Chapter 4: Analysis and Findings
Analysis and Findings
Given the survey responses, the following is the presentation as well as interpretation of the results regarding the expenditure and cash management services as well as payment methods. The survey results from the 30 respondents are presented in graphs and tables indicating the company’s efficiency regarding the application of strategies and various approaches. That is then used as a guide to where it needs to enhance the management.
Challenges:
There are numerous challenges that business faces in cash and expenditure management. In that respect, the company’s challenges can be summarized as follows.
The rise in interest rates has been identified as the key challenge in the business management of the cash. That is given the current environment and could be associated with the effect that the rise has in increasing the interest expense burden. Other key challenges include the staff shortage that could affect the supervision of the cash management operations. Further, the business also faces challenges from the cash flow issues given that they have a substantial impact on the availability of cash to address the short-term obligations. However, the business does not identify the raising of capital and increasing operational costs as being among its cash management challenges. That could owe to possible efficiency in identifying suitable financing sources and management of the expenses.
Time to receive payments:
Time taken to receive payments is a good indicator of the management’s efficiency in managing the business cash. With that, the business, efficiency can be summarized by the following data.
Given the responses, the business is effective in managing its receivables collection given that the time taken to receive the payments is minimal. That is given the results indication that the payments are mainly received within a month of the sales.
Effect of payments delay:
Payments delays have varying implications on the business performance and efficiency. That is given that role that the cash plays in the business. With that, the key effects for the business can be summarized as follows.
In line with cash management principles that indicated that delayed payment receipts increases the burden regarding the business ability to meet its obligations, the respondents find the delayed payments to have a substantial impact on the company’s ability to pay its suppliers as well as the pressure on the cash flow that is key in maintaining sound liquidity level. Also, the delayed receipts have been noted to have an impact on the ability to pay employees.
Strategies to reduce operating expenses:
Effective cash management is dependent on the strategies that the management applies in managing the operating expenses. With that, the management’s efficiency can be summarized by the following strategies application.
Given the survey response, the most prevalent strategies that the company’s management applies in the management of the operating expenses are the use of business services as well as the use of cheap supplies. That could be because of the services and suppliers are normally key expense centers for a business and a focus on their cost management is perceived as a key to substantial expense reduction. Also, the business applies cost control measures. However, the business does not apply cuts on costs that could affect its employees and management's efficiency such as the cut on business trips and employees pay. Also, the business is indicated as not key in considering layoffs as a means of cutting the operational costs. That could be an indication of the management’s focus on morale enhancement given business sustainability.
Time spent by management in managing expenses:
The time that the management spends on various aspects management determines its efficiency and is a good measure of its priorities. With that, the company’s management concern with the cash and expenditure management can be summarized by the following data.
Although it is crucial for management to spend time on expense management, much time could indicate inefficacy and could mean that the management is focusing less on other key areas. With that and considering that the business’ management is identified to spend mainly about one to three days in the expense management, the company can be said to be relatively effective in the cash management and allocation of the management resources to that effect.
Payment methods
Common method for paying suppliers:
There are various methods that a business can apply in making payments for its supplies. Some of them are more effective while some can be considered as inefficient. With that, the following data can summarize the business efficiency in the payments management.
Given the survey response, the business is indicated as being still focused on the application of the traditional payment methods about its supplies. That is given the results indication that check payments are the most common. With that, the business would need to enhance its expenditure as well as cash management with application of more advanced methods that could mean efficient payments at low cost.
Cash balance management method used:
Various models have varying effectiveness in managing the cash balance. With that, the following data summarizing the company’s application of the models indicates its efficiency in cash management.
Given the survey response, the most common cash balance management model that the business applies is the Miller-Or model that was developed by Miller and Orr (1966), followed by the Beranek model. That shows the preference for mixed models application by the management as Archers model is also applied but has the least application. However, the business does not apply the Baumol model being an indication of the preference for the most effective balance management approaches given the literature finding that the Baumol Cash Management Model is mainly useful in determining a firm’s optimum cash balance under certainty whereas the firm operates under uncertainty (Baumol, 1952).
Existing policies for maintaining cash balance:
Effective cash management requires a business to have in place policies that can address the cash balance issues. That is given the need for maintaining a suitable cash level that does not limit the business ability to maximize on available opportunities as well as that which does not have a negative impact about the liquidity issue. Further, the policies should be well communicated and understood across all levels of management. With that, the following survey finding summarizes the company’s efficiency in cash management policies application.
