PROJECT TOPIC- IMPACT OF CASHFLOW STATEMENT ON CORPORATE ORGANIZATION
This research work critically examines the impact of cash flow statement in an organization. The broad objective of this study is to examine the relationship between operating cash flows and corporate performance and also to examine the correlation between investing cash flows and corporate performance. The primary source of data collection was used in the study and data for the study were collected through the use of questionnaire. 60 questions were administered and fifty eight (58) were returned. The responses were then analyzed using the simple percentage method and the chi-square denote by a Greek symbol (X2) to test the hypothesis. The findings showed that there is a significant relationship between cash flow statement and corporate investment and that cashflow statement impact on organization performance. However, it was recommended that in improving their performance and cash flow, corporation should seek to improve their investment policy since increase investment lead to more cash flows for the organization.
- Background to the Study
Cash flow of a company is a crucial factor that enhances its operations. According to Efobi (2008), Due to the relevance of cash flows in the company’s operations and performance, corporate organizations need to develop a suitable cash flow mix and apply it in order to maximize shareholders values. Uremadu (2004) sees cash flows of an organization as those pool of funds that the company commits to its fixed assets, inventories, account receivables and marketable securities” that lead to corporate profit.
The ability of the company to effectively choose adequate source of funds to finance its operations will differentiate strong cash flow governance and poorly managed cash flows (Efobi, 2008). For the cash flows to be well structured and effectively utilized, a business firm must be able to devise various ways for selecting the best components of its cash flows which would be used in the company’s operation to raise its productivity or achieve performance. This process should be based on the criteria well drawn up by the finance manager after making a careful financial planning and control for the company (Uremadu, 2004).
Cash flow is an index of the money that is actually received by or paid out by a firm for certain time period (Albrecht, 2003). This index is not inclusive of non-cash accounting charges such as depreciation. Cash represents the firm’s vascular system, if it dwindles, the business will not survive. The fact that a firm is profitable does not mean that it is also solvent. The profit is not cash. The solvency, flexibility and the financial performance of the firm are set on the firm’s ability to generate positive cash flows from the operating, investing and financing activities (Turcas, 2011).
Cash flows represent all inputs and outputs liquidities and cash equivalents. Liquidities represent cash on hand and demand deposits. Cash equivalents are short-term investments with a liquidity degree that can be easily converted into cash with an insignificant risk of value change.
According to Adelegan (2003), cash flows are more direct measure of liquidity and a contributing factor in corporate performance. Cash flow information assists its financial statement users in obtaining the relevant information concerning the use of resources of virtually the entire financial resources over a given time period (Ross, 2007). Financial statements translate the financial activity of the enterprise into a more or less objective set of numbers, which provide valuable information about the firm’s performance and about its possible problems and its potential in the future (Turcas, 2011).
The importance of cash flows cannot be overemphasized mainly because the users of accounting information are particularly interested in the cash of the company that is published) in its financial statements (Narkabtee, 2000). According to Bodie (2004), internally, managers need to know the current financial position of the firm (performance and problem), continuing with problems and control functions.
According to Fabozzi and Markomits (2006), suppliers are interested in the firm’s liquidity because their rights are generally on a short term and in this case the company’s ability to pay is best reflected by the liquidity indicators. According to Bragg (2002), investors in bounds, who ordinarily lend the firm on medium or long term for remuneration, are rather interested in the company’s ability to generate cash flow for medium and long-term coverage of debt service.
1.2 Statement of Problem
According to Pitman (2010), cash flow does not always coincides with cash outflows. Thus, in some periods, cash will flow in than out and at other times, cashflows out than in. if receipts and payments period could be matched perfectly and forecast with certainty than a firm need no cash balance.
Pitman (2010) went further I say that shortage of cash curtail the operations of the firm which usually manifest inability of the organization to pay bills when due and the dissipation of assets. Persistence of cash shortage can lead to financial insolvency which may subsequently lead to litigation of the organization. If there is too much cash, it is not invested, then the firm is paying directly or indirectly for money that is not using. The organization losses to earnings, interests and run the risks of keeping the liquid fund (cash). The problem that faces management is how to maintain and control optimum cash balances despite the difficulties in cashflows.
PROJECT TOPIC- IMPACT OF CASHFLOW STATEMENT ON CORPORATE ORGANIZATION
Pitman (2010) also stated that the importance of cash as an asset of a firm cannot be over emphasized with out cash, that is, where is short is supply, the normal flows of operation of the corporation flows are directly productive, it is sterile. It neither produces goods for sale or induces customers to buy as if the case of other assets, fixed assets, inventories and account receivable.
In current practice, including the ambiguity of terms such as funds, lack of comparability arising from diversity in the focus of the statement (cash, cash and short term investment, quick assets, or working capital) and resulting differences in definition of funds flows from operating activities.
1.3 Research Questions
This research work is meant to proffer solutions to the following research questions:
- What is the relationship between operating cash flows and corporate performance?
- What is the correlation between investing cash flows and corporate performance?
- What is the relationship between financing cash flows and corporate performance?
1.4 Objectives of the Study
The main objective of this study is to appraise the usefulness of cash flow statement in the management of corporate organization.
It is also aim at familiarizing stakeholders with the sources of cash flows and how to assess the company’s performance on vital criteria of liquidity and financial health.
This study basically centres on:
- To examine the relationship between operating cash flows and corporate performance.
- To examine the correlation between investing cash flows and corporate performance.
- To examine the relationship between financing cash flows and corporate performance.
1.5 The Statement of Hypotheses
The following hypothesis will be tested.
Ho: There is no impact of cash flow statement on corporate organization.
HI: There is an impact of cash flow statement on corporate organization.
Ho: There is no significant relationship between cash flow and corporate investment.
HI: There is a significant relationship between cash flow and corporate investments.
Ho: There is no significant relationship between cash flows and liquidity of a company’s finance health.
HI: There is significant relationship between cash flows and liquidity of a company’s finance health.
1.6 Significance of the Study
The impact of the study includes:
- Creditors and other sophisticated lenders will find it useful as the cash flow reveals the company’s ability to pay its debt.
- Potential/actual investors will find it useful in determining the company’s ability to pay its customary dividends.
- It will help management of corporate bodies to determine whether or not the company should undertake borrowing to finance expansion.
According to Pandey (2005), the statement prepared to analyze the cash flow is an important tool of short term financial planning. In the long run, the firm is interested in working capital as this will ultimately change into cash. But to make payments in the immediate future, the firm needs cash. Cash is needed to pay maturing debts interests, dividends and various expenses in the near future”.
Again according to Garrison and Noreen (2007) “there is very good reason to focus on cash-without sufficient cash at the right time, a company may miss golden opportunities or may even fall into bankruptcy”.
Hence, it helps management to carry out thorough assessment of the performance and prospect of the business.
1.7 Scope of the Study
This study focuses on the information relating to the movement of financial resources within and out of the company and its importance to managers in understanding the outcome of their decisions, actions and payments derived from each activity collectively illustrating the difference between the beginning and ending cash flow on their corporate performance.
The published financial statement of Eco Bank Plc. will be used.
1.8 Limitations of the Study
The study is hampered by the following limitations:
- Financial Constraint: The high cost of materials and transportation constitutes a serious hindrance to early completion of this study.
- Time Factor: There is equally limited time to be able to carry out a very detailed study.
1.9 Definition of Terms
Cash Flow: The movement of cash into and out of a business Oxford Dictionary of Accounting).
Cash Equivalents: Highly liquid investments that are capable of being converted into known amounts of cash without notice and that were within three months of maturity when acquired.