CASH MANAGEMENT AND PROFITABILITY OF CORPORATE FIRMS
ABSTRACT
The study was carried out to examine cash management towards profitability of corporate firms: A case study of MTN Uganda Limited Mbarara Branch in Mbarara District. The objectives of the study were; to assess the effectiveness of cash management policies of corporate firms, to analyze the motives of holding cash on profitability by corporate firms and to find the important relationship between cash management and profitability of corporate firms. Cross sectional research design was used to assess the effectiveness of cash management policies of corporate firms.
The sampling strategies that were used are simple random sampling and purposive sampling to select respondents who participated in the study. The sample was 35 respondents where 5 were administrators, 5 managers, 5 supervisors and 20 were other employees. Questionnaires as well as interview method was used to collect data from the respondents. Data was then organized according to different themes processed and calculated in percentages then presented in frequencies on different tables.
The study recommend that MTN (U) Limited Products management should embrace a ‘total cash management’ philosophy that is putting cash management at the heart of both business and Strategy development and the operational decision making. The company should actively consider ways of shortening the cash operating cycle to make the company more generative. A cost benefit analysis should be performed to determine whether it is worthwhile to employ more resources, additional staff or new plant to speed up the production process and shorten the cash operating cycle.
The study recommends that further area of research should be finding out Relationship between cash management towards performance of corporate firms and the contribution of working capital towards profitability.
CASH MANAGEMENT AND PROFITABILITY OF CORPORATE FIRMS
CHAPTER ONE
1.0 INTRODUCTION
This chapter presents the background of the study, statement of the problem, purpose of the study, objectives of the study, research questions, and scope of the study and significance of the study.
1.1 Background of the Study
This study was about cash management and profitability of firms. All over the world, various corporate firms highly recognized the importance of cash management since it helps in increasing profitability. If cash 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 transactionary motive is the need to hold cash to satisfy the normal disbursement and collection activities associated with the firm’s ongoing operation.
Many companies were having negative cash flows which result 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 by financial difficulties with organizations failing 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.
Most firms manage cash through the following processes; determine the appropriate cash balance which is the assessment of trade off between benefit and cost of liquidity, then the optimal amount of liquidity is determined and the surplus cash employed in short marketable securities for profit maximization (Westerfield, 2000).
The MTN Uganda Limited (MTN Group) was pleased to announce a sound performance, with 74. 1 million subscribers across its 21 operations as at 30 June 2008. This is a 53% increase in subscribers compared to the same period last year (June 2007:48,3 million). This is against the background of increased investment in infrastructure and distribution to cater for ever increasing demand. In the six months from 31 December 2007, the West and Central Africa (WECA) region increased its subscribers by 16%, to 32,5 million subscribers.
The South and East Africa (SEA) region increased its subscribers by 9% to 21,0 million subscribers, followed by the Middle East and North Africa (MENA) region which recorded 47% increase to 20,6 million subscribers. The growth in the MENA region was mainly driven by MTN Irancell, which recorded a sterling increase of 93% to 11,6 million subscribers from 31 December 2007. The Group’s profit after tax (PAT) increased by 11% to R7,0 billion compared to the six-month period ended 30 June 2007. (Copyright 2007 © Mobile Telephone Networks).
CASH MANAGEMENT AND PROFITABILITY OF CORPORATE FIRMS
According to Ranson (2005), defined cash 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.
Cash management is, 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 cash 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.
CASH MANAGEMENT AND PROFITABILITY OF CORPORATE FIRMS
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 Uganda Limited.
1.1 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.
CASH MANAGEMENT AND PROFITABILITY OF CORPORATE FIRMS
1.2 Purpose of the Study
The purpose of the study was to investigate the relationship between cash management and profitability of MTN Uganda limited in Mbarara municipality
1.3. Objectives of the study
This study was based on the following objectives;
- To assess the effectiveness of cash management policies of corporate firms.
- To analyze the motives of holding cash on profitability by corporate firms
- To find out the important relationship between cash management and profitability of corporate firms.
1.4 Research Questions
This research was guided the following research questions:
- What is the effectiveness of cash management policies of corporate firms?
