Cash Management Summary

Abstract Cash management is one of the most important function in any organization. The main aim of any organization is to increase profits as well as maximize the wealth of the shareholders. The resultant cash should thus be managed in the best way possible. The following research paper will explore the various cash management theories that are employed in the Kenyan multinational companies whether and whether they have been effective or not. In addition the research paper will also provide informed recommendation on the cash management theories that the multinational companies should apply IntroductionCash management is very important in any organisation.

Broadly defined cash management refers to the collection, concentration, and disbursement of cash. The goal is to manage the cash balances of an enterprise in such a way as to maximize the availability of cash not invested in fixed assets or inventories and to do so in such a way as to avoid the risk of insolvency. Factors that are monitored as a part of cash management include a company’s level of liquidity, its management of cash balances, and its short-term investment strategies. Managing cash flow is the most important job of business managers.Efficient cash management processes are pre-requisites to execute payments, collect receivables and manage liquidity. Managing the channels of collections, payments and accounting information efficiently becomes imperative with growth in business transaction volumes.

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This includes enabling greater connectivity to internal corporate systems, expanding the scope of cash management services to include “full-cycle” or cash management services targeted at the needs of specific customer segments. Cost optimization and value-add services are customer demands that necessitate the creation of a mechanism to service the various customer groups.There are several cash management theories that organisation should use in order to be able to perform their tasks in a n effective manner.

Failure for an organisation to fully manage its cash properly may make the company to suffer some severe liquidity problems. Eventually it may lead to the company to fail or get into very high debts. During the recent financial recession many companies all over the world collapsed due to poor cash management strategies. A company should choose a cash management theory which it feels that it can easily use. In so doing the company does not risk losing a lot.

Background of the study The research will focus on the cash management theories that multinational companies in Kenya use. Different companies tend to use different theories in managing their cash. This is partly due to the nature of the company and the size of the company. For the sake of this research, five companies will be involved. These companies are 1. Nakumatt Nakumatt is a Kenyan supermarket chain. Nakumatt is an abbreviation for Nakuru Mattresses. As of November 2010[update], it has twenty-seven (27) stores across East Africa and employs over 4,000 people.

It has subsidiaries in Uganda, Rwanda and has plans to enter other East African countries. 2. East African Breweries East African Breweries Limited is a large East African brewing company which owns 80% of Kenya Breweries, 98. 2% of Uganda Breweries, 100% of Central Glass (a glass manufacturer), 100% of Kenya Maltings and 46% of United Distillers and Vintners (Kenya) Limited, 100% of Universal Distillers Uganda, 100% EABL International (responsible for exporting), 100% of East African Maltings, 100% EABL Foundation and 51% of Serengeti Breweries limited. 3. Nation media groupNation Media Group (abbreviated as NMG) is a Kenyan media group listed on the Nairobi Stock Exchange. NMG was founded by Aga Khan IV in 1959 and is the largest private media house in East and Central Africa with offices in Kenya, Uganda, and Tanzania. In 1999, NMG launched NTV, a news channel in Kenya, and Easy FM.

The group publishes The EastAfrican, Daily Nation (Kenya’s largest newspaper), The Business Daily, Daily Monitor, The Citizen, NMG Investor Briefing, Taifa Leo and Zuqka. NMG owns a 76. 5% stake in the Monitor newspapers & KFM (a leading FM station) in Uganda and 60% of the Mwananchi Communications Ltd in Tanzania.The two outfits have added a significant amount in the group’s revenue. 4. Kenya Commercial Bank Group Kenya Commercial Bank Group (KCB Group) is a financial services provider headquartered in Nairobi, Kenya. As of December 2010[update], it was among the three largest commercial banks in Kenya with assets of more than sh223 billion, and shareholders capital valued at sh40. 9 billion.

The other two are Barclays Bank Kenya and Standard Chartered Bank Kenya. The company has branches in Kenya, Burundi, Southern Sudan, Tanzania and Uganda. Statement of the problemIn the recent past many multinational companies have been forced to review the cash management theories that they use. This has partly been because of the global financial crisis that has hit the world. Many banks have seen a reduction in the profits that they make.

