CHAPTER ONE
INTRODUCTION
1.
General introduction and
background of the study
The management of an organization’s capital relates
to the finance and investment of non-human resources, that is, physical and
monetary assets, for the purpose of maximum benefit in terms of
profitability. According to Frear (1980)
profitability is determined in part by the way in which a company manages its
working capital elements, especially the company’s management policies in
respect of cash and account receivable/payable.
Basically, there would be a drop in profit if the basic element of
working capital were raised without a corresponding rise introduction or
margins. So one of the principal functions of a financial manager is to provide
the arrect amount of each elements of working capital at the right time and in
the appropriate place to realize the greatest return on investment. A business
which is basically profitable in a capital intensive industry with high level
of inventory turnover but does not have an effective/efficient policies for
it's’ working capital constituents, especially cash, can easily be stopped by a
temporary set-back into liquidation because it has no room to maneuver. Traditionally, the users of accounting
information, especially the external users are interested in notions of
solvency and liquidity as criteria for assessing credit worthiness. In
recent years, cash and trade credit management has become the most
important sector of financial management in many trading and manufacturing
organizations. At one time, it was
possible for a business to survive without proper cash management policies as
well as lay down policies for accounts receivable (trade debtors) as long as it
was reasonably profitable. Accounting to
Bennel (1989) prior to 1970’s; trade credit was not a dominant feature of
conducting business and procurement of fund were largely easily were not
exploited to its fullest use. Today
however, this has not generally been the case and many highly profitable
companies have had liquidity. Problems
and some have gone into liquidations, largely because of lack of appropriate
cash and credit management policies/techniques.
In these circumstances, business executives now attach a high decree of
importance to the cash and accounts receivable management function. In large organizations, the financial
director or treasurer is usually in charge of the management of cash resources
and in introducing appropriate systems that will ensure adequate working flow
that enable the economy to remain liquid at all times. Illiquidity problems could be found in all
types of companies and not restricted to small inefficient firms. In some cases, large well known companies
have experiences illiquidity problems and in some few instances, liquidation
proceedings and eventual demise of such organizations. The current wave to distress in our financial
sectors (Banks and insurance companies) provides a good background to
illiquidity problems arising from inefficies in cash and credit management
policies in spite of their profitability.
Today, several of these institutions have been liquidated.
These developments have naturally had an effect on
credit and cash management policies and it is therefore considered to be
particularly important that the reasons behind these liquidity problems should
be appreciated; using Anambra motor company ltd – a manufacturing organization
as a case study. The choice of this
organization is the relevant, which cash and credit management policies bear to
its operation.
1.
Statement of the problem
Many profitable organizations are forced into
untimely liquidation, bankruptcy and experience work stoppages as a result of
strike action and consequently operate at losses not because the business is
not profitable but due to inefficient utilization of cash and other material
resources at its disposal. Moreover,
majority of business transactions are conducted credit basis and this has
always increased the volume of account receivable (debtor) and a substantial
amount of these receivable are lost daily through bad and doubtful debts. The resultant effect is that companies have
huge amount of its fund tied to un-collectables, hence a state of illiquidity
can arise. Therefore, the continued
existence of a firm/company, its survival and growth depends, among other
factors on how best the firm utilizes its available cash resources and the
efficient management of its collectable as the neglect of these highly
important core of management are could soon lead to a state of insolvency due
to illiquidity problems. The study is
therefore designed to evaluate the essence of efficient cash and credit
management policies existing in Anambra motor company limited
1.
Objective of study
Realizing the high rate of failed / distressed
organization in the financial sector and the manufacturing sectors of the
economy due to illiquidity and problems and the fact that factors responsible
for such distressed conditions had not been properly addressed, the specific
objectives of the study are to find out:
I.
The magnitude to which cash and collectibles bear to
the firm’s total working capital
II.
To
discuss as far as possible the extent to which improper management of cash
resources and accounts receivable can create illiquidity/ a state of insolvency
in a business outfit.
III. To
evaluate the extent to which an organization that requires regular use of cash
resources that can ensure regularity in its liquidity management through the
technique of cash flow budgeting.
