THE EFFECT OF IMPREST SYSTEM ON CASH MANAGEMENT

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CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

The Imprest System is an accounting system designed to track and document how cash is being spent. The most common example of an imprest system is the petty cash system. Cash is both a fundamental resource and the means by which the entity acquires other resources. To manage cash is to manage the entity’s ability to purchase assets, service debt, pay employees, and control operations. Thus, effective cash management directly correlates with the entity’s ability to realize its mission, goals, and objectives. The term cash management has been defined in different ways by different scholars. For instance, Barrett (1999) defines cash management as the series of processes used by an organization to obtain the maximum benefit from its flow of cash funds. Storkey (2003) defines cash management as having the right amount of money in the right place and time to meet the government’s obligations in the most cost-effective way.

The Chartered Institute of Management Accountant (CIMA, 2002) observed that, cash management is imperative in every business organization as cash is said to be the life blood of any business. No business operation is isolative of cash management (Abioro, 2013). The success of enterprises largely depends on a number of factors including sound cash management practices (Attom, 2014). The essence of cash management is to ensure positive cash flow for smooth business operation (Abioro, 2013). Barrett (1999) documents that the underlying objective of cash management is having enough cash available as and when it is needed, and that sound cash management involves better timing of expenditure decisions, earlier collection and banking of revenue, and more accurate forecasts of cash flows. This helps minimize the cost of any borrowing that is necessary and facilitates investing surplus funds to achieve the best return overall.

The Asian Banker Research (2011) documented that the main drivers for improving efficiency in cash handling are to minimize cost and increase security and therefore adequate forecasting is the key to minimize excess cash, but is also the most challenging task, as it is influenced by many variables. Moyer, Maguigan and Kretlow (2001) submit that effective cash management is particularly important for the following reasons: First, it assists in preparation of financial statement plan to support application for bank loans; secondly,