CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The managements of an organization capital relate 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 fear (1980) profitability is determine 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 or payable.
Basically, there would be a drop in profit if the basic elements of working capital were raised without a corresponding rise in production or margins. So one of the principle functions of a financial manager is to provide a correct (optimum) amount of each element 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 have an effective or efficient policy for its 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 organization. At one time, it was possible for a business to survive without proper cash management policies as well as lay down policies for accounts receivables (trade debtors) as long as it was reasonably profitable.
According to Bennel (1989),prior to 1970’s, trade credit was not a dominant feature of conducting business and procurement of fund, were largely easily obtained and cash flow projections or forecasting 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 or technique. In these circumstances business executives now attach a high degree of importance to the cash and accounts receivables 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 capital flow that enable the company 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 case, large well known companies have experienced illiquidity problems and in some few constant, liquidation proceedings and eventual demise of such organizations. The current wave of distress in our financial sector (Bank and insurance companies) provides a good back up to illiquidity problems arising from in efficiencies 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 liquidity problems should be appreciated, using united Bank for Africa plc Enugu and Nigerian Breweries plc Enugu as study of some selected companies. The choice of these organizations is the relevant which cash and credit management policies bear to its operations.
1.2 STATEMENT OF THE PROBLEM
Many profitable organization are forced into untimely liquidation ,bankrupt and experience work stoppages as a result of strike action and consequently operate at looses 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 transaction are conducted on credit basis and this has always increased the volume of account receivable (debtors) 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 uncollectable, hence a state of illiquidity can arise. Therefore, the continued existence of a firm or company, its survival and growth depends among other factors on how best the firm utilizes it’s available cash resources and the efficient management of its collectables, as the neglect of these high important core of management area could soon lead to a sale of insolvency due to illiquidity problems.
This study is therefore designed to evaluate the essence of efficient cash and credit management policies existing in united Bank for Africa plc Enugu and Nigerian Breweries plc Enugu.
1.3 OBJECTIVES OF THE STUDY
Realizing the high rate of failed or distressed organization in the financial sector and the manufacturing sectors of the economy due to illiquidity problems and the factors responsible for such distressed conditions had not been properly addressed, the specific objective of the study are to find out:
(i) The percentage of cash and collectibles to the firm’s total working capital.
(ii)The extent to which improper management of cash resources and accounts receivables can create illiquidity or insolvency in a business outfit.
