time deposits, cash payments, anticipated interest and payments by cheques. The process of documentation includes maintaining of accounting records such as: a. Investment Cash Book: Such information as the amount invested, the duration of the investment, when the investment is expected to mature, date of premature termination of investment, interest receivable, whether options exist among others need to be documented provision of periodic totals are necessary. b. The Receipt Cash Book: It documents cash receipts whether by cash or cheques. Separate columns should be provided to record cash receipts and cheques 81 Source: http://www.doksinet received. There should also be two separate columns for cash and cheque lodgements. Posting into the receipts cash book should be immediately after a transaction has been completed. The proper thing to do on a daily and monthly basis is to record the totals for ease of extraction. c. Record

Keeping in Respect of Bank Accounts: Banks are very valuable financial institutions which render important services to organizations. Among such services are safeguarding the financial resources of organizations and providing loans to meet a firm’s financial requirements. As a result of the fact that there is always a difference with respect to time between the time banks record transactions and that of organizations. It is necessary that banks balances as indicated on the bank statements are reconciled 82 Source: http://www.doksinet with cash book balance from time to time. A bank reconciliation statement should be prepared after adjusting for bank charges, interest etc. d. Payment Cash Book: This records all payments whether by cheque or cash. If it happens that the volume of transactions is high, a different cash book known as petty cash book is used. The format of the cash book should be analytical such that desired information can easily be extracted from it. Daily, monthly

or yearly totals must be appropriately and promptly indicated. 2.8 ASCERTAINMENT OF MINIMUM AND MAXIMUM CASH HOLDING In determining cash deficiencies or surpluses, it is necessary to ascertain minimum and maximum cash 83 Source: http://www.doksinet holdings. Minimum cash holding is a situation where cash held by a firm falls below the optimum cash level. Conversely, maximum cash holding is as situation whereby the cash held by a firm exceeds the optimum cash level. Whenever cash holding falls short of the requirement drastic steps are taken to inject more funds into the system. The same thing applies to a situation whereby cash is held above the required amount where such excess cash is invested in profitable securities. Adequate cash holding ranges between the minimum and maximum cash levels. It may be possible for an organization to set guide posts by fixing minimum and maximum cash levels deliberately to control its cash holding. Of course, bearing in mind the motives for cash

holding, the minimum cash level should be such can allow for payment of debts that have fallen due, purchases, legal obligations, contingencies and wages. 84 Source: http://www.doksinet 2.81 Ascertainment of Minimum Cash Level Betty (1978:235), a simple way of ascertaining the minimum cash level is to divide a year’s anticipated payment or expenditure by the number of weeks in a year (52) and then contingencies. If make NBC allowance Plc has an for unforeseen annual recurrent expenditure of N1m, the minimum cash holding will be Minimum Cash Holding = 1000000 52 = 19230/week This particular approach has a major disadvantage in the sense that it assumes that cash payment is evenly spread throughout the year. The method still gives management at a glance an idea of the minimum cash holding. Put differently, the minimum cash balance is the same as to construct a probabilistic 85 distribution of an Source: http://www.doksinet organization’s day-to-day

change in net cash flow. This will ignore major items which are certain to occur and should be prepared from recent industrial data. The area under the normal curve represents the probabilities and management can specify the chance it will be ready to take for being out of cash. The level of the minimum cash should be considered as a danger point. There must be need for action to obtain more cash once this minimum cash level is reached. 2.82 Determination of Optimum Cash Level The optimum cash level is that level of cash level at which cash holding should not be allowed to exceed or fall. Cash in excess of the optimum level is regarded as surplus or idle cash which should be invested immediately in some short term profitable securities. A lot of models have been 86 Source: http://www.doksinet developed over the years of the determination of optimal level of cash to be held by a firm but one which is gaining grounds is the establishment of an ideal ratio is around 20:1 which

should be regarded as a guide rather than a rigid standard. Other models also exist which also attempt to determine the optimum level of ash. These models include: a. Cash budget model b. Inventory model c. Miller-orr model d. Stochastic model e. Probability model However, it depends on prevailing situation, the models could be used to determine appropriate optimum level of cash by modifying some of the underlying assumptions. The models should be used only when they 87 Source: http://www.doksinet offer improvement over simpler decision rules – Van Horne (1983:372). a. Cash Budget Model: It is based on the usual cash budgeting principle involving inputs such as accounts payable and receivable, inventories and so on. This model uses the probability approach bearing in mind that cash flow of a firm are neither completely predictable nor stochastic. They are predictable within range. b. Inventory Model: It is based on the assumption that cash flow is

predictable. This is a simple model for determining the optimum coverage amount of cash transaction through the economic order quality (EOQ) formular used in inventory management under conditions of certainty. This model was first applied in 88 Source: http://www.doksinet cash management by Baumol (1952: 545 – 556). Under the conventional model, Where Q = Economic order quantity D = Annual demand C = Ordering cost H = Holding or carrying cost Alternatively, the optimum cash level that minimizes total cost in cash management can be determined with the formular below. C Where 2bT i = C = Optimal level of cash b = Fixed cost of a transaction which s assumed to be independent on the amount transferred. T = total demand for cash over the period under consideration. 89 Source: http://www.doksinet i = interest rate of marketable security – the opportunity cost of cash holding (the interest foregone on marketable securities). c. Miller-ORR Model:

This is one of a number of control limit models designed to deal with cash management problem under the assumption of Stochastic Cash Flows. The model stipulates two control limits in naira as an upper bound (h) and Zero naria as a lower bound (Z). In the figure, when the cash balance touches the upper bound h – z naira of marketable securities are bought and the new balance becomes z naira. Also when the cash balance reaches zero, z naira of marketable securities are sold and the new balance again becomes Z. No action will be taken as long as the cash balance changes between the upper and lower control limits. This mode is illu 90 Source: http://www.doksinet Figure 2.5: Control Unit Model Applied to Cash Management Source: Van Horne (1983:371) d. Stochastic Model: This model can be applied to instances where the uncertainty of cash flow is high – Van Horne 1990:407). Van Horne says that we can assume that the demand for cash is Stochastic and unknown in advance. Cash

balance under this condition changes, thus requiring application of control limits. Two control limits can be set such that when cash reaches upper limits and the setting of these two control limits associated partly with depends securities the transaction opportunity cost of holding cash. 91 on fixed cost and the Source: http://www.doksinet e. Probability: This model is based on prior knowledge and experience. To use this approach, cash flows are now reasonably predictable. The cash balance at the end of the period are estimated for various cash flows outcomes to form a probability distribution. Under this model, information on fixed cost of transfer between cash and marketable securities can be used to determine the initial balance between cash and marketable securities. Using any of the methods above, it is possible to determine the optimum cash balance by matching the transaction cost (a situation whereby a firm incures expenses, borrow or even sell its