Many of clients of the multinational companies come from abroad. Due to the reduction of incomes of those individuals, the income of these banks has reduced. The following research paper will be very useful in establishing the cash management theories and whether they are effective or not.In addition, the research will be useful in giving the specific recommendations on what the cash model an organisation can use. Objective of the study The objective of the study is to establish the cash management theories that are used by the multinational companies in Kenya. In addition the research will also explore whether the companies have been able to use these cash management theories effectively.

The research paper will also give specific recommendations of the cash management theories that should be employed.Literature review Introduction. Cash management is a broad term that covers a number of functions that help individuals and businesses process receipts and payments in an organized and efficient manner. Administering cash assets today often makes use of a number of automated support services offered by banks and other financial institutions. The choice of cash management services ranges from simple checkbook balancing to investing cash in bonds and other types of securities to automated software that allows easy cash collection.When it comes to cash collections, there are a few popular options today that can make the process of receiving payments from customers much easier. Proper cash management and efficient financing are both important and beneficial to a company in order to maintain a competitive market share, which will increase profit potential and shareholder value through rising stock.

Cash management can be used to lower or eliminate idle cash balances that do not earn revenue, using the freed up cash as sources for financing through interest building securities.Financing allows a company to secure needed funds in order to meet production needs and gain maximum profitability. Profitability is the amount of money you expect to make if all customers paid on time and if your expenses were spread out evenly over the time period being measured.

However, it is not your day-to-day reality. Cash is what you must have to keep the doors of your business open. Over time, a company’s profits are of little value if they are not accompanied by positive net cash flow. You can’t spend profit; you can only spend cash. Cash Flow refers to the flow of cash into and out of a business over a period of time.According to (———) Cash management involves forecasting, receiving, controlling, disbursing, and investing funds from your company’s operations. Besides helping to improve liquidity and increase profits, effective cash management will:    increase cash inflow, reduce cash outflow and increase the yield on idle funds. an effective cash management system will enable you to stretch your business—and in many instances, increase your earnings.

In order to effectively manage cah in an organization, it is important to understand the financial statements and budgets.There are various ratios that can help in this process Accounts receivable turnover Accounts Receivable Turnover is a measure of the net sales for a fiscal reporting period and the average balance in accounts receivable. Accounts receivable turnover is a good indication of the average time needed to convert receivables into cash.

The calculation of accounts receivable turnover is: Net Sales on Credit / Average Receivables Average collection period Average collection period is The approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.It is calculated as Calculated as: [pic] Calculation of ratios helps a company to compare itself to industry norms, this helps it to review your policies and procedures to determine the effectiveness of cash management. FORECASTING CASH FLOW Cash flow forecasts provide important data for estimating cash requirements, or investing idle funds not needed for day-to-day transactions. A cash flow experts helps an organisation to develop cash flow forecasts using the following information: Cash on hand. This should be easily determined from the companies accounting records.

Expected cash receipts.These can be determined by estimating sales of goods or services, assets, and capital stock or securities. Expected cash disbursements. These can be determined by estimating the timing and amounts to be spent on operating costs, including: Payroll and employee benefits. Material and supply purchases, Taxes, dividends and interest, Debt payments, Capital acquisitions ENHANCING CASH FLOW Increasing the flow of cash that your business takes in requires a careful analysis of your billing and collection procedures.

Some points that can be considered include: Billing schedule. f for example the customers’ monthly statements are paid once per month, the cash manager should bill them at the time of the transaction Early payment discounts. if the customers are offered discounts for early payments then the cash management personnel can analyze discount policies to determine if they are effective in speeding up collections. Credit and collection procedures.

These procedures determine who should be given credit and how collections can be improved. The right personnel can be able to recommend credit-granting policies.They can also evaluate the cost-effectiveness of allowing customers to make payments using major credit cards, or of selling the accounts receivable to a third party.

Deposit of cash receipts. This determines the methods of depositing cash, whether by lockbox system or wire transfer. Qualified personnel in cash management can prepare a cost analysis to determine the cost-effectiveness of each method.

CONTROLLING CASH DISBURSEMENTS Controlling cash disbursements to improve the availability of cash is a major objective of cash management.Minimizing the effects of cash outflow requires timing payments to maximize your use of funds, while maintaining good vendor relations. This may result in reduced borrowing costs. In addition, reducing operating costs in certain areas can help minimize your expenditures.

