CASH MANAGEMENT AND PROFITABILITY IN PRIVATE SCHOOLS
A CASE STUDY OF TARA PRIMARY SCHOOL
BY
NABIRYE BETTY
07/U/11493/EXT
A RESEARCH REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE EXTERNAL MAKERERE UNIVERSITY
JULY, 2011
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DECLARATION
I Nabirye Betty do hereby declare that cash management and profitability is entirely my own original work, except where acknowledged, and that It has not been submitted before to any other University or institution of higher Learning for the award of degree .
Signature……………………………… Date……………………………
07/u/11493/EXT:……………………
Student
APPROVAL
This research report has been submitted for examination with my approval as the candidate’s University supervisor.
Signature……………………
Supervisor: VICTORIA B. NAKKU
Date:……………………………..
DEDICATION
I dedicate this book to my beloved mother Naigwe fidahand my late Father Magumba Wilson and my brothers Buyinza Moses, Isabirye Fred, Katabira Peterand my sister Namulondo Becky for their continued encouragement and support throughout my studies.
ACKNOWLEDGEMENT
I would like to express my sincere gratitude to my belovedbrothers Buyinza Moses,Isabirye Fred, Katabira, and my sisters Becky, Eva, and Esezafor their love and financial support. I am also grateful to my friends Diana, Winnie,Fiona, Ivan, Ayub, Lawrence and Ntege who gave me a lot of encouragement and academic support throughout my course of study.
Thanks go to my supervisor Victoria B. Nakku who kept on guiding me when writing this dissertation, I appreciate his friendly encouragement and guidance during the course.
Finally thanks to the staff of Tara primary school for all their support in providing adequate data which enabled me to finish my research work,
God bless all.
TABLE OF CONTENTS
DECLARATION
APPROVAL
DEDICATION
ACKNOWLEDGEMENT
LIST OF TABLES
ABSTRACT
CHAPTER ONE
1.0 Introduction
1.1 Back ground.
1.2 Statement of the problem.
1.3 Purpose of the study.
1.4.0 Objectives of the sturdy.
1.5 Research Questions.
1.6. 0. Scope of the study
1.6.2. Geographical scope.
1.6.3. Time scope.
1.7.0 Conceptual frame work
1.8.0. Significant of the study
CHAPTER TWO
LITERATURE REVIEW
2.0 introduction
2.1 Cash management
2.1.2 Importance of holding cash.
2.2 Cash management techniques
2.2.1 Cash planning
2.2.2 Cash collection
2.2.3 Managing surplus and deficit cash balance.
2.2.4 Managing of cash outflows
2.3.0 Indicator of cash management
2.3.1 Cash control
2.3.3. Cash allocation
2.2 Profitability.
2.3 Relationship between cash management and profitability.
CHAPTER THREE
METHODOLOGY
3.1. Research design
3.2 Study area
3.3. study population
3.4 Sampling design
3.5 Sampling size
3.6Data sources
3.6.1 Primary data
3.6.2 Secondary data
3.6 Data collection tools
3.6.1 Questionnaires
3.7.2 Interview guide
3.7 Data processing, analysis and presentation
3.7.1 Data processing
3.7.2 Data analysis
3.7.3 Data presentation
3.8 Anticipated limitations of the study
CHAPTER FOUR
4.0 PRESENTATION, INTERPRETATION AND DISCUSSION OF FINDINGS
4.1 Introduction
4.2.0 Findings on the general information about respondents
4.2.1 Findings on the gender of the respondents
4.2.2 Age of the respondents
4.2.3 Educational level
4.3 Results on objective one. Cash management techniques.
4.3.1 Findings on the schools plan for cash
4.3.2 Findings on school’s allocations of cash
4.3.2 Findings on the cash banked,
4.4.2 Findings on how staff productivity contributes to profitability
4.4.3 Findings on the dividend shares
4.5 Results on objective three. Relation ship between cash and profits
4.5.1 Findings on how cash in and out flows, cash planning influence the level of profitability
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS.
5.0 Introduction
5.1 Summary of findings
5.2 Conclusions.
5.3 Recommendations
5.4Areas of further research.