marketable securities as a result of running out of cash) and risk of too small a balance with the opportunity cost (the cost of potential 92 Source: http://www.doksinet interest on large cash holdings) of too much cash balance. This can be illustrated graphically. Minimum total cost Cost Opportunity cost Transaction cost Optimum cash balance Figure 2.6: Optimum Cash Balance Source: Pandey (1993:771) In a situation where an organization maintains large amount of cash balance, its transaction cost would decline 93 Source: http://www.doksinet but the opportunity cost would be increase. Optimum cash balance is the point X where the sum of the two costs is minimum and this is the point where every company should seek to achieve. 2.83 Practical Problems in the Determination of Optimum Cash Balance All the models used above are theoretical as a result require to be adjusted to the peculiar situation of each establishment. Quiet a good number of assumptions have to be made with

respect to the inputs used. For instance, the minimum and maximum cash balances, the date of transferring funds from marketable securities to cash and vice-versa and the cost of running out of cash and of keeping certain amount of cash. 94 Source: http://www.doksinet They are subjectivity determined and therefore reliability and accuracy of results got from the models depend on the accuracy and consistency of the input data. These models can only serve as guides to companies in determining their optimum cash balances. In this respect, the approach used depends of course, on the available information and management attitude. 2.9 INVESTMENT OF EXCESS OR IDLE CASH After determining the optimum cash balance, the excess of cash above the optimum cash level needs to be invested in short term profitable securities with a view to earning interest income for the firm as carrying the fund in form of cash in hand or at bank will add little or nothing to profit except they are put into

some for of investment appropriately. Before investment decisions are taken, a lot 95 Source: http://www.doksinet of considerations have to be taken. Such according to Van Horne include (1983:373 – 375): a. Maturity: The longer the maturity, the greater the risk of fluctuation in the market value of securities. Investors need to be offered risk premium to induce them to invest in long term securities. b. Default Risk: The risk that the borrower will not satisfy the contractual obligation to make principal and interest payment as and when due. Not too long ago some banks and other financial institution collapsed, investors lost a lot of money as their investment could not be regained. 96 Source: http://www.doksinet c. Taxability: Interest income of most securities are taxable thus reducing the benefits accruing to the investors. d. Marketability of Investment: The ability of investors to convert securities into cash by selling a significant volume of investment in a

short period of time without important price concessions. It is worthy of mention that the lower the marketability of a security, the greater the yield necessary to induce investors. Having considered the above points, it is the responsibility of the enterprise to invest the excess cash in short term securities like bonds or government treasury bills, equities, corporate bonds etc. 97 Source: http://www.doksinet 2.10 RESPONSIBILITY FOR CASH MANAGEMENT The responsibility to manage cash effectively is the function of top management. The effect of poor cash management are unfortunately not directly visible on the operating statements and this impairs the company’s profitability and consequently its survival. Top management should for this reason carefully formulate and periodically review the basic policies, plans and forecasts which constitute guidelines within which the daily cash management operation functions. In organizations, cash management is usually assigned

to the finance accounting department placing the responsibility of managing cash on the financial manager. To ensure that the financial manager carry out his or her obligation, there is need for a high degree of co-ordination and control among the various departments within the firm. 98 Source: http://www.doksinet It is in the interest of co-ordination and cost minimization that many firms have organized most if not all activities concerned with cash into a single operating department headed by financial manager. 2.11 FINANCIAL RATIOS ASSOCIATED WITH SURVIVAL In trying to know whether an organization is surviving at a point in time, the use of financial ratios such as profitability and liquidity ratios becomes indispensable. Its indicators are computed from the final accounts such as trading profit and loss account and the balance sheet etc. The ratios that are commonly used are: 1. Return on Equity (ROE): It shows the relationship between earnings and net equity, that

is, the total funds due to the owners which comprise nominal capital plus all retentions and reserves. It measures 99 Source: http://www.doksinet efficiency in the use of equity funds. The ratio effectively combines measure of operating efficiency and that of the equality of performance of the finance functions. It could be given as stated below: Net Profit After Tax and Interest Net Equity 2. Current Ratio: It compares total current assets with current liabilities. The rationale behind this is to determine the extent to which all liquid and near liquid assets (cash, debtors and marketable securities) would suffice to defray or pay all short term liabilities (creditors, dividend payable, bank overdraft and current taxation) where all of these fall due within the same short term period. This ratio is an important measure of potential liquidity and its given as 100 Source: http://www.doksinet Current Assets Current Liabilities 3. Quick Assets Ratio: It is current

assets excluding stock to total current liabilities. It defines the ease with which current assets can be realized in the event of sudden demand by short term creditors. It is given by Current Assets Less Stock Current Liabilities 4. Net Profit Margin: It is the ratio of net profit before tax to sales. The ratio measures the rate at which income accrues from sales. It is frequently expressed as a percentage or as a certain number of kobo per naira and is computed thus: Net Profit Margin = 101 Net Profit Before Tax Sales Source: http://www.doksinet 5. Return on Capital Employed (ROCE): Relates earning to long term funds only. Capital employed is defined as equity funds plus all long and medium term loans. Return on Capital Employed = Net Profit Before Tax and Interest Capital Employed 6. Return on Assets Managed (ROAM): it is defined as the relationship between net profit before tax and total assets. It tries to measure the rate of efficiency in the use of the firm’s

total assets. Thus, total assets is the summation of fixed and current assets. While net profit for the ratio include profit before interest and taxes, interest. It is given by Return on Assets Managed = Net Profit Before Interest and Taxes Total Assets 102 Source: http://www.doksinet The ratios above particularly profitability and liquidity ratios need to be computed together to determine if a firm is surviving as management cannot accurately determine the firm’s survival by mainly looking at the figures in the final accounts. Hence, profitability ratio must be computed alongside liquidity ratio as management cannot use only profitability ratio to known if the firms is surviving or not. 2.12 LIMITATIONS OF FINANCIAL RATIO All the ratios employed in this study do have limitations as to their usage. One of such limitations is that some ratios have dual meaning and basis of computation. Therefore, ratios are not categorical as it can lead to alternative interpretations of

