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IMPACT OF CASH
MANAGEMENT ON COMPANY’S SURVIVAL
A Case Study of the
Nigeria Bottling Company
ABSTRACTS
Nigeria Bottling
Company PLC (NBC), like any other organization requires adequate cash at all
times to meet different needs. Cash adequacy derived from the proper planning,
monitoring and control of its cash resources is vital for the smooth operation
of the organization. The planning, monitoring and control of cash resources are
quiet important when we have to consider the topic of the research work under
review, the effectiveness of which is crucial to the attainment of the set
objectives and survival of the company. Poor cash management has some negative
implications for the firm with regards to such factors as the disruption of
production activities and diminishing profit.
It is on this premise
that this study is aimed at evaluating the effectiveness of the cash management
efforts of NBC PLC and also to validate the long established theory by
economists that profitability has a significant impact on company’s survival.
The study comprise of
five chapters. The chapter one is about the background information, defines the
problem the study was aimed to address and states the objectives, relevance,
scope, limitation and hypothesis. Chapter two focused on the relevant
literature on cash management. Chapter three reviewed the research methodology
adopted in the study. Data collected through different means are presented and
analyzed in chapter four including the test of hypothesis. In Chapter five, we
evaluated our findings, and made the due recommendations.
It is hoped however,
that the outcome of this study particularly the findings and recommendations
will be of benefit to companies that seek to improve on their cash management
activities.
TABLE OF CONTENTS
Title
Table of Contents
CHAPTER ONE
1.1
Preamble
1.2
Brief History of the Company
1.3
Statement of Problem
1.4
Objectives of the Study
1.5
Scope of the
Study
1.6
Research Methodology
1.7
Relevance of the
Study
1.8
Statement of Hypothesis
1.9
Limitation
1.10
Definition of some
Terms
CHAPTER TWO:
INTRODUCTION
2.1.1
Objectives of Cash
Management
2.1.2
Survival
2.2.
Functions of Cash
Management
2.3.
The Need to Manage
Cash
2.4.
Why Hold
Cash
2.5.
Pre-requisite for Effective Cash Management
2.6.
Process of Cash Management
2.7
Managing the Cash
Flows
2.8
Ascertainment of Minimum and Maximum
Cash
Holding
2.9
Investment of Excess or Idle Cash
2.10
Responsibility for Cash Management
2.11
Financial Ratios Associated with
Survival
2.12
Limitations of Financial
Ratio
CHAPTER THREE
3.1
Introduction
3.2
Research Sampling
3.3
Source of Data
3.4
Data Analysis
CHAPTER FOUR: DATA
PRESENTATION AND ANALYSIS
4.1
Data Presentation
4.2
Test of Hypothesis
4.3
Evaluating the Effectiveness and Efficiency of
Cash Management
CHAPTER
FIVE: FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1
Findings
5.2
Recommendations
5.3
Conclusion
Bibliography
Appendix
CHAPTER ONE
1.1
PREAMBLE
The efficient and
effective utilization of the resources of an organization is important if such
an organization is to achieve its set goals and objectives. As it is the case
that resources are known to be scarce relative to demand, organizations and indeed
all consumers strive to maximize the benefits that can be derived from the
usage of the resources. Thus, organizations manage key resources required in
their day-to-day operations to ensure ready availability, proper utilization
and avoidance of waste. Cash is one of such resources that has to be handled
adequately if organizational activities are to be carried out without
disruptions.
Cash is the money
which a firm holds to operate its business and also to meet its obligations as
they fall due. Cash includes coins, money in an organization’s bank account as
well as cheque. Non availability of cash and its components simply implies that
there is no cash. It is the most liquid, significant current asset and also the
basic liquid, significant current asset and also the basic input that an
organization needs to keep the business running on a continuous basis. It
determines the survival of an organization. Practically, companies do go
bankrupt and sometimes even go out of business not because they are not making
profit but rather as a result of non availability of cash and/or its
components. Cash is however subject to more frequent changes than any other
assets and therefore poses more problems of control. Hence, the need for
effective and efficient cash management especially in this period of inflation
to ensure survival.
Cash management has
to do with “managing the monies of the firm in order to attain maximum cash
availability and invest idle funds” – Van Horn (1983:356). Cash management
activity is usually carried out by the treasures office. It involves the
management of cash flows into and out of the firm, cash flows within the firm
and cash balances held by the firm at any point in time by financing deficit on
investing surplus fund. Hence cash planning and control as well its effect on
the organization’s survival is an important issue to almost any type of
organization.
The ideal cash
management system will depend on the firm’s products, competition,
organizational structure and options available.
It is pertinent to
state at this juncture that cash could be held for precautionary motive,
speculative motive and transactionary motive. The main objective of cash
management is to maintain adequate control over cash position, to keep the
business sufficiently liquid and to use excess cash in some profitable venture.
Alternatively, the aim of cash management is to ensure that just the right
amount of cash is held at any particular time to meet its various usages.
Thus a firm should
emphasize efficiency in the management of cash so as to overcome the difficulty
in the economy which now prevail in Nigeria in particular and the developing
countries in general.
1.2
BRIEF HISTORY OF THE COMPANY
The Nigerian Bottling Company (NBC) Plc
was registered in 1953 and had its first plant in Nigeria in Lagos precisely at
Oyingbo, Ebute-Metta, which is where we now have Mainland Hotel. The need for
more markets for their products which would invariably lead to more profit, raw
materials and exchange of technical know-how by Leventis Group in London which
lead to the creation of a Bottling Company in Nigeria which was to be called
Nigerian Bottling Company (NBC). The Nigerian Bottling Company is the largest
group in the private sector in terms of size and geographical spread of
operations. Its main objective is to make profit which can only be achieved by
making the products available in large quantities.