REFERENCES
APPENDIX 1: QUESTIONAIRE
APPENDIX II: INTERVIEW GUIDE
LIST OF TABLES
Table 1 Showing composition of respondents...... 15
Table 2: Gender of respondents...... 17
Table 3: Age of respondents...... 18
Table 4: Academic levels of respondents...... 19
Table 5: Aim for cash plan...... 20
Table 6: Allocation of cash...... 21
Table 7: cash banked...... 22
Table 8: staff productivity and profitability...... 22
Table 9: Share holders and dividends...... 23
ABSTRACT
The study was designed to evaluate the effect of cash management and profitability in private schools in an attempt to assess the relationship between the two variables in Tara primary school as the case study.
The research was forecast on achieving the following objectives; to establish cash management techniques used in Tara primary school., to assess the profitability of Tara primary school, to establish the relationship between cash management ant profitability of Tara primary school.
A descriptive study design was adopted during the study; information was obtained from primary sources using questionnaires and interviews andpurposive sampling was used and 30 respondents where interviewed and these included directors, head teachers, bursar, and PTA members.
The findings revealed that Tara primary school plans for its cash as a tool against misuse, embezzlement and frauding of the school funds, the school also employs other tools like cash banking, Staff productivity and profitability move in the same direction, Cash in flows, out flows, and planning was all found out to influence profits of an organization.
Recommendations suggested include the following, organization has to put into place controls to ensure that cash is safe, parents to even pay even during holidays as a way of boasting the school collections which in turn will enable allocations to made in time,as the schools’ surpluses and deficits are concerned, the school needs to invest such monies in projects beneficial to the school, should also use more of the accrual basis of cash out flow than the cash basis in order to maintain the school liquidity at an optimal level..
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CHAPTER ONE
1.0Introduction
1.1 Back ground.
Cash management is an essential tool which aims at establishing the financial position of the organization. Pandey (1998) notes that it is a set of guidelines established by management to ensure that the organization has optimal cash balance at any time to meet the organization goals, cash recovered should be matched with cash spent on services so that there is no un used cash balances. Cash management is concerned with the management of cash flow that is to say inflow and out flow of cash, this seeks to archive control of cash by paying obligations like meeting organizational needs[Kakuru 20001. The indicators of cash management include cash planning which is a technique use to plan and control the use of cash, safety that is to say there should be one to authorize use of cash, cash control, cash allocation and cash budget.
Most businesses are set up with the aim of making profit. Profitability is the organization’s desired state where turn over is greater than input cost (Bogess 1967). According to Kakuru [2001] profitability is the ability of a firm to earn returns on investment. The higher the cash balances are in a business, the more returns or profitability will be fore gone. The indicators of profitability include return on assets, return on capital employed and sufficient cash flows.
Cash management techniques applied by private schools include paying school fees in the banks using school bank slips, students paying directly to the bursar, using a lock box and other paying through by cheque for, example students sponsored by big organizations such as plan Uganda.
Kategaya (1987) argues that the public seems interested in the developments in primary schools where he cited a big number of private students that have shown steady progress for example Green Hill Academy, Sir Apollo Kagwa.
According to Foulks (2005) Effective cash management enhances growth which in turn produces increased profitability, how ever some private schools continues to close down due to weak cash management for example St John Namaliga in Bombo - Luweero district (New Vision 20th 2008).
TaraPrimary school is located in Kampala district, Makindye East division in Namuwongo parish. It has both day and boarding sections, it started as nursery school but as time went on it grew in to a primary school.
1.2 Statement of the problem.
Cash management techniques are adopted by organizations in order to ensure effective investment of cash and to achieve profitability both in the short run and long run (Puxty and Dodds 1991).
But despite the adoption of these cash management techniques, still most present private schools run bankrupt to the extent that some are even closed due to poor cash management for example St. John Namaliga in Bombo town in Luweero distruct (New vision 20th 2008).
Some head teachers withdraw money and use it for their personal purposes leaving school accounts dry which leads to cases like not paying for the candidates’ registration (New vision October 2008) where students did not sit for their final exams.
1.3 Purpose of the study.
The purpose of the study was to establish the relationship between cash management and profitability of private schools.