results arrived at. Furthermore, some financial ratios have to be computed for a given number of years to impact significant 103 Source: http://www.doksinet results. A ratio cannot sufficiently give a true and fair view of the state of affairs of a company. It has to involve other ratios. Also price changes distort ratios computation. The price at the beginning is most likely to change before the end of a period so that the value of computations would not be a true value of the state of affairs of the firm. Again, the ills in the manipulation by management staff limits the application of financial accounting ratios. The use to which the ratios are put does not necessarily assure the liquidity and profitability position of the company. It is also possible for such limitation to come in the form of accounting policy adopted by the firm. The accounting policy adopted by the firm would have effect on 104 Source: http://www.doksinet the ratio used as a result the

workability of the ratio is affected. Accounting ratios have also proven to be doubtful in the evaluation of conglomerate companies which have diversified operations. The listed cases however, is not exhaustive concerning the limitation of the accounting ratios as a result we should make it clear that reliability on these ratios cannot be total since we cannot rely on the ratios completely. Despite the limitations of the ratios they still serve as a very important element in evaluating the survival of an entity. 105 Source: http://www.doksinet CHAPTER THREE 3.1 INTRODUCTION In the previous chapter, relevant literature on the subject of cash management and survival in the company were reviewed. It was seen that the efficiency and effectiveness of cash management plays an important role in the survival of an entity. Here we shall make efforts to give an insight into the way and manner in which this research work is carried out to empirically test the statement above. The chapter will

cover research sampling, sources of data and data analysis. 3.2 RESEARCH SAMPLING The sampling design for this study will be primarily focused on the manufacturing sector of the Nigerian economy. Accordingly, the whole of the organization of the 106 Source: http://www.doksinet Nigerian Bottling Company Plc will be employed for sampling purpose of this study. 3.3 SOURCE OF DATA The data used in this research study consist of both primary and secondary sources. 3.31 Primary Source The primary data used in the study were collected with the aid of structured questionnaire which consist of a set of questions. Personal interviews were however, conducted in some cases in order to extract some important explanations from the staff of the company. The purpose of the questionnaire is to obtain quantitative and information as well as such other information that cannot be disclosed in the financial reports. 107 Source: http://www.doksinet 3.32 Secondary Source The secondary

data were sourced majorly from annual reports, journals, financial statements etc. Not only dud we obtain quantitative data as qualitative data which also obtained such as the nature of the business, the date of incorporation of the organization. 3.4 DATA ANALYSIS The use of statistical approach to data analysis in this study will be adopted to test the research hypothesis. The use of ratio analysis and correlation analysis will be used in the test of hypothesis. For the purposes of the study, the use of financial ratio analysis involves the following ratios: a. Liquidity Ratios: In terms of these groups of ratios, calculations will be used based on current ratio and 108 Source: http://www.doksinet acid test ratio. These ratios measure the ability of the firm to meet its maturing obligations as they fall due. b. Profitability Ratios: Under these group of ratios calculations will be based on Return on Capital Employed (ROCE), Return on Assets Managed (ROAM), Net Profit Margin and

Return on Equality (ROE). These ratios measure the ability of the company to earn returns which is a pre-requisite for profitability. Correlation analysis is to show the relationship between the effective cash management and the survival of the company. The data for evaluating this will be based on the ratios of profitability and liquidity. 109 Source: http://www.doksinet CHAPTER FOUR DATA PRESENTATION AND ANALYSIS This chapter aims to evaluate the performance of NBC Plc in the years 2007 – 2011. Various methods are used in evaluating the financial performance of a firm. Such methods however, include financial ratios and analysis which is the most common form of evaluating financial performance of a company. The researcher shall do this through the use of profitability ratios, liquidity ratios, interperiod comparison and trend analysis correlation coefficient and T distribution which are statistical tools used in testing hypothesis will be utilized. 4.1 DATA PRESENTATION

From the annual reports and financial statements of the company for a five year period under review (2007 – 110 Source: http://www.doksinet 2011) the following ratios are computed to analyze the trends of performance and survival of the company. 4.11 Inter Period Comparison: Selected Ratios of NBC for the Period 2007 – 2011 Table 4.1: Net Profit Margin N’000 Years Turnover 2011 Net Profit Before Tax and Exceptional Item 4346826 68529128 6.3 2010 1933982 59674516 3.2 2009 3576257 55444504 6.5 2008 3330594 47553874 7.0 2007 6045057 43900832 13.8 Source: NBC Annual Report 2011 – 2007 111 Net Profit Margin (%) Source: http://www.doksinet As can be seen from the net profit margin ratio shown in the table above that it shows a relationship between net profit and sales. It shows the approximate level of profit earned from every N1 sale after considering expense. We can deduce from the table that the company’s ability to generate profit increases for

some years and reduces at some other years. These ratio indicates management efficiency in the respective years in the manufacturing administering and selling the products. In 2007 the net profit margin was 13.8% apparently higher than the subsequent years. For the following years of 2008 – 2010 the net profit margin was falling all through. It was 7%, 6.5% and 32% respectively Eventually in 2011 it rose again to 6.3% The average for the five year period was 7.36% It can be seen that the company’s profit was dropping for three consecutive years before it eventually 112 Source: http://www.doksinet rose in 2011. These decrease in net profit may have been caused by poor management, the down turn in the economy, decrease in demand etc. While in those years where the company experienced increase in sales may have been as a result of increase in demand, increase in selling price and effective management control etc. Table 4.2: Return on Assets Managed N’000 Years 2011 Net Profit

before Interest and Tax (a) 4346826 Total Assets Return on (b) Assets Managed (%) (a/b) 48088134 9.0 2010 1933982 46521053 4.2 2009 3576257 30039586 12.0 2008 3330594 35948052 9.3 2007 6045057 33697079 18.0 Source: NBC Annual Report 2011 – 2007 113 Source: http://www.doksinet This ratio reveals that extent to which the business assets are utilized by management. It is also a measure of corporate profitability. It measures the profitability of all the financial resources invested in the firm’s assets. The ratio can also be used in evaluating the performance of divisions in a multi-divisional organization such as NBC Plc. The company recorded a return on assets managed (ROAM) of 10% in 2007 and in the following year which is 2008 it dropped to 9.3% and it kept fluctuating through out the years under review. On the whole, NBC Plc was more efficient in utilizing its assets in 2007. The overall average for the periods under consideration is 10.5% The increase could

