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The Impact Of Cash Management On The Financial Performance Of Listed Agriculture Firms In Nigeria

CHAPTER ONE

INTRODUCTION

1.1       Background of the study

Cash management involves the process of cash collection, monitoring of cash and its application in investment activities. It is one of the key element for ensuring a company’s financial stability and solvency (Hansen, 2005). It is worthy noting that any business entity, having the objective of maximizing on the profits must always want to acquire the necessary resources for the operation not. These resources needed are limited by ownership of the firms and supply. Money needed for any investment opportunities is also scarce and can only be availed because it was withheld from consumption.

Hutchison (2007) defines cash management as the process which involves the collection and management of cash to ensure optimal cash balances by the business entities. The management of cash focuses at ensuring adequate cash is maintained by the business entities and any surplus is put into the correct use. Business entities have the duty of ensuring that the entities don’t overuse overdrafts as the means of finance. When business entities over apply the overdraft facility ,they can make high returns but still struggle with maintaining adequate cash flows due to the following, making losses, seasonal businesses, delay from the length of credit given to customers and avoidable delays caused by poor administration such as failure to notify the involving department that goods have been dispatched for them to invoice or cheques from debtors being made out incorrectly because invoices do not contain clear information(Hutchison, 2007).

Cash management entails cash forecasting. If entities know their demand for cash in the future, it is possible for any business entity to estimate the demand for cash at any point in time. Due to the uncertainty involved, determining the level of liquidity entails the forecasting of short term and long-term cash demands with reference to investment by the firms, their marketing demands and production activities. Cash forecast. Nevertheless, cash budgets are the best tools for the ongoing WC requirements. It is therefore advisable for the financial controller to carry out the cash forecasts on daily, weekly or monthly basis depending on how busy the entity is (Hutchison, 2007).

Cash management has acquired a global concern in recent years. According to economist John Keynes (1990) business entities hold cash because of the following reasons. Transaction motive implies that persons hold cash for the payment of the normal day-to-day transactions, precautionary motive which means that people will hold cash to cater for any emergencies that may arise and speculative motives which means that persons have expectations that at a future date the cost of some of their inputs may be low. They therefore set some money aside to take advantage of the low price and acquire bulk of the same for use or disposal when prices escalate. In summary, this motive entails holding cash to meet some planned expenditure.

It is unrealistic to suppose that every business payment bill will go through the bank account. When the firm has determined its future cash needs, it is prudent to plan their financing so as to gain control over it. If the shortage of cash is persistent, it indicates a state of under-capitalisation and the need for additional permanent capital; and unless this is obtained the entity may be forced out of business (Flick, 1998). According to the free cash flow theory of cash management (Huseyin, 1991), the management has the responsibility of holding cash to gain control over it in making investment decisions which can affect a business entity. Therefore, this will improve the financial performance of the business entities.

The objective of the cash management is to ensure the financial health of business entities in the agricultural sector which will ultimately improve the profitability for the shareholders. This can be achieved by ensuring that finance is available when needed since liquidity is the lifeblood of any business entity. According to Miller –Orr model approach (Miller and Orr, 1961), business entities should always maintain the optimal cash balances; and in case of any cash crisis the business entity should reverse past investment decisions by diverting from activities which are not key.

 

1.2       Statement of the problem

Cash management is an increasing trend in Nigeria due to the benefits associated with it. Many corporate bodies in Nigeria have adopted cash management models which are aimed at ensuring efficient cash management which will translate to improved financial performance for the stakeholders in the industry. Several studies have been carried out in cash management, Mose (2006) researched on the effect of cash management on the financial performance of insurance sector in Nigeria between 2013 to 2015. The population of study was 37 insurance companies in Nigeria. However, a sample of 16 insurance firms was selected for the study. He used the primary data which was obtained using the questionnaires. ANOVA and simple regression model was employed in the analysis. He concluded that good cash management practices enhanced accountability have improved financial performance.

Cash management represents an important component of working capital management (Akinyomi & Tasie, 2011; Malik, Waseem & Kifayat, 2011). Literature revealed that several studies on working capital management have been conducted both in the advanced market economies and developing economies (Wongthatsanekorn, 2010; Abbasi & Bosra, 2012). These studies have reported the relationship between working capital management and financial performance (Hutchison, Farris II and Anders, 2007; Akinyomi & Tasie, 2011). However, till date, only limited studies have investigated the relationship between cash management and financial performance especially in the context of developing economies (Raheman & Nasr, 2007). Peavler (2009) observed that most failed businesses (up to sixty percent) were of the opinion that all or most of their failures were due to cash flow problems. Thus the relationship that exists between cash management and organizational performance in Nigeria remains unresolved and called for investigation.

 

1.3       Objectives of the study

The main objective of the study is to examine the impact of cash management on the financial performance of listed agriculture firms in Nigeria.

  1. Examine the relationship between cash management and return on assets of listed agricultural firms in Nigeria.
  2. Investigate the relationship between cash management and return on equity in listed agricultural firms in Nigeria.
  3. To investigate on the factors affecting profitability of the listed agricultural firms in Nigeria

 

1.4       Research question

In order to achieve the objective of this study, the following research question has been posed:

  1. What is the relationship between cash management and return on assets of listed agricultural firms in Nigeria?
  2. What is the relationship between cash management and return on equity in listed agricultural firms in Nigeria?
  3. What are the factors affecting the profitability of the listed agricultural firms in Nigeria in Nigeria?

 

1.5       Hypothesis of the study

HO1: There is no relationship between cash management and return on assets of listed agricultural firms in Nigeria.

HO2: There is no relationship between cash management and return on equity in listed agricultural firms in Nigeria.

HO3: There is no factors affecting the profitability of the listed agricultural firms in Nigeria in Nigeria

 

1.6       Significance of the study

In recent time due to changes in business generally, greater emphasis have been placed on cash management. The important of this study is that it will highlight the consequences of not having and operating an efficient cash management system in business organizations. The research work will also expose the management of manufacturing organization to effective way to manage cash towards the achievement of organizational goals and enhance profitability.

Companies will greatly gain from the need for cash management since cash management is a key determinant of the success or failure of any business entity. Therefore, the management are able to determine best cash management strategies. For example the use of cash conversion cycle theory which proposes that the shorter the cash conversion cycle, it implies that the business organization needs few resources to operate.

It will act as a basis for making investment decisions by investors. Investors will always want to invest in the companies with efficient cash management models in order to get the value for their money. Cash management practices are key to success or failure of any business entity. Good cash management practices contribute to improved financial performance.

 

1.7       Scope of the study

This study is carried out on the impact of cash management on the financial performance of listed agriculture firms in Nigeria.

 

1.8       Limitation of study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, statistical bulletin).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

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