It is important to determine when to make payments and it is possible to take advantage of early payment discounts. In addition the study of inventory and purchasing policies will help the managers to see if your company has maintained proper inventory levels, adopted the most cost-effective purchasing procedures, and determined the vendor with the most favorable terms.INVESTING CASH Investing your idle funds in appropriate vehicles earning interest or dividends may increase your company’s earnings or minimize tax liabilities. IMPROVING CASH MANAGEMENT Developing a cash management plan requires a complex analysis of your business’ policies and procedures. Because of their technical knowledge, training, and business experience, financial personnel are particularly qualified to assist businesses in improving their cash management functions.

They can analyze cash systems and make recommendations that will help you run your business more efficiently and profitably.In addition they should be able to review your current cash management system. Develop a budget, forecast cash flow, increase net cash inflow, decrease net cash outflow, select appropriate investments, Evaluate banking procedures, improve your billing and collection policies, analyze your inventory and purchasing practices, reduce borrowing costs and monitor managerial controls. By reviewing your cash management techniques, financial personnel may recommend changes for immediate implementation, or for future benefit—helping the organisation to fulfill whatever plans you may have for your business’ growth.Typically, the larger the business is, the more cash that it has to take care of on a day-to-day basis. In order to stay organized, these big businesses tend to employ banks to deal with their cash management.

When an organization is smaller or just starting out, it must have efficient cash-management techniques to ensure that it keeps track of its cash transactions According to ()some of the common cash management techniques will include Holding One cash management technique is holding, which means that a company holds on to cash and keeps it on hand or in a local bank account.This is one of the preferred methods for many companies since there are often many short-term transactions necessary. These expenses may include inventory, paying employees and taxes. When a company holds on to the cash that it receives from customers, it does not receive interest, but it does have security in case a last-second expense comes up. If a company holds a large-enough cash balance at a local bank, certain fees for bank services will be waived. Electronic Funds Transfer Due to the convenience of the Internet, many businesses use electronic funds transfer for their cash management.

Each sector of the business that receives cash can quickly move all of its excess cash to its main bank branch through these electronic transfers. One method of electronic funds transfer is called the automated clearinghouse, which immediately sends information from local accounts to the main account. Direct deposit for paying employees is one way that the automated clearinghouse works. Third-Party Collection In cash management the term for a delay of payment is known as a float. There are several different kinds including a mail float, processing float and a bank float.

These terms correspond with the delay of payment when arriving through the mail. To avoid these delays, some companies use a third-party collection service that is set up at the post offices near local branches of the company. This third-party service collects the payments mailed to that post office and deposits them so that these float delays can be avoided. Short-Term Investing If a company has enough cash on hand to pay for upcoming expenses, it may invest the excess cash in a short-term fund. These investments are often made in money-market securities that are built for the liquidity of short-term investing.They can make the company a small amount of money on their cash even when only invested for a month or two. A company that is well-versed in this type of investing can improve its cash flow drastically over time. Long term investing This is carried out by firms that have a relatively high cash flow.

Many large and multinational companies are involved in this form of cash management. Multinational companies make high profits and may find it unwise to hold the cash engage in short term lending. Long term investment enables companies to widen their portfolio as well as diversify risk.Effective cash management has enabled the multinational companies to stays in business both in good times and turbulent times. Analysis and interpretation Analysis and interpretation of Cash management in East Africa Breweries. As stated earlier, East African Breweries is the largest beer manufacturing company in East and Central Africa. In addition it is the second most profitable company from Safaricom.

Therefore, it has to use appropriate cash management methods. One of the greatest cash management theory that the company employs is the use of holding of cash technique.EABL is a company that experiences cash inflows and outflows at a very high rate. Being the number one manufacture and distribute of beer, the company has to make sure that it has a stable banks where it can store its cash and where the cash can be managed properly. Its main banks are Citibank and the Barclays bank. The banks, being multinational ones are very stable are at a very low risk of collapsing.

Another reason why the company uses these banks to manage its finances is their availability in most countries where it has branches. Barclays bank is located in Kenya, Uganda and Tanzania.On the other hand, Citibank is both in Kenya and Tanzania. In addition the company engages in various forms of investment. For example the company purchased the central glass company which specializes in the manufacture of glasses.