have been as a result of efficient utilization of assets and the reverse being the case in the years where reductions where experienced. 114 Source: http://www.doksinet Table 4.3: Return on Capital Employed N’000 Years Capital Employed 2011 Net Profit Before Interest and Tax 4346826 31094541 Return on Capital Employed (%) 14 2010 1933982 26872509 7.2 2009 3576257 27056144 13.2 2008 3330594 24541518 13.6 2007 6045057 24794270 24.4 Source: NBC Annual Report 2011 – 2007 The return on capital employed (ROCE) shows the return achieved by management in the utilization of assets and investments under their control before payment to internal and external finances. The ratio enables the existing investor to compare return on his investment to return from other investment so as to decide whether to hold, buy more or sell his interest in the organization. The 115 Source: http://www.doksinet company did better in 2007 where it had a ratio of 24.4% thereafter the

ratio kept dropping up to 2010 and eventually rose by about 100% in 2011 to 14%. There was efficient management of capital employed in the years when the ratio was high than in the years when it was low. Table 4.4: Return on Equity N’000 Years Net (b) 2011 Net Profit After Tax and Interest (a) 3166418 Equity Return on Equity (%) (a/b) 22034302 14.4 2010 1042578 17151665 6.1 2009 2314358 19220546 12.0 2008 3025954 18263179 16.6 2007 4394960 20080269 21.9 Source: NBC Annual Report 2011 – 2007 116 Source: http://www.doksinet This is the ratio that measures the profit generated by management from funds entrusted to them by the absentee owners (shareholders). The investor will hold his investment if the returns from other alternatives are equal. If on the contrary, the return on such investment turns out to be more than that of the alternatives, such an investor will commit more funds and vice versa. We can deduce from the table above that in

2007 the company utilized its owners equity more than any other year, as a matter of fact the ratio kept dropping before it rose in 2011 to 14.4% with an overall average of 142% 117 Source: http://www.doksinet LIQUIDITY RATIO Table 4.5: Current Ratio N’000 Years 2011 Current Assets (a) 14043356 Current Current Liabilities(b) Ratio(a/b) 16993593 0.8 2010 13139672 19648244 0.7 2009 13950231 16933673 0.8 2008 11564219 11406534 1.0 2007 11265723 8902809 1.3 Source: NBC Annual Report 2011 – 2007 Current ratio is the most crucial ratio for measuring corporate liquidity. It is expressed in ratio form The ratio measures the ability of a firm to meet its short term obligation as, they fall due. Although it is best for any company to have a current that is greater than one but it is possible for a firm to strive under a condition of less than one. Some companies with a very high current ratio still 118 Source: http://www.doksinet run into problems, this is because

current assets can have a very high figure for stock which is not easy to convert at short notice. The current ratio in the table above for 2007 was 1.3 and 1 for 2008 afterwards it was galloping up to 2011 in other words for every N1 that the company owed in 2007 and 2008 it had N1.30k and N1 to pay respectively and afterwards it did not have up to N1 to pay in the period under review. Table 4.6: Acid test Ratio N’000 Years Current Liabilities Acid Test Ratio 2011 Current Assets Less Stock 3069583 16993593 0.2 2010 3030307 19648244 0.2 2009 3603129 16933673 0.2 2008 2964897 11406534 0.3 2007 4080860 8902809 0.5 Source: NBC Annual Report 2011 – 2007 119 Source: http://www.doksinet The acid test ratio is a modification of the current ratio against the back drop of the difficulties of converting stock and other elements such as prepayments to cash. It is a measure of the ability of a firm to meet its shows term obligation from cash or near cash within the

short time possible. From our computation, it shows that the company scarcely able to meet its short term obligation in the years under review since for every N1 owed the highest it could afford was 50k in 2007 and that figure dropped eventually to 30k in 2008 then for the remaining years it was 20k. It shows that significant amount of current asset where tied down in stock. 120 Source: http://www.doksinet 4.12 Summary of Profitability and Equity Ratios RATIOS Net 2007 2008 2009 2010 2011 7.0 6.5 3.2 6.3 on 18.0 9.3 12.0 4.2 9.0 on 24.4 13.6 13.2 7.2 14.0 on 21.9 16.6 12.0 6.1 14.4 1.3 1.0 0.8 0.7 0.8 test 0.5 0.3 0.2 0.2 0.2 profit 13.8 margin (%) Return asset managed (%) return capital employed (%) return equity (%) Current ratio Acid ratio 121 Source: http://www.doksinet 4.2 TEST OF HYPOTHESIS H o : That there is no positive relationship between profitability/liquidity and company’s survival. H 1 : That there is a positive

relationship between profitability/liquidity and company survival. Where: Ho = Null hypothesis H1 = Alternative hypothesis To put the hypothesis formulated above to test the use of correlation analysis and T-distribution are employed so as to establish a relationship between profitability and liquidity ratios. Correlation coefficient and T-distribution are statistical tools that are used to measure the relationship between variables as would be seen in this research to establish the degree of relationship between profitability ratios and liquidity ratios and to test the hypothesis formulated. 122 Source: http://www.doksinet Table 4.7: Correlation between Net Profit Margin and Current Ratio Current Ratio Years Net Profit Margin X 2007 13.8 2008 1.3 X–X 6.44 y–y 0.38 (X – X) 2.4472 (X – X)2 41.4736 y – y2 0.1444 7.0 1.0 -0.36 0.08 -2.0288 0.1296 0.0064 2009 6.5 0.8 -0.86 -0.12 0.1032 0.7396 0.0144 2010 3.2 0.7 -4.16 -0.22

0.9152 17.3056 0.484 2011 6.3 0.8 -1.06 -0.12 0.1272 1.1236 0.0144 x = 7.36 y = 0.92 Σ=0 Σ=0 Σ= 3.564 Σ= 60.772 Σ = 0.228 r where Y ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 = r = correlation coefficient x = net profit margin y = current ratio ∑ = summation 123 Source: http://www.doksinet r 3.564 = (60.772) (0228) r = 3.564 13.856016 r = 3.564 3.722366989 r = 0.96 In our analysis above the value of r calculated is positively related i.e there is a positive relationship between net profit margin and current ratio. This is however, not in line with principle that for a company to achieve higher profitability, its liquidity position must be reduced. 124 Source: http://www.doksinet T-distribution for the correlation coefficient above is as follows: t r Where: n −1 1 − r2 r = correlation coefficient n = sample size (2007 – 2011) constant t = T-distribution we can substitute these values as