- What are motives of holding cash on profitability by corporate firms?
- What is the important relationship between cash management and profitability of corporate firms?
1.5 Scope of the Study
1.5.1 Subject Scope
The study focused on; the effectiveness of cash management policies of corporate firm, to analyze the motives of holding cash on profitability by corporate firm and to find the important relationship between cash management and profitability of MTN Uganda limited on Mbarara High Street in Mbarara Municipality.. This will provide reliable information for the study.
1.5.2 Geographical Scope
The area of the study was MTN Uganda Limited – Mbarara Shop which is located on high street of Mbarara – Kampala road in Mbarara Municipality- Mbarara district in western Uganda. Mbarara District is bordered by Ibanda District to the north, Kiruhura District to the east, Isingiro District to the southeast, Ntungamo District to the southwest, Sheema District to the west and Buhweju District to the northwest. The district headquarters at Mbarara, the largest city in the sub-region, are located approximately 270 kilometres by road, southwest of Kampala, Uganda’s capital city, and largest metropolitan area. The coordinates of the district are:00 36S, 30 36E.
The name ‘Mbarara’ has its roots in the English Colonialist’s mispronunciation of the word ‘Mburara’a certain type of grass; a favorite for the cows. Mbarara was formerly the capital for the southern region. Mbarara is mainly divided in three divisions which are Kamukuzi, Nyamitanga and Kakoba. It is further sub-divided into six sub-divisions including Ruharo, Nyamitanga, Nyamityobora, Kamukuzi, Kakoba and Lutti. Mbarara has a number of streets which include Mbarara High Street (named after one of the town’s most prominent secondary schools, Mbaguta Street (named after a former prime minister of Ankole), Bishop Willis Street (named after Bishop Willis, one of the first whites to visit Ankole and Mbarara), Garage Street, Markhan Singh Street, Bulemba Road and Bucuku Street.
CASH MANAGEMENT AND PROFITABILITY OF CORPORATE FIRMS
1.5.3 Time Scope
This study covered the period between 2000 up to 2012 for provision of updated information. The area scope was limited to only MTN Uganda Limited Shop – Mbarara municipality to avoid too much complexity in research findings and also Mbarara municipality having many corporate firms that can enable access to the information needed by the researcher.
1.6 Significance of the Study
The study was very significant to the different stakeholders that include; management, the Researcher, Suppliers, Consumers and Government organizations in the following ways;
- To make the management know which policies of cash management to adopt in order to achieve the desired levels of profits in these corporate firms.
- The study findings were used by future researchers and academicians as they provide information to help them in their study especially in the same significance of
the study. - The study findings were of great benefits to the corporate firm’s management to broaden their knowledge on how profits are measured in these corporate firms.
1.7 Limitations of the study
The study involved the following constraints;
Time: The time allowed to do this research was not enough to allow exhaustive study and obtain all the essential information for much more suitable conclusions. The problem was minimized by putting much effort on this research so as to meet the deadline.
Financial Constraints: The Researcher was limited by financial resources such as the transport costs and stationery to carry out her research effectively. In an effort to mitigate this shortcoming, the researcher will source for funds from a few sponsors.
Slow or non- response: Since the researcher did not know the kind of respondents to deal with, some of them had failed to respond or delay to do so. The researcher made convenient appointments with the respondents and encouraged them to respond and give true information in time.
Due to the sensitivity of the study, the respondents refused to give some data to the researcher citing the reasons behind the study. The researcher however overcame this by showing an introductory letter acquired from the faculty fully explaining the purpose of the research. The researcher also assured respondents that their ideas were treated with utmost confidentiality.
Bureaucracy delayed the study. From all the procedures, getting data from management take time. However, the researcher will take time and appeal to the bureaucrats for data.
The limitation of the research was lack of primary data collection due to difficulty in getting appointment with senior top officials in MTN Uganda Limited of Mbarara area.
Time and resources constraints restricted the scope of the research. Despite the researcher effort to expand the scope of the research by getting into more in-depth study of cash management, it did not materialize due to the practical difficulties faced during the work.