The fact that there are policies on issues such as liquidity is an indication of management effort towards cash management. However, there is an indication of poor communication of the policies given that the policies may have not been heard or applied at some senior management level as well as by supervisors and the junior staff. That is an indication of a need for better policy communication that could enhance understanding of responsibilities that each person has regarding the cash and expenditure management.
In summary, the survey findings show that the company’s management has made an effort in cash and expenditure management but needs to enhance that by addressing key issues such as poor communication of the management policies.
Net Cash flow
According to Noor, Nour, Musa, and Zorgan, (2012), the cash flow statements plays a crucial role in liquidity management. That is because maintaining a positive and improving net cash-flow is desirable for a business and the company’s trend over the past five years is summarized as follows.
The net cash flow trend shows a fluctuation with improvement from 2010 to 2012 followed by a decrease that peaked in 2014. That is an indication of possible issues with the cash management. Thus, given the accounting theory, there should be the maintenance of a positive cash flow that exceeds the outflows (Noor et al, 2012).
Analysis of interviews with Senior Management (A.V.P, Budget Manager, Treasury Officer)
Cash balance policy
The business has policies regarding maintenance of cash balances. That is effective as liquidity can be easily managed. Its policy seeks to ensure that Cash balances are maintained at minimum balance given that excess cash earns the business nothing and loses the purchases power. Thus, the policies are key to the business maintenance of an efficient cash position (Davidson, 1992).
Cash management concept
All the key personnel in the finance including the AVP, treasury officer and the budget manager are conversant with the cash management concept. Thus, they identify with the literature review that cash management should maintain adequate liquidity position. That involves the methods of collecting as well as disbursing cash on timely basis (Lienert, 2009).
Cash management policy
Although the AVP and the treasury officer consider the UTC cash management policy to be effective the budget manager is not aware of its existence hence the need for better communication and training on the policies as a means of enhancing budgeting management that is key to the cash management concept.
Liquidity enhancement
There are also suitable measures to enhance liquidity being identified to include monitoring of cash balances, taking advantage of the vendor terms as well as utilization of credit as means of stretching the payback period. All the measures’ are in line with the literature review finding by Dalton, (2011) that a strong cash position can be a financing cushion against any unplanned expense that possibly affect the company’s liquidity position.
Liquidity management
There is also the need for better training on the roles and responsibilities of liquidity management given that the AVP, treasury officer and the budgeting manager have varying views regarding who should be responsible for the role.
Cash budgets
There is also the use of cash projections and budgets that the finance officers find to be effective in planning for the expected cash flow. That is an indication that the business has a roadmap that helps in decision making in line with the view of Chastain (2008), in the literature review.
Investments risk management
There are adequate policies guiding investments including liquidity parameters, investment guidelines as well as the application of procedures followed by the funds.
Thus, as the literature review by Dalton, (2011) indicates, there is a need for a process that involves the collection of cash, managing it, and investing it within or outside the business, the business seeks application of Cash management that is key to ensuring its financial stability as well as solvency.
Analysis of interviews with Accountant and Accounts Payable Supervisor
Organizational issues
Accounting function is organized vertically hence could limit the coordination and decision-making
Suitable order of reporting from the clerk to a supervisor to an accountant to AVP to the VP.
The management of activities is in order of importance with the high-risk activities being responsibility of the senior management
Involvement of adequate number and management level employees in each activity for accountability purpose
Have adequate policies, principles and procedures on approvals and limits that are key to risk management
There is appropriate job description
Accounts payables processing
Suitable payment procedures about discounts, receipting and prepayments as a means of ensuring effective cash management. Such include no prepayments, payments upon receipts and taking discounts.
Payables processing is done at a regular period of two weeks, but with an exception for statutory and urgent payments. That is crucial in avoiding conflicts with authorities as well as ensuring meeting of key obligations.
There is an integrated processing system for the payables that helps address issues of inappropriate payments with such cases like no offline manual payment
Vendor payment processing
The vendor payment processing is well organized with procedures on payments and authorizations.
There is also automation of the invoices as well as regular check on the payments in addition to the adequate provision of details on invoices being paid and the reconciliation of the vendor payments.
The payments are also well authenticated regarding the details and processing before the final payments are made.
However, there is a need for effective cost management regarding the knowledge on cost per payment of cycle that could be key to managing the vendors’ payments.
Thus, the vendors’ payment process is in line with the literature review finding as Cui, Hastak, and Halpin (2010) suggests that firms must adopt suitable strategies to pay their suppliers for the purpose of receiving discounts on material purchases.