stated below: r = 0.96, n = 5, r2 = (096)2 t t 0.96 0.96 5 −1 1 − (0.96) 2 4 1 − 0.9216 125 Source: http://www.doksinet t 0.96 4 0.0784 t 0.96 51.02040816 t = 0.96 t = 6.8571 Table 4.8: x 7.1349 Correlation between Net Profit Margin and Acid Test Ratio Current Ratio Years Net Profit Margin X 2007 13.8 2008 Y y–y 0.22 (X – X) (y – y) 0.5 X–X 6.44 1.4168 (X – X)2 41.4736 y – y2 0.0484 7.0 0.3 -0.36 0.02 0.0070 0.1296 0.0004 2009 6.5 0.2 -0.86 -0.08 0.0688 0.7396 0.0064 2010 3.2 0.2 -4.16 -0.08 0.3328 17.3056 0.0064 2011 6.3 0.2 -1.06 -0.08 0.0848 1.1236 0.0064 x = 7.36 y = 0.28 Σ=0 Σ=0 Σ= 1.9104 Σ = 0.772 Σ = 0.068 126 Source: http://www.doksinet r r ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 = 1.9104 = (60.772) (0068) r = 1.9104 4.129096 r = 1.9104 (60.722) (0068) r = 1.9104 4.129096 r = 1.9104 2.032017716 r = 0.94 127 Source:

http://www.doksinet The calculated value of r above shows that net profit margin and acid test ratio are positively related. That as net profit margin increases, acid test ratio also increase. The relationship can be illustrated using a simple diagram as below. Net profit Margin Acid test ratio 0 This shows that the liquidity position of the company is greatly affected by stock. Hence, the value of stock contributes more to the current assets of the firm. 128 Source: http://www.doksinet T-distribution for the correlation coefficient above is as follows: t r Where: t n −1 1 − r2 r = 0.94, n = 5, r2 = (094)2 0.94 5 −1 1 − (0.94) 2 t 0.94 4 1 − 0.8836 t 0.94 4 0.1164 t 0.94 34.36426117 129 Source: http://www.doksinet t = 0.96 t = 5.5104 Table 4.9: x 5.8621 Correlation between Return on Asset Managed and Current Ratio Current Ratio Years Return on Assets Managed X 2007 18.0 2008 y–y 0.38 (X – X) (y – y) 1.3 X–X 7.4

2.812 (X – X)2 54.76 y – y2 0.1444s 9.3 1.0 -1.3 0.08 -0.104 1.69 0.0064 2009 12.0 0.8 1.4 -0.12 -0.168 1.96 0.0144 2010 4.6 0.7 -6 -0.22 1.32 36 0.0484 2011 9.0 0.8 -1.6 -0.12 0.192 2.56 0.0144 x = 10.6 y = 0.92 Σ=0 Σ=0 Σ= 4.052 Σ = 96.97 Σ=0.228 r = Y ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 130 Source: http://www.doksinet r 4.052 = (60.772) (0228) r = 4.052 22.10916 r = 4.052 4.702037856 r = 0.86 It can be deduced from the computed r above, we discovered that the correlation between return on assets managed and current ratio increases, current ratio increases, current ratio increases. That is to say that as the firm tries to improve its return on assets managed by increasing the level of assets held, the liquidity position of the company increases. 131 Source: http://www.doksinet If we apply the T-distribution to the above correlation we will have. t r Where: n −1 1 −

r2 r = 0.86, n = 5, r2 = (086)2 t 0.86 5 −1 1 − (0.86) 2 t 0.86 4 1 − 0.7396 t 0.86 4 0.2604 t 0.86 15.3609831 t = 0.86 x t = 3.3706 3.919309008 132 Source: http://www.doksinet Table 4.10: Correlation between Return on Assets Managed and Acid Test Ratio Years Return on Acid Assets test Managed Ratio X Y 2007 18.0 2008 y–y 0.22 (X–X) (y–y) 0.5 X–X 7.4 1.628 (X – X)2 54.76 y – y2 0.0484 9.3 0.3 -1.3 0.02 -0.026 1.69 0.0004 2009 12.0 0.2 1.4 -0.08 -0.112 1.96 0.0064 2010 4.6 0.2 -6 -0.08 0.48 36 0.0064 2011 9.0 0.2 -1.6 -0.08 0.128 2.56 0.0064 x = 10.6 y = 0.28 Σ=0 Σ=0 Σ= 2.098 Σ = 96.97 Σ = 0.068 r r r ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 = 2.098 = (96.97) (0068) = 2.098 6.59396 133 Source: http://www.doksinet 2.098 2.567870713 r = r = 0.81 Here we have a positive relationship between return on assets managed and acid test ratio, as

profitability increases the liquidity of position of the firm also increase. This simply means that the company instead of using cash generated to acquire more stock left the cash in the business which consequently raised the liquidity position. The T-distribution is as follows: t r Where: t n −1 1 − r2 r = 0.86, n = 5, r2 = (086)2 0.81 5 −1 1 − 0.6561 134 Source: http://www.doksinet t 0.81 4 1 − 0.3439 t 0.81 11.6313 t = 0.81 t = 2.754 Table 4.11: x 3.4 Correlation between Capital Employed and Current Ratio Years Return Current on Ratio Capital Employed X Y 2007 24.4 2008 X–X y–y (X – X)2 y – y2 1.3 9.92 0.38 3.7696 98.4068 0.1444 13.6 1.0 -0.88 0.08 -0.0704 0.7744 0.0064 2009 13.2 0.8 -1.28 -0.12 0.1536 1.6384 0.0144 2010 7.2 0.7 -7.28 -0.22 1.6016 52.9984 0.0484 2011 14.0 0.8 -0.48 -0.12 0.0576 0.2304 0.0144 x = 14.48 y = 0.92 Σ=0 Σ=0 Σ= 5.512 Σ=154.048 Σ=0.228 135

(X–X) y) (y– Source: http://www.doksinet r r ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 = 5.512 = (154.048) (0228) r = 5.512 35122944 r = 5.512 5.9265 r = 0.93 There is a high positive relationship between the return on capital employed and current ratio. As the profitability increases the liquidity positive of the firm also increase. T The T-distribution is as given below: 136 Source: http://www.doksinet t r Where: n −1 1 − r2 r = 0.93, n = 5, r2 = (093)2 t 0.93 5 −1 1 − 0.8649 t 0.93 4 1 − 0.1351 t 0.93 29.6077 t = 0.93 x t = 5.0604 5.4413 137 Source: http://www.doksinet Table 4.12: Correlation between Return on Capital Employed and Acid Test Ratio Years Return on Capital Employed X Acid test ratio Y 0.5 X–X 9.92 y–y 0.22 2.1824 (X – X)2 98.4068 y – y2 0.0484 (X–X) (y–y) 2007 24.4 2008 13.6 0.3 -0.88 0.02 -0.0176 0.7744 0.0004 2009 13.2 0.2 -1.28 -0.08

