An Appraisal of Current Asset Management in Public Limited Liability Companies

 A Critical Appraisal of Current Asset Management in Public Limited Liability Companies

Literature review means forecasting reading, evaluation all available documents of written material port related to a given study or investigation. This will provide an understand of previous work that has been done in an area of investigation and will also help to correct the errors of mistake in the study.

For the purpose of this research work, the following literature will be considered:

  • Management of Cash
  • Inventory Management
  • Management of receivable and
  • Management of marketable Securities

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2.1     MANAGEMENT OF CASH:

Cash acclaimed the most important current assets and thus the management of cash require that prince statues.

According to Pogou (1917) he said that cash is the money, which a form can disburse immediately without any restrictions. It includes coins, currency and cheque, held by the firm and balance in the bank and sometimes non-cash claims like marketable securities. It also includes demanded deposit. Cash is the basic input and the ultimate output.

According to Keynes (1986) the Keynesians believed that cash is affected by interest rate. Nowadays, interest has been developed in cash management because of the following reason.

  • Prince importance of asset as an organization asset, the fact that each is the least production of all the assets rising interest rates on securities, which makes the opportunity cost of holding cash more expensive.
  • The trend in cash management s towards during cash to a minimum. The term should keep sufficient cash neither more nor less cash shortage will disrupt the firms manufacturing operation. While excess cash will simple remained idel, without contributing anything towards the firms profitability.

Generally when a firm has excess cash, it invest in marketable security, this kind of investment contributes to the profit of the form.

For the Purpose of cash management, the financial manager should be concerned with the management of:

(a)           Cash flows into and out of the firm

  • Cash within the firm
  • Cash balance held by the firm at the point in time.

Cash management is most important than other current asset because it is significant in the sense that it is used to meet the firm’s obligations.

Therefore an adequate cash position should be maintained to keep the firm sufficiently liquid.

However, for the purpose of management of cash, the manager would need to:

  • Identify the need to hold cash balance
  • The cost of holding cash balance
  • The cost of not holding cash balances
  • Merge the two set of cost.

2.2              THE NEED TO HOLD CASH BALANCES:

Here we consider the reasons for which organizations lend to hold cash. Generally, Kegness (1986) designated three motors for holding cash.

1,       For Transaction purposes:

Cash balance is held for the purpose of meeting planned expenditures on goods and services. Salaries and wages. This to finance regular expenditures.

2,       For Precautionary Purpose:

Thus the Keynesians assumes that there is need to keep money to meet unforeseen circumstances. So cash balance are held to meet unexpected demands and expenditures on the organization such as emergency repairs.

3,       For speculative Purposes:

This motives for holding cash balances assumes that profitable investment opportunities may arise unexpectedly and cash has to be available to take advantage of than (to hold as an asset)

A healthy cash flow is fundamental to the business ability to survive and prosper. Many companies with apparent large profit have wound up as a result of poor control over cash flows.

It is always difficult to predict cash flow account rately and cash inflows and out flows cannot be equated. Sometimes, cash out flows will exceed cash inflows because the company may make payment such as taxes, dividends etc.

Atimes, cash inflows will exceed cash sales and debtors may be realized too

To resolve this issue uncertainly of cash flow position, the firm should evolve some strategies for cash management.

  1. CASH PLANNING:

Through the cash budget the deficit of surplus is determined for each period.

  1. MANAGING THE CASH FLOWS:

Managing the cash flow properly involves accelerating the inflows and decelerating the out floes of cash.

  1. OPTIMUM CASH LEVEL:

The optimum level of cash balance should determine. To determine the optimum cash balance, the transitions cost of too small balance should be marched with the opportunity cost of too large balance.

  1. INVESTMENT IDLE CASH:

Idle cash is uninvested on short terms to earn profit All those will be discussed later in this chapter to hold such balances are advance as follows:

(i)      The inability to meet current obligation as they fall due. This could lead to loss of goodwill among supplier – and employees may demand greater rewards as compensation for the greater uncertainties.

This situation could lead to loss of credit rating and legal actions leading to termination of business.

(ii)     Profitable investment opportunities may be lost and the opportunity cost may also lost.

(iii)    When unexpected occurs, the cost associated with borrowing at short notice may be great, rate may be expensive and there may be no room for bargaining. However, there are also cost of holding cash balances, such cost are as follows:

  1. Idle cash balance earns nothing.   Holding them therefore means loosing returns that would have been earned if they were invested.
  1. Another major cost is associated with the loss in value of such cash balances especially in period of inflation.

Therefore, if there are cost either ways, what then should the financial manager do?

He has to balance the cost against each other and be to arrive at optional cash holding.

This is not a chance affair. It is a forward-looking management that forecasts the future. One technique that aids the financial manager in this regard is cash budgeting.

2.3     CASH PLANNING FORECASTING AND BUDGETING

It is possible that a firm may be making adequate profit, but may suffer from shortage of cash as its growing need may be consuming cash very fast.

The poor cash position of the firm may be corrected, if the cash needs are planned in advance. Atimes a firm may have exceed cash with it. If its cash inflow exceed cash outflow such exceed cash flows can be managed and properly invested if cash planning is carried out using some theories and principle of each flows.

Thus, Adibe (1995) said the theory of represent value states that an investment should be adopted only if the present value of cash it generates in the future exceed its cost ie if it has positive Npv.

If a firm uses some theories like the net present value (NPV) internal rate of return (IRR) in application of cash flows, investment and cash should properly be managed.

This article was extracted from a Project Research Work Topic

“A CRITICAL APPRAISAL OF CURRENT ASSET MANAGEMENT IN PUBLIC LIMITED LIABILITY COMPANIES”

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