Cash distribution processing
There is an effective system for vendors’ payments that ensures appropriate communication with the recipients. Vendors are also paid in time without slowing of the payments further to there being electronic transfers.
However, there is no regrouping of the payments regarding vendors and payments are made on a regular basis.
There is a need for establishing a system to identify the cost per disbursement as there is currently none. That would enhance cost management regarding the payments.
In summary, the cash disbursement is effective with an exception of the need to implement a cost evaluation system for each disbursement. Further, the effectiveness is demonstrated in the firm’s effective application of debt management to lengthen the time it takes to repay debts. That is in line with the literature review finding that indicates the need for negotiating a reduction the cash outflows as a means of postponing or reducing payment.
Record keeping and analysis
Appropriate records are kept for each payment
Only analyzes the processing errors while leaving the others that could expose the business to losses and fraud
Provides reports in standard software hence lacks customized reports
Use of SAP software and desktop that increases the data risk.
Ratios analysis
Finance rations covering various aspects from profitability, efficiency to liquidity are good indicators of the ability to manage a company’s resources including the cash. In that respect, the following profitability, liquidity and efficiency ratios summarize that efficiency.
The reliance on the revenue source is indicated to have had fluctuating trends with a general decrease in profitability towards the year 2014 from 2010; similar to the other profitability ratios. In that respect, although the business has had substantial profitability, it needs to apply effective measures to enhance and regain the profitability. That could include better assets allocation as well as expenses management.
Regarding the management’s efficiency, the following operational efficiency ratio shows the trend in the company’s asset management.
The general rise in the operating expense ratio is an indication of the decreasing efficiency in the management of expenses given the company’s revenues. With that, there is a need for better expense management that would enhance the business cash-flows.
Regarding the liquidity that refers to the ability to meet the business obligations, the following ratios summarize the management’s efficiency in cash management.
The general increase in the current ratio is an indication of improving liquidity for the business over the five years period. That could relate to the business suitable liquidity management policies such as policies on cash balances and investments as well as payments and receipts processing.
However, the business has had fluctuating working capital with an improvement from 2011 to 2012, but that is followed by a decrease in the capital. That is an indication of the business effort and challenge in ensuring adequate current assets while also ensuring that the assets are effectively allocated without unnecessary, redundant resources. Thus, the business should apply the standard ratios as means of evaluating how profitable it is as they provide information needed to support its strategic decisions (Wood and Sangster, 2012).
In that respect, the firm applies various cash management techniques of analysis for interpretation of its cash management including the cash budgeting, cash flow statement analysis and ratio analysis that are in line with the literature review finding by Ross (2000) as crucial tools.
Finally, the analysis of the company’s policies as well as the trends in the cash management measures indicate supports the literature and theory regarding the cash management. With that, in areas where policies and procedures are adequate, the business shows improvement and better performance. On the other hand, in cases where the policies and procedures are weak, the performance in cash management indicates a deteriorating trend. However, the key finding regarding the policies and procedures is that the business has them in place but are poorly communicated, hence a need for better communication and training on the same.
Reference list
Baumol, W. J., 1952. The Transactions Demand for Cash: An Inventory Theoretic Approach. Quarterly Journal of Economics, 66(4), 545-556.
Chastain, C., E., 2008. Integration of Cash Management. Journal Finance 29(6), pp 79-84.
Cui, Q., Hastak, M. & Halpin, D., 2010. Systems analysis of project cash flows management strategies.Construction Management and Economics, 28(4), 361-376.
Dalton, T., 2011. Cash Management: Making Your Business Cash-rich Without Breaking the Bank.1st Ed. London: A&C Black.
Davidson, E. R., 1992. Cash Traps, 3rd Ed. New York: Prentice Hall
Lienert, I., 2009. Modernizing Cash Management. Washington, D.C.: International Monetary Fund.
Miller H. and Orr D. 1966. A Model of the Demand for Money by Firms. The Quarterly Journal of Economics, 80(3), pp. 413-435.
Noor, M., I., Nour, A., Musa, S., & Zorgan, S., 2012. The Role of Cash Flow in Explaining the Change Liquidity. Advance Social Research Journal 2 (4), June 12 p. 234.
Ross, A., S., 2000. Fundamentals of Corporate Finance, 5th Edition. New York: McGraw-Hill.
Wood, F. & Sangster, A., 2012. Business Accounting. 12th Ed. New Jersey: Pearson Education.