0.1024 1.6384 0.0064 2010 7.2 0.2 -7.28 -0.08 0.5824 52.9984 0.0064 2011 14.0 0.2 -0.48 -0.08 0.0384 0.2304 0.0064 x = 14.48 y = 0.28 Σ=0 Σ=0 Σ= 2.888 Σ=154048 Σ=0.068 r r r ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 = 2.888 = (154.048) (0068) = 2.888 10475264 138 Source: http://www.doksinet r 2.888 3.236551251 = = 0.89 From the above result we have a high positive relationship here again between return on capital employed and acid test ratio, that is, as profitability increases so also does liquidity position of the firm. The T-distribution for the correlation above: t r Where: t t n −1 1 − r2 r = 0.89, n = 5, r2 = (089)2 0.89 0.89 5 − 1 1 − 0.7921 4 1 − 0.2079 139 Source: http://www.doksinet 0.89 t 19.2400 t = 0.89 t = 3.9038 Table 4.13: x 4.3863 Correlation between Return on Equity and Current Ratio Return on equity Years X Current Ratio Y y–y -0.38 (X – X) (y

– y) 2.926 (x–x)2 59.29 (y–y)2 0.1444 2007 21.9 2008 16.6 1.0 2.4 -0.08 0.192 5.76 0.0064 2009 12.0 0.8 -2.2 -0.12 0.264 4.84 0.0144 2010 6.1 0.7 -8.1 -0.22 1.782 65.61 0.484 2011 14.4 0.8 -0.2 -0.12 -0.024 0.04 0.0144 x = 14.2 y = 0.92 Σ=0 Σ=0 Σ= 5.14 Σ=135.54 Σ= 0.228 r = 1.3 X–X 7.7 ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 140 Source: http://www.doksinet r 5.14 = (134.54) (0228) r = 5.14 30.90312 r = 5.14 5.559057474 r = 0.92 The computed value of r above, we see that the firm’s profit level is increasing, just as liquidity position also goes up. As the shareholders fund is being increased through the purchase of assets the firm still needs to use more of the cash should be invested. The T-distribution for this correlation is given below: t r n −1 1 − r2 141 Source: http://www.doksinet Where: r = 0.92, n = 5, r2 = (092)2 t 0.92 5 − 1 1 − 0.8464 t 0.92 4

1 − 0.1536 t 0.92 26.04166667 t = 0.92 t = 4.69 x 5.103013631 142 Source: http://www.doksinet Table 4.14: Correlation between Return on Equity and Current Ratio Return on equity Acid test Ratio 2007 X 21.9 0.5 2008 16.6 2009 Years X–X 7.7 y–y 0.22 (X – X) (y – y) 0.3 2.4 12.0 0.2 2010 6.1 2011 r r r 1.694 (X – X)2 59.29 (y – y)2 0.0484 0.02 0.048 5.79 0.0004 -2.2 -0.08 0.176 4.84 0.0064 0.2 -8.1 -0.08 0.648 65.61 0.0064 14.4 0.2 0.2 -0.08 -0.016 0.04 0.0064 x = 14.2 y = 0.28 Σ=0 Σ=0 Σ= 2.55 Σ=135.54 Σ = 0.068 Y ∑ ( x − x ) ( y − y) ∑ ( x − x )2 ∑ ( y − y )2 = 2.55 = (135.54) (00688) = 3.55 9.21672 143 Source: http://www.doksinet 2.55 3.035905137 r = r = 0.84 In the calculated value of r above we have a positive relation between return on equity and acid test ratio, that is, as profitability increases, liquidity position of the firm also increases. The

T-distribution for this correlation is given below: t r Where: t t n −1 1 − r2 r = 0.84, n = 5, r2 = (084)2 0.84 0.84 5 − 1 1 − (0.84) 2 4 1 − 0.7056 144 Source: http://www.doksinet t 0.84 4 1 − 0.7056 t 0.84 13.58695652 t = 0.84 t = 3.0963 4.21 x 3.686048904 Summary of Individual Correlation Coefficient and T-Distribution for Nigerian Bottling Company Profitability and Coefficient of Liquidity Ratios T-Distribution Correlation Computed Net Profit Margin vs Current Ratio 0.96 6.8571 0.94 5.5104 Net Profit Margin vs Acid Test Ratio 145 Source: http://www.doksinet Return on Assets Managed vs Current ratio 0.86 3.3706 0.81 2.754 0.93 5.0604 0.89 3.9038 0.92 4.69 0.84 3.0963 Return on Assets Managed Vs Acid Test Ratio Return on Capital Employed vs Current Ratio Return of Capital Employed Vs Acid Test Ratio Return on Equity Vs Current Ratio Return on Equity Vs Acid Test Ratio The profitability and liquidity correlation

results for Nigerian Bottling Company Plc from the above table are high with all being positive showing a strong correlation. 146 Source: http://www.doksinet If the principle of correlation is anything to go by that is, that the range of r (correlation) should be between -1 and 1 meaning that if the value of r is close to 1, the relationship is a strong one between the variables, when r is close to -1 then the relationship is still strong, but they are pulling in different direction and if close to 0, then the relationship is a weak one. As a result of the principle above as well as the computed statistical correlation (r) of NBC PLC, it shows that there is a positive relationship between net profit margin and current ratio and the relationship is tending towards 1. Showing that as one of the variables increases, the other also increases. The correlation computed between net profit margin and acid test ratio is 0.94 this signifies a positive and strong association between them as r

is close to 1. in other 147 Source: http://www.doksinet words, net profit margin and acid test ratio move in the same direction. The return on assets managed and current ratio gives a positive r (correlation) of 0.86, this again shows that the relationship between the two variables is strong and they go in the same direction. The correlation coefficient in the same respect to the relations between return on assets managed and acid test ratio gave a positive relationship of 0.81, with this, the degree of closeness is strong The return on capital employed and current ratio gave a closeness that is very strong with a positive relationship that is close to 1. Similarly the return on capital employed and acid test ratio coefficient of correlation is close to 1 and also reveals a very high relationship. Return on equity and current ratio showed a correlation of 0.92, this shows a positive and very strong 148 Source: http://www.doksinet relationship while, return of equity and

