CHAPTER ONE
INTRODUCTION
1.1 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 correct 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 inefficiencies 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.
1.2 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
1.3 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: The magnitude to which cash and collectibles bear to the firm’s total working capital 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. 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. To assess the adequacy of cash and credit management policies of the case study 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 o insolvency and eventual liquidation.
