Cash management in non-banking financial institutions: a case study of National Social Security Fund

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University of Dar es Salaam
General background Cash management is professionally a highly refined activity. Despite the fact that cash is an idle asset, it is needed to pay for labour and raw materials, buy fixed assets, pay taxes, service debt, and pay dividends and so on. When possible, cash should be “put to work” by investing it in assets that have positive expected returns. The cash includes coins, currency and cheques held by the firm and balances in its bank accounts. Since cash is the basic input needed to keep the business running as a going concern, it is also the ultimate output to be realized by selling the services or products manufactured by the firm. Cash management is concerned with the managing of cash flow into and out of the firm, cash flows within the firm and cash balance held by the firm at a point of time by financing deficit or investing surplus cash surplus has to be invested while cash deficit requires borrowing. Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a firm holds. It is important simply because it is used to pay the firm’s obligations. (Pandey, 1999). Firms are bound to hold a substantial cash balance due to the following main, but not exhaustive, reasons. First, a large amount of cash is needed for the purposes of transaction, or the daily business operation, which involves the disbursing and also receiving of money. Secondly, compensation to banks for providing loans and services, banks make money by lending out funds that have been deposited with it. Thirdly, precautionary balance (motive) is another reason of holding cash in hand. Firms need to hold some cash in reserve for random unforeseen fluctuation is cash flows. This safety balance is termed as precautionary balance. The less predictable the firm’s cash flows, the larger such balances should be, finally, cash is maintained to enable the firms to take advantage of bargain purchases that might arise. The fund is called speculative balance. Managers, however, do consider all four factors when establishing their target cash position. In addition to that, if optimal cash balance is adequately maintained it enables the firm to take advantage of cash discounts from suppliers who frequently offer customers discounts for early payments of bills. The firm will keep its current and acid test ratios in line with those of other firms in the industry. A firm will take advantage of favorable business opportunities.The optimal cash balance under certainty is determined by the use of the Baumol Model, this means that the actual and ready known constant cash flows, a big cost of transfer from assets into cash are used; while the cash balance under uncertainty can be deduced using the Miller-OrrModel, which allows for daily cash flow variation. This is because of the presence of assumption that cash needs to fluctuate randomly and not known in advance. This is due to the fact that current events are related with the future. (Van Home, 1998). Background to the problem The firm’s operational efficiency is mainly determined by the financial position of any business organization. Enough cash balance is needed to support day-to- day activities of any firm depending on the size and the nature of the company’s activities. Most of the manufacturing firms are mainly concerned with having enough stock of material and finished goods because their aim is to maximize production; it makes this type of firm to have effective stock control policies. Firms in the service industry may focus on different aspects. The financial institutions and Banking sectors is strictly concerned with effective cash management. This includes Banks, provident funds association and insurance companies. It is because they aim maximizing cash collection from its
Available in print form, East Africana Collection, Dr. Wilbert Chagula Library, Class mark (THS EAF HG4028.C45K34)
Cash management, Non-banking financial institutions, National Social Security Fund
Kailembo, Kailembo Yahya (2004) Cash management in non-banking financial institutions: a case study of National Social Security Fund, Master dissertation, University of Dar es Salaam