This was also seen by many as a cost cutting measure. In the past, the company used to tender the central glass company to process the beer glasses. However, after the purchase the company was able to do it on its own.

Saving their cash on the bank ensures that it is able to mitigate itself from any unprecedented occurrences.In addition to this the company is able to monitors it cash flow. This is done by the analysis of these accounts. Analysis and interpretation of Cash management in Nakumatt holdings As discussed earlier, Nakumatt is one of the leading chain retail stores in East African region. Therefore the company has to use elaborate and effective cash management theories to manage their cash. One of the greatest strategies that the company uses is through long term investment.

Nakumatt is one company that increasingly growing over the years.By the close of the 20th century, the company had only 5 stores, which were all located in Kenya. Today the company has 27 stores in Kenya, Uganda and Rwanda. The company sees an opportunity and takes it. Just recently, its strategy of cash management through long term investment enabled it to open a branch along Kiambu road, Nairobi.

In addition the company plans to increase the number of store in Rwanda and Uganda. in the recent past, the company has entered into talks with Tanzanian authorities to open a branch in the country. The managers of this chain of stores believe that long term nvestment is the best way to ensure that cash is effectively managed in addition this helps the company to diversify its portfolio which in turn helps it to reduce its risk. Analysis and interpretation of Cash management in Nation Media Group Nation Media Group, being the largest media group in East Africa, in terms of profitability, should have an elaborate method of cash management. The company has been able to use the electronic fund transfer method for cash management. The media house has several departments including radio, television, newspaper and online media.There are many short term transactions in each department.

For example in the Newspaper segment, there are many short term payments made in relation to advertising. The same case scenario applies to the television service where the segment receives dozens of advertisements per day. It is therefore important for the company to embrace electronic fund transfer method in managing cash. Each sector of the company that receives cash can quickly move all of its excess cash to its main bank branch through these electronic transfers. This has been greatly enhanced by the recent trends of the banks to go regional.

Therefore, the company is able to perform this function effectively. Each department has properly qualified personnel who help the cash management. They ensure that each and every coin that a department spends of gains is accounted for. The cash is then put in a common pool. This helps the company to determine its cash flow; whether negative or positive.

Analysis and interpretation of Cash management of Kenya Commercial Bank Group As discussed earlier, Kenya commercial banks is one of the largest bank in East Africa. Therefore the banks is likely to have a lot of cash at is disposal.One of the methods that the bank uses to manage its cash is through the use of holding technique.

The bank holds much of its cash in form of liquid money. The bank has very secure safes where it is sure that the money is safe and it can withdraw it time a need arises. Its is important to know understand that a bank is an institution that experiences rapid cash inflows and outflow.

Therefore it is important to have a place where it can easily access the cash. For safety purposes, the cash is stored in various branches across East Africa. This also mitigates it from such isks as theft, fire or any other natural calamities. In addition to this the company also makes some short term investment using the cash. For example the bank invests in some securities in the country that it operates. However the company does it very cautiously and ensures that it does not invest so much money in these securities. These two strategies have enabled the bank to manage its cash effectively.

Recommendation and conclusion As the analysis and interpretation of the data clearly shows, the multinational companies in Kenya have adopted clear theories for the management of their cash.Proper use of these strategies have enabled these companies to properly manage cash in their reserves. However, in the analysis, it is clear that only one company has embraced the use of electronic fund transfer. In the rapidly changing business environment, there is a need to embrace technology. Some of the strategies that the companies are using today may become absolete in the near future.

Electronic cash transfer reduces the risk assocatiated with money having to pass through various places before it reaches the required destination. Nakumatt uses the bulk of its cash in investment leaving very little cash at hand.However, it is important to save a bulk of the cash to mitigate the company against any unforeseen eventualities. The world we are living in is very unpredictable. Therefore, it is wise to put to save up money for such circumstances In conclusion, cash management is a very important practice in any organization. In multinational organization, this practice should be done in the most effective manner. Professionals in cash management should be hired to carry out this function. In so doing, organizations can be able to plan for the future with the properly managed cash.

Author: Glenn Jefferson


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