CHAPTER 1
INTRODUCTION
1.1 Background of the study.
This study deals with, the liquidity management and corporate performance of selected communication firms. All over the world, various corporate firms (particularly communication firms) highly recognized the importance of liquidity management since it helps in increasing profitability and minimize loss. If liquidity management is properly monitored, these firms achieve the desired motives of holding cash, which include transactional, speculative and precautionary motives (Smith, 2000).In business, all motives for holding cash which include transaction, precautionary and speculative seem to be of little importance. It is very difficult for companies to hold cash to satisfy the transactionary motive. (Smith, 2000).states that, the transactionery motive is the need to hold cash to satisfy the normal disbursement and collection activities associated with the firm’s ongoing operation.
Many corporate firms having negative cash flows which resulted in difficulties in funding business commitments such as paying suppliers, meeting payroll demands and paying taxes. Holding inadequate amount of cash or cash equivalent interrupts the normal flow of most business activities. There has been failure by most business organizations to satisfy the precautionary motive. Holding cash for precautionary motive, assumes management, need cash for emergency purposes when the cash flows are less than what is projected (Smith, 2000). It will be difficult for firms to cover for any unexpected needs for cash by acting as a preventive balance. Moreover, due to inaccurate safety margins by many firms, they will experience financial difficulties with organizations failing to take advantage of unexpected investment opportunities. It will also be difficult for organizations to satisfy the speculative motive. According to Wright (2002) speculative motive is holding cash to take advantage of additional opportunities such as a bargain purchase.
According to Ranson (2005), defined liquidity management as a set of guidelines established by a firm to ensure that it has optimal cash balance at any time. He further clarified that firms should seek to match the cash receipts and disbursements so that there is no redundant cash balance. In this argument the firm should aim at zero cash balance is cash inflows have covered the cash out flows. Cash management; the main ambition of most organizations is today to present good financial results. An organization’s financial result is, for example, strongly influenced of the efficiency in an organization’s value chain. According to Larsson (2000) the efficiency in the value chain can be improved, if organizations control and perhaps adjust their financial routines. One part of an organization’s financial routines with potential, but which often is neglected, are organizations managing their liquid capital, or cash management.
Liquidity management, according to Larsson (2000), not a new phenomenon and organizations have always considered how their liquid capital in the best way should be managed. Even though managing liquid capital always has been done, the term cash management has brought new light to managing liquid capital with focus on the time- dimension of cash flow. During the fifties the first cash management – models were presented and the concept cash management was taken in use. Larsson (2000) hold that cash management can be defined as “theories and methods for handling liquid capital”. According to liquidity management report 580, which Larsson discusses, cash management consists of e.g. handling liquid capital and cash flow. Larson holds that many organizations neglect their work with cash management. This neglect arises from the shortcoming of e.g. efficient payment routines and trade receivables. Larsson describes that these routines easily can be obsolete if organizations don’t focus enough on follow up and developing existing routines.
Trade receivables are a part of the work with cash management that ties up a considerable part of an organization’s working capital (Larsson, 2000). By improving and making their trade receivables routines more efficient, Larsson holds that organizations can free capital from trade receivables and thereby decrease their loss and interest cost. An organization can make their routines more efficient by controlling customers’ terms of payment, overdue routines and interest on overdue payment. In making time from sending out invoice to payment as short as possible. Terms of payment, overdue routines and invoice to payment can also be used as a mean of competition. Pindado (2001) argues that basic cash management refers to that part of the working capital that makes up the optimal level needed by a company treasury. However, if the profit opportunities available in the process of cash flow creation are to be maximized, this scope must be broadened to take in more operational decisions, since optimum cash levels are influenced by other factors outside the restrictive concept of “treasury”. Linking these concepts with the concepts of monetary theory reveals that the initial reasons for cash management were transaction and precaution, and those reasons were then joined by speculation, taking it closer to the overall concept of treasury management in the broad sense of the term (Maseda & Iturralde, 2001)
Cash management is identified as the efficient collection and payments of cash both inside the group and lo the third parties which should be a concern of the treasury departments. This treasury department is concerned with detail of receivables and payables, he also added that this treasury department is concerned with revising the policies of cash management in the firm and such policies include what should be the debt collection period, payment period, discount on receivables and how much surplus fund should be invested (JM Samuels, F.M Wiiker and RE Brayshar, 2000).In this study cash management will be characterized by transactional motive speculative and precautionary motive.
Different corporate firms are ensuring appropriate cash management policies so as they achieve the desired levels of profits, as it is said to be their main objective (Torrins, 2007). If appropriate cash management policies are adopted by these corporate firms, there will be increased cash inflows, maintaining a cash flow in these firms and minimizing cash out flows, their profitability levels will easily be achieved (Ransom 2000). These have prompted the present researchers to carry out a study to evaluate the effectiveness of cash management and profitability of corporate firms using a case study of MTN Nigeria Limited.
1.2 Statement of the problem
Despite the fact that cash management in corporate firms involves managing monies to maximize cash availability and profitability which involves synchronization of business cash receipts perfectly with cash payments bearing abroad aspect of maximizing profits, corporate firms have failed to attain the desired levels of profitability (Van Horne, 2006) MTN Uganda limited is faced with a problem of delayed payment of workers as result of competition from other telecommunication companies and creditors auditor report (2010) which perhaps is caused by poor management of cash. Many firms are having negative cash flows which result into difficulties in funding firm’s commitments such as paying suppliers, meeting payroll demands and paying taxes. Holding inadequate amount of cash or cash equivalent interrupted the normal flow of most firm activities. There is also failure by most business firms to satisfy the precautionary motive. Holding cash for precautionary motive, assumes management, needs cash for emergency purposes when the cash flows are less than what is projected (Tobin, 2006). It may be difficult for firms to cover for any unexpected needs for cash by acting as a preventive balance. Moreover, due to inaccurate safety margins by many firms, they experience financial difficulties with organizations failing to take advantage of unexpected investment opportunities. It is also difficult for firms to satisfy the speculative motive. It’s upon this fact that the researcher has been propelled to carry out this research topic to ascertain the effect of cash management and profitability of corporate firms. This low profitability in these corporate firms may be attributed to inappropriate cash management policies adopted. If these firms do not adopt appropriate cash management policies, they are likely to collapse.