acid test ratio also showed a positive relationship with a strong association. 4.22 Testing Hypothesis using Average Correlation H o : That there is no positive relationship between profitability/liquidity and company’s survival. H 1 : That there is a positive relationship between profitability/liquidity and company’s survival. Where: Ho = Null hypothesis H1 = Alternative hypothesis In testing the hypothesis formulated and deciding whether to reject the null hypothesis and accept the alternative hypothesis, average correlation coefficient is gotten by adding all the individual correlation and then diving by the number of correlation. 149 Source: http://www.doksinet Profitability and Liquidity ratio Net profit margin vs current ratio Correlation Coefficient 0.96 Net profit vs acid test ratio 0.94 Return on assets managed vs current ratio 0.86 Return on assets managed vs acid test ratio 0.81 Return on capital employed vs current ratio 0.93 Return

on capital employed vs acid test ratio 0.89 Return on equity vs current ratio 0.92 Return on equity vs acid test ratio 0.94 Total 7.15 8 Average correlation 0.89 150 Source: http://www.doksinet Therefore, T – distribution for the above average correlation is given as follows: t n −1 1 − r2 to = table value of the distribution r = average correlation coefficient n = sample size (2007 – 2011) ∝ = level of significance v = degree of freedom, n – 1 to = 2.132 r = 0.8938 n = 5 years ∝ = .5% v = 4 Where: ∴ r 151 Source: http://www.doksinet Substitute the values in the formula above t 0.8938 5 − 1 1 − (0.8938) 2 t 0.8938 4 1 − 0.7989 t 0.8938 4 1 − 0.2011 t 0.8938 19.8906 t = 0.8938 t = 3.9863 x 4.4599 This value is therefore plotted in the T-distribution diagram as follows. 152 Source: http://www.doksinet Acceptance Region -to µ=0 rejection Region 3.9863 00025 4.604 +to The t value

calculated is larger than the table value that is 3.9863 < 4604 and so we reject the null hypothesis and the alternative hypothesis is upheld, that there exist a positive relationship between survival and profitability/ liquidity is accepted. 153 Source: http://www.doksinet 4.3 EVALUATING THE EFFECTIVENESS AND EFFICIENCY OF CASH MANAGEMENT In an attempt to evaluate the effectiveness and efficiency of cash management in a firm, we have to make reference to a good number of factors that should be considered in order to ascertain the proper use of cash. That is to say, that to evaluate whether Nigerian Bottling Company is effective and efficient its cash management, we have to consider its planning, recording controlling, receipts and disbursement activities. It is only when the firm properly plans, record, control and increase its receipts and delay its payment of cash and invest its excess cash in short term marketable securities that we can say that the firm i.e effective and

efficient in managing its cash In doing this, we look at the various answers given to the 154 Source: http://www.doksinet questions asked. From the response derived from questionnaire prepared, we obtained the following. We observed that NBC Plc operates financial planning, use cash budgets, and flexible budget so as to take cognizance of possible deviation from expected cashflow into account. The company also depends largely on cash budgeting in its policy formulation. The firm regularly compares its actual cash receipts and disbursement with cash budget in order to know if there is deviation. Bank reconciliation statements are regularly prepared on a monthly basis and the company maintains minimum and maximum cash level in order to monitor the optimum cash level. We also observed that the firm maintains adequate records of cash transactions by keeping receipts/ lodgements cash books, payment cash books (cheques), 155 Source: http://www.doksinet petty cash books

which are regularly balanced on daily weekly and monthly basis. It was discovered that the firm’s receipts are usually in the form of cash, cheques, bank drafts and bank transfer. The casher goes to the bank to deposit cash, thus minimizing teeming and lading. The firm maintains accounts with various bank branches close to its various branches. We observed that in the period under review the company did not invest in short term marketable securities that would have increased it profitability level, such excess cash if invested would have earned income that can only come from the investment of such cash. There is neither excessive cash holding nor cash deficiency company operates on cash and carry basis. 156 and the Source: http://www.doksinet In conclusion, we observed that the company properly planned, controlled and recorded its cash, facilitated the receipts of cash, delayed payments and although, did not invest excess cash. Based on these facts, we can say to a

large extent that NBC Plc management is which effective and invariably is efficient part of in its the cash factors contributing to its survival. Other factors include efficient utilization of resources, good implementation of decisions made, good marketing strategies and its philosophy on improvement of employees working conditions among other reasons. 157 Source: http://www.doksinet CHAPTER FIVE FINDINGS, RECOMMENDATIONS AND CONCLUSION It is in this chapter that we will highlight our findings in the course of this research work, make recommendations and finally conclude on the research work. 5.1 FINDINGS We have been able to come up with the following findings: a. That the liquidity and profitability correlation values for Nigeria Bottling Company (PLC) were positive and high too, indicating that as the liquidity position of the firm increases, profitability position of the firm also increases. This however, is not in line with established theory by economist.

They observed an inverse 158 Source: http://www.doksinet relationship between returns on investment and liquidity level. b. From our observation the survival of an organization is determined by the profitability and liquidity position of the organization. This is true because a company that is able to earn returns on investment and also meet its obligations as they fall due stands a better chance of survival than the one that is unable to make profit and fails to meet maturing obligations will collapse. c. The system of internal control with respect to cash is quiet efficient. This is an important aspect of the cash management process because, if cash is not properly accounted for, the company will suffer great losses or even collapse. d. We observed that the company’s value of stock contributed more to the current assets of the company 159 Source: http://www.doksinet in the years under review. Hence, the positive relationship among the variables. e. Nigeria

Bottling Company Plc prepares financial statements like the income statement and balance sheet on a yearly basis. Cash budgets are also regularly prepared. These financial statements and cash budgets form the basis and record for the analysis of cash management of the firm. f. From our observation, the company experiences cash difficulties which invariably slows down the rate of operation. g. It was observed also that the company performed a wide range of cash management activities such as the preparation of cash budget. h. Besides the use of cash budget, the capital needs of the company were not clearly identified. For instance, 160 Source: http://www.doksinet there was a complete absence of the use of cash operation cycle which could assist in determining average payment. 5.2 RECOMMENDATIONS What this research work tries to achieve is a proper understanding of cash management process in a manufacturing company. We therefore make the following recommendations to

management which we expect would be useful to the company. a. Cash flow position should be analyzed as frequently as possible to ensure cash availability to meet the organization’s commitment both in the short and long run. 161 Source: http://www.doksinet b. The environment should be analyzed to ascertain factors that might hinder or enhance future performance. c. The company can “play the float” whenever it experiences temporary cash deficiency. This could be done by issuing cheques drawn by one branch to creditors in another state and vice versa. The considerate length of time required to clear the cheque, this will offer temporary cash availability. d. Emphasis should be placed by management on strategic planning through environment analysis and diagnosis to enable management make accurate forecast. e. Emphasis should be placed on the optimum cash level. This however is in the best interest of the company as 162 Source:

