EFFECT OF CASH CONVERSION CYCLE ON PROFITABILITY IN MTN AND GLOBACOM
ABSTRACT
This study was to examine the effect of cash conversion cycle on profitability in MTN and Globacom. To achieve this objective, three research questions were stated to guide this study. The data collected were analyzed using simple percentages and tables to analyze research questions. A structured questionnaire was used as the major instrument for data collection from the staff and management of MTN and Globacom Telecommunication firms. After the careful analysis of the data, the following findings were revealed that; there are effects of cash conversion cycle on profitability in telecommunication firms and cash conversion cycle plays a significant role in telecommunication firms. The study was concluded with some recommendations that the cash conversion cycle should be evaluated in relation to a firm’s maintenance of liquidity reserve investments, its availability of unused borrowing capacity, and potential volatility in the firm’s cash flows.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. The working capital is known as life giving force for any economic unit and its management is considered among the most important function of corporate management. Due to that, every organization whether, profit oriented or not, irrespective of size and nature of business, requires necessary amount of working of working capital (Achchuthan & Kajananthan, 2013). Working capital management is a simple and straight forward mechanism of ensuring the ability of the firm to fund the difference between the short term assets and short term liabilities (Kajananthan & Achchuthan, 2013). It deals with current assets and current liabilities. There are two basic ways to assess the working capital management of firms.
They are balance sheet concept and studying current assets and current liabilities. The Cash Conversion cycle measures the number of days between actual cash expenditures on purchase of raw materials and actual cash receipts from the sale of products or services (Eljelly, 2004). Since every corporate organization is extremely concerned about how to sustain and improve profitability, hence they have to keep an eye on the factors affecting the profitability. In this regard, liquidity management having its implications on risks and returns of the corporate organizations cannot be overlooked by these organizations and hence cash conversion cycle being indicator of the liquidity management needs to be explored as to how it may affect the profitability of the corporate units. Today due to changing world’s economy, advancement of technology and increased global competition among the companies, every company is striving to enhance their profits and for that companies are putting every effort to bring their cash conversion cycle at optimum level to increase profitability.
1.2 STATEMENT OF THE PROBLEM
In order to manage working capital efficiently, a firm has to be aware of how long it takes them, on average, to convert their goods and services into cash. This length of time is formally known as the Cash Conversion Cycle. In order to measure how well a firm manages its working capital, a financial performance metric called cash to cash cycle (abbreviated as CCC) which was developed by Richards and Laughlin (1980). This metric which basically indicates length of the period between paying suppliers and being paid by customers, has three determinants: days payable outstanding, days of inventory and days of receivable outstanding. The concept of cash conversion cycle is a basic financial concept.
It is a composite metric that has been described as “the average days required to turn a dollar invested in raw material into a dollar collected from a customer” (Stewart, 1995).
In another way, Cash conversion cycle is “the length of time a company’s cash is tied up in working capital before that money is finally returned when customers pay for the products sold or services rendered” (Churchill and Mullins, 2001). Cash conversion cycle is a unique financial performance metric that indicates how a firm is managing their capital across the supply chain.
The process for calculating cash-to-cash requires adding days of inventory plus days of accounts receivable and subtracting therefrom, the number of days of accounts payable. Therefore, Cash to Cash bridges material activities with suppliers, production operations, distribution functions, and outbound sales activities. The cash-to-cash metric is important for both accounting and supply chain management perspectives. It can be used for accounting purposes in the determination of firm liquidity and organizational valuation. A shorter Cash to cash cycle, implying that fewer days cash are tied up in working capital and not offset by “free” financing in the form of deferred payments, results in more liquidity for the firm (Soenen 1993). This study attempts to uncover the effect of this metric together with its variables on profitability in the listed information and telecommunication firms in Nigeria.
1.3 OBJECTIVES OF THE STUDY
The objectives of this study include the following:
1. To examine the effect of cash conversion cycle on profitability in telecommunication firms.
2. To examine the role of cash conversion cycle in telecommunication firms.
3. To determine problems confronting telecommunication firms in Nigeria.
4. To make useful recommendations based on the findings of this study.
1.4 RESEARCH QUESTIONS
The following research questions were stated to guide this study:
1. What is the effect of cash conversion cycle on profitability in telecommunication firms?
2. Does cash conversion cycle play any role in telecommunication firms?
3. Are there any problems confronting telecommunication firms in Nigeria?
1.5 SIGNIFICANCE OF THE STUDY
In this study, the researcher sets out to examine effect of cash conversion cycle on profitability in MTN and Globacom telecommunication firms. It would enable telecommunication firms to improve on the system of actual cash and expenditure where lapses are discovered to exist.
The study would also educate those who do not understand what expenditure control entails and also afford those charged with the responsibility of spending funds the opportunity to know if they observed the rules expenditure and hence appropriation of such expenditure.
This study will also help to serve as literature (reference source) to students, individuals, telecommunication sector or corporate bodies into what to carry out on further research on the similar topic.
1.6 SCOPE OF THE STUDY
The study concerns about the effect of cash conversion cycle on profitability in MTN and Globacom in telecommunication sector in Nigeria.
1.7 LIMITATION OF THE STUDY
The study limitation was inability of management of telecommunication to divulge certain information which they consider sensitive and fear of publication which might be detrimental to their operations.
Distance and its attendant cost of travel in order to obtain information which to write this study was also a major limitation. Another limitation to the study is short time factor which did not give time for thorough research work, hence gathering adequate information becomes very difficult.
Finally, lack of materials on the topic; this is new in the area of the effect of effect of cash conversion cycle on profitability in MTN and Globacom in telecommunication sector in Nigeria. Therefore, the researcher resolved to seek friendly approach in order to obtain the needed materials or information from the organization under study through the administration of questionnaire.
DEFINITION OF TERMS
a) Cash Management: Cash management is defined as a part of treasury management, which is defined as a part of the main responsibilities of the central finance management team. The specific tasks of a typical treasury function are cash management, risk management, hedging and insurance management, accounts receivable management, accounts payable management as well as bank relations.
b) Cash Conversion Cycle (CCC): The cash conversion cycle is a metric used to gauge the effectiveness of a company’s management and, consequently, the overall health of that company. The calculation measures how fast a company can convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash.
c) Profit: Profit is an absolute number determined by the amount of income or revenue above and beyond the costs or expenses a company incurs. It is calculated as total revenue minus total expenses and appears on a company’s income statement.
d) Profitability: Profitability is the ability of a business to earn a profit. It is also measured the income and expenses of an organization.
e) Communication: Communication is defined as the act of conveying intended meanings from one entity or group to another through the use of mutually understood signs and semiotic rules.
