CHAPTER ONE
INTRODUCTION
1.1 Background to The Study
Cash management of a firm, which deals with the management of current assets and current liabilities, has been recognized as an important area in financial management. Cash (WC) refers to the firm’s investment in short-term assets. Pandey, (2005) classified Cash into gross and net concepts. He defined gross Cash as the firm’s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and these include; cash, short-term securities, debtors, bills receivables and stocks. He described net Cash as the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year. These include trade creditors, bills payable, bank overdraft and short- term loan. Home van, (2000) described Cash management as involving the administration of these assets namely cash, marketable securities, receivables and inventories and the administration of current liabilities.
Management of these short-term assets and liabilities is important to the financial health of business of all sizes. This importance is hinged on the fact that the amounts invested in Cash are often high in proportion to the total assets employed and therefore warrants a careful investigation (Smith, 1980). Cash therefore, should neither be more nor less, but just adequate for the smooth running of a firm. While excess amount of Cash results in the reduction of firm’s profitability, holding of inadequate amount of it leads to lower levels of the firm’s liquidity and stock outs resulting in difficulties in maintaining smooth operation (Krueger, 2002).
Business success, therefore, heavily depends on the ability of the financial managers to effectively manage accounts receivable, inventory and account payable (which are component of Cash) (Filbeck and Krueger, 2005).
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