http://www.doksinet it helps in preventing the cash level from falling below or rising above the level of cash required. f. The cash needs of the company should be ascertained through the study of the operation cycle. g. It is recommended to future researchers to attempt to study this type of research work from a multidimensional approach by incorporating other factors. 5.3 CONCLUSION We do hope that the cash planning and control techniques discussed in this research work will provide companies both private and government organizations with the necessary tools for efficient and effective control and a workable systems for their operation, performance and hence survival. 163 Source: http://www.doksinet BIBLIOGRAPHY Anao, A. R. (1989), An Introduction to Financial Accounting, Longman: Lagos. Anthony, R. N (1983), Accounting Richard D. Text and Irwin, Cases, Homewood, Illinois. Armstrong, M. (1991), A Hand Book Techniques, of Management Kogan Page Ltd.

Pentrorille Road, London. Batty, J. (1975), Management Accounting, Fourth Edition. The English Language Book Society and MacDonald and Evans Ltd., Plymonth, 1975 Batty, J. (1978), Cost and Management Accountancy for Students. Third Heinemann, London. 164 Edition, Source: http://www.doksinet Baumel, W. J (1952), The Transaction Demand for Cash”: “An Inventory Theoretic Approach, Quarterly Journal of Economics, No. 66, November Davis, R. R (1951), The Fundamental of Top Management, New York: Harper and Row. Donnelly, Jnr, et. al (1981), Fundamental of Management, Fourth Edition, Plano, Tex Business Publications. Drury, C. (1985), Management and Cost Accounting, Van Notrand Reinold. Ekwere, A. B (1993), Effective Cash Management. The Nigerian Accountant, April/June. Izedonmi, O. I F (2005), A Manual for Academic and Professional Research. Second Edition, Bamadek Prints, Lagos. 165 Source: http://www.doksinet Ibitoye, S. (1985), Working Capital

Management, University of Ibadan Publishing Co., Ibadan Ofuan, J. I (2005), Advanced Financial Accounting: Dalag Prints and Packaging Ltd, Ibadan. Murphy, B. (1975), Management Accounting, Hodder and Stoughton. Osaze, B. and Anao, A R (1990), Managerial Finance, Published and Printed by Uniben Press. Pandey, I. M (1993), Financial Management, Sixth Revised Edition, Vikas Publishing House, New Delhi. Stoner, J. A F and Wankel, C (1988), Management, Third Edition. 166 Source: http://www.doksinet Terry, G. R and Franklin, S G (1982), Principles of Management, Eight Edition, Richard D. Irwin Inc Homewood, Illinois Van Horne, J. C (1983), Financial Management and Policy, Princeton Cliffs, N. J www.grossarchivecom 167 Hall Inc. Englewood, Source: http://www.doksinet APPENDIX Department of Accounting, Dear Sir/Madam, This questionnaire is designed to find out “The Impact of Cash Management on Company’s Survival” This project is being undertaken in partial

fulfillment of the requirements for the award of a B.Sc Honours degree in the above department. Kindly complete this questionnaire as honestly as you can. Your opinion will be used purely for the purpose of the study and such opinion will be treated with utmost confidentiality. Thanks for your anticipated co-operation. Yours faithfully, 168 Source: http://www.doksinet QUESTIONNAIRE TOPIC: THE IMPACT OF CASH COMPANY’S SURVIVAL SECTION A: Sex: Male [ Kindly fill in the appropriate. ] Female [ Age: 25 – 40years [ Marital status: ] Single [ MANAGEMENT blank space or tick ON as ] 40 years and above [ ] Married [ ] ] Name of your department: Educational qualification: Primary 6 certificate [ Diploma/ND [ ], TC II [ ], B.Sc [ ], O’ level [ ], Others [ ], ]. Position held/Grade level: SECTION B: For each question, kindly tick as appropriate i.e Yes [ √ ], No [ √ ] or make verbal comment. S/N 1. Yes

Does the company operate or the basis of financial plans 2. If (No.1) above is Yes, does the firm operate cash budgets? 169 No Verbal Comment Source: http://www.doksinet 3. If (No. 2) above is Yes, does the firm prepare flexible budgets to take cognizance of possible deviation form expected cash flow? 4. If (No. 3) is No state the reason(s) 5. If the firm operates cash budgets, are there comparisons made with the actual cash receipts/disbursements for the purpose of reconciling discrepancies regular? 6. To what extent does management depend on cash budgeting for formulating policies? 7. Are cash receipts usually in form of cash? 8. 9. Does the company employ petty cash book to document cash transactions? If (No. 8) above is Yes, how often is the petty cash book balanced? 170 Source: http://www.doksinet 10. Are bank reconciliation statements prepared regularly? 11. Are cash flow statement prepared? 12. Does your firm operate imprest system?

13. If Yes, state the imprest float? 14. Does the company maintain minimum and maximum cash level? 15. If (No 4) is No, please state how you ascertain the excessive cash holding? 16. Please state how you ascertain cash deficiency? 17. Whenever there is surplus cash on hand, what does the firm do with the surplus? 18. What are the factors you think can be attributable to the success of your firm? 19. What problems do you encounter in the area of cash management? 171 Source: http://www.doksinet 20. What are the sales figures for the following years? (a) 2007 N : K (b) 2008 N : K (c) 2009 N : K (d) 2010 N : K (e) 2011 N 21. What were the corresponding credit sales figure? (a) 2007 N : K (b) 2008 N : K (c) 2009 N : K (d) 2010 N : K (e) 2011 N 22. What were the yearly purchases for the years under review? (a) 2007 N : K (b) 2008 N : K (c) 2009 N : K (d) 2010 N : K (e) 2011 N 23. What were the corresponding credit

purchases? (a) 2007 N : K (b) 2008 N : K (c) 2009 N : K (d) 2010 N : K (e) 2011 N 24. What were the total current assets of your firm for the periods under review? (a) 2007 N : K (b) 2008 N : K (c) 2009 N : K (d) 2010 N : K (e) 2011 N 172 Source: http://www.doksinet 25. What were the firm’s current liabilities for the years under review? (a) 2007 N : K (b) 2008 N : K (c) 2009 N : K (d) 2010 N : K (e) 2011 N 173