1.2.1
Production and Marketing Activities of the Company
Nigerian Bottling Company is Nigeria’s
number one bottler and manufacturer of soft drinks. Its brands include Fanta,
Sprite, Bitter Lemon, Fanta Lemon, Coca-Cola, Fanta Apple, Eva Table Water,
Linger Ale, Fanta Tonic, Fanta Soda, five Alive etc. Although NBC Plc has
stopped the production of some of these brands.
The major raw
materials used by NBC Plc are carbonated water, sugar, phosphoric acid, sodium
benzoate, caramel colour, flavouring, ascorbic acid, sunset yellow etc some of
these materials are imported.
The company has
production stages ranging from sorting, washing, inspecting bottles to the
production of syrup, warehousing and dispatching of the products to the
consumers. NBC Plc is the only bottler of Coca-Cola products in Nigeria and one
of the largest in the world. It is also the largest manufacturer of
carbon-dioxide (Co2) used to carbonate the favourite soft drinks.
The taste and quality
of these products are the same all over the world. Nigerian Bottling Company
(NBC) Plc is a market leader in the soft drink industry.
1.3
STATEMENT OF PROBLEM
It is almost impossible to have a
manufacturing concern that does not encounter cash problem. This problems are
aggravated today in Nigeria by the economic crisis and various government
policies which directly or indirectly affect the cash that a firm holds at any
point in time. This makes it mandatory for firms to manage their cash
efficiently to ensure an optimal level of cash.
Firms are always
faced with the problem of how much cash to hold in a particular period and when
to hold small or large amount of cash. This however, is as a result of the fact
that holding too much cash makes the organization loose the profit that would
have accrued if such excess cash was invested. Similarly, insufficient cash can
disrupt the activities of the firm. It is in light of this that the study is
being carried out to strike a balance between holding too little cash and
holding too large amount of cash, in other words we are trying to determine the
optimum cash balance or level which is the point where cash management is
efficient.
Following from the
above the study seeks to answer the following questions.
1.
What is the cash policy of Nigeria Bottling Company (NBC) Plc.
2.
Is there an optimal cash level?
3.
Does this optimal cash level ensure profitability of companies?
1.4
OBJECTIVES OF THE STUDY
As it was mentioned earlier, the
business environment is quite dynamic. The success or failure of any firm
depends to a large extent on the cash position of the organization. Since it is
true that the importance of cash cannot be over-emphasized as cash is used to
meet obligations as they fall due and also transact business on a day-to-day
basis.
The objectives of
this study therefore are
a.
To draw conclusion and make recommendations for improvement on the company’s
cash management where necessary.
b.
To determine whether there is a relationship between profitability and survival
of the business.
c.
To determine whether there is any relationship between liquidity and survival
of the business.
d.
To establish and evaluate the efficiency and effectiveness of cash management
in the organization.
e.
To assist management in establishing the optimum cash balance because it is the
point where cash management is efficient.
1.5
SCOPE OF THE STUDY
As a result of the limited time
available for this research work and the insufficient fund at the disposal of
the researcher, this study will cover relevant literature on cash management
with the aim of determining its relevance to the survival of the organization.
The evaluation of
cash management using Nigeria Bottling Company Plc as a case study in order to
validate the theory that the level of survival of a company depends largely on
the effectiveness and efficiency of the management of cash.
1.6
RESEARCH METHODOLOGY
The study utilizes questionnaire
designed to collect necessary information with respect to cash system in the
company, the questionnaire is also designed to obtain information that cannot
be disclosed in the financial reports.
Oral interview will
be conducted with top management staff of the organization.
Secondary data
will be used to obtain information from the company’s books in relevant areas,
records, library and journals.
RELEVANCE OF THE
STUDY
A good number of organizations in
Nigeria are currently passing through a period of economic recession as a
result of the inflationary trend and particularly too, as a result of cash
mismanagement or misappropriation of funds within such organization. In an
attempt to restore their survival, this study is conducted to examine benefits
of
1.
Potential investors who are those capable of putting money for profit into any
enterprise, therefore such investors want to be sure that there is proper
management of cash in the organization before they invest their money in such
organization.
2.
Creditors are those who have provided loan capital, credit facilities and goods
to the company with the understanding that payment will be deferred to a future
date, they want to be sure that the company is liquid enough to meet its short
term obligations and still have enough cash to continue in operation.
3.
The government needs to know the financial position of the organization for tax
purpose, that is to assess the tax liability of the company.
4.
Investors are concerned with the value of their investment and the income
derivable from the investment.
5.
Employees of the company need to know how efficiently and effectively the
financial resources of the company is being managed to assess the level of job
security as well as their pay.
6.
The public needs to know also how the impact of management of cash resources of
an organization is managed so as to be able to improve on the conditions of the
immediate environment where the company operates.
1.7
STATEMENT OF HYPOTHESIS
In the course of this study the
following hypothesis have been formulated.
Hypothesis
That there is no positive relationship
between profitability/liquidity and survival of a company.
That there is a positive relationship
between profitability/liquidity and survival of a company.
1.8
DEFINITION OF SOME TERMS
Cash
- This is the standard medium of exchange and it
provides the basis for measuring all other items. Cash consist of currency
(bank notes and coins) and bank account balances, etc.
Cash
Management: This is the
critical task of deciding the volume of funds and the speed with which they
travel through the system.
Survival
- This relates to the
ability of an organization to earn returns on resources or assets invested and
ability to honour its debt obligations as they fall due.
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