IV. To
assess the adequacy of cash and credit management policies of the case study
V.
On the basis of the findings of the study, propose a
comprehensive and effective cash/credit policies (package) that would made for
an effective management of cash and account receivable as a way off insolvency and eventual liquidation.
1.
Research question
The following research questions have been designed
to address the detailed area of the study and will serve as a guide to the
researcher on the issue of the study.
I.
Why are most profitable organization experiencing
liquidity problems in spite of large turnover and better profit margin?
II.
Why is cash management an essential variable in
determining the continuous existence and growth of business organization?
III. What
are the techniques that can lead to efficient cash management?
IV. How
can a company achieve efficiency and effective collective of receivable.
V.
When should a company grant credit to its customers?
VI. What
are the likely consequences of refusing credit?
VII.
When should a company stop further credit facilities to
customers?
VIII.
What are the likely consequences of not collecting
receivables as at when due?
IX. How
can cash budgeting/ preparation of flow statements ensure adequate cash
availability to solve liquidity problems?
X.
What are the consequences of not using cash projections
techniques for cash planning and control?
XI. How
can a company determine the optimum cash balance to meet liquidity
requirements?
XII.
Should a company charge interest on over due accounts?
These and others are the area in which this study
intends to explore.
1.
Working hypothesis
According to Spiege (1972) “a research hypothesis is
an assumption, statement or suggestion
about the population under consideration”.
Omololaijie (1986) defined hypothesis as a suggested
investigation”
Consequently, the following hypothesis will be used
in this study:
1.
Illiquidity and insolvency is a result of bad credit
and cash management policies.
2.
Profitable
organizations do not face liquidity problems since they made huge amount of
profit
3.
liquidity problems are due to lack of cash planning and
budgeting system
4.
granting cash discount has no significant effect on the
ability of debtors to pay their debts.
1.
Significance of the study
This research project will be of great importance to
the company management and other corporate bodies as well as the general public
as investors. This way which this study has been planned and carried out will
offer enough information and explanation to all those engaged in the management
of an organization either as financial managers or financial controllers.
Furthermore, this study is expected to offer a
secondary source of data to many students/ researchers in the are of working
capital management.
1.
Scope and limitation of the
study
Osuala (1989) defined scope of study as those parts
of topic or problem that normally might be considered to be part of such but
which because of limitations of time, physical capacity or other reasons, the
researcher cannot or does not wish to include.”
Thus the researcher had to restrict himself to a particular area of
concentration and specific period of time.
The
scope of this study is limited to cash and credit management policies for
improved liquidity in an organization with particular reference to Anambra
motor manufacturing company ltd. The
researcher will only decree on the design of effective cash and credit policies
through cash budgeting techniques and efficient collection procedures for
bailing out companies in the web of Illiquidity/liquidation.
It is
also necessary to state the scope of the study was limited to Enugu environment
due to time, financial and other constraints which inhibit the researcher’s
scope of activities in this field.
Unwillingness/unco-operative posture of some respondents also affected
the scope of this study.
1.
Historical Background of
Anammco
Daimler Ben A.G of Germany, the parent company of
ANAMMCO LTD started its export to Nigeria since 1952. Mercedes – Benz commercial vehicles have been
successfully marketed throughout Nigeria since then utilizing a distributive
network, which has particularly laid
emphasis on services this brand of vehicles had been made market lender in the
country through imports.
The then federal military government of murtal
/Obasanjo came up with the bold plan of negotiating a joint venture association
with other manufacturers of commercial vehicles in Nigeria. The series of negotiations evolved into
signing of partnership agreement between the federal military government and
the Daimler Benz AG of Germany was thus incorporated as a private limited
liability company with an authorized share capital of N7000,000 (seven million
Naira) on 17th January, 1977 to carry out the terms of agreement. The then military governor, vol. John Atom
Kpera, then laid the foundation stone of the company, in the then Anambra state
on 12th may 1978. The official
commissioning of the plant was later performed on 8th July, 1980 by the then
president of the federal republic of Nigeria, Alhaji shehu shagari