1.4.0 Objectives of the sturdy.
- To establish cash management techniques used in Tara primary schools.
- To assess profitability of Tara primary school.
- To establish the relationship between cashmanagement and profitability of Tara Primary School.
1.5 Research Questions.
- What are the cash management techniques used in TaraPrimary School?
- What is the profitability of Tara Primary School ?
- What is the relationship between cash management and profitability in TaraPrimary School?
1.6. 0. Scope of the study
1.6.1 Content scope
The study was limited to cash management techniques, factors that determineprofitability and the role of cash management on profitability.
1.6.2. Geographical scope.
The study was based on Tara Primary School in Kampala district, Makindye East division.
1.6.3. Time scope.
The study was carried out between the months of January and may for a period of fiveyears that is 2006-2010.
1.7.0 Conceptual frame work
Independent variable
Cash management
Conceptual frame work is a diagram of proposed causal linkage among aset of variables believed to be related to aparticular problem.The variables are in the boxes while the relationships are shown by arrows as shown above.
1.8.0. Significant of the study
i)The study enabled schools to appreciate the importance of cash management techniques.
ii)The research helped the researcher to improve on her research skills fore example in proposal writing and data analysis.
iii)The study provided as reference and guidance to further students and researchers.
CHAPTER TWO
LITERATURE REVIEW
2.0 introduction
This chapter reviews the different existing literature of different scholars, the definition of cash management, the appropriate cash management techniques, the indications of cash management, profitability and the relationship between cash management and profitability
2.1 Cash management
Cash management involves managing the monies of the firm in order to maximize cash availability. It includes policies and procedures adopted by the management of an entity to assist in achieving the management policies, laws and regulations of cash, the prevention and detection of fraud and error, promoting orderly, efficient operations(Van Horme1995).
According to Pandey (1998) cash is the money that a firm can disburse without any restriction. The term cash includes coins, currency and cheques held by the firm and balances on its bank accounts. Sometimes near cash items such as marketable securities or bank time deposits are also included in cash.
Pandey(1998)noted that cash management is concerned with management of cash flows into and out of the firm, cash flow within the firm and cash balances lent by the firm at a time of financing deficit surplus cash .
2.1.2 Importance of holding cash.
According to puxty and Dodds (1999), it is essential to keep some of the organization’s resources in cash by any business unit. The need to hold cash may be attributed to the following motives, the transaction motive, precautionary motive and speculate motive.
- Transaction motive recognized that the organization has to carryout daily transactions in order to protect its profitability position. Cash is needed to pay labor, materials and utilities in order to ensure smooth operations (Kakuru 2001).
- Precautionary motive, cash is needed to Cashion the organization against any unforeseen problems like failure of emergency work force problems, failure of electric system and such problems have negative implications on the organizations profitability. Therefore the availability of cash resource mitigates their effects and keeps the organization profits in balance (mantilla et al 1999).
- For speculative motive the organization maintains cash balances in order to take advantage of any profitability venture that may un expectedly crop up like a sudden fall in price of scholastic materials. Once the organizations cash is stripped. It will not be able to take on such advantages and additional incomes and savings from such events will be lost ( Puxty and Dodds 1999)
2.2 Cash management techniques
2.2.1 Cash planning
According to Pandey (2003) cash planning is a technique used to plan and control the use of cash. It involves preparation of forecasts of cash receipts and payments so as to give out an idea of the future financial requirements. Therefore the management of the school needs to determine the schedules of monthly disbursements and collection schedules of creditors. with efficient cash planning system, the financial needs of the school will be met, with reduced possibility of the cash balances which lowers the school’s profitability and cash deficits which can lead to school’s failure .
He further notes that a cash budget is the most significant device used to plan for and control cash receipts and payments.
A cash budget is a summary statement of the firm projected time period. This information helps the financial manager to determine the future cash needs of the firm, plan for the financing of these needs and exercise control over cash and liquidity of the organization(Kakuru2003). The researcher is wondering whether Tara primary school actually budgets for inflows and outflows of cash.
2.2.2 Cash collection
A school can conserve cash and reduce its requirements for cash balances if it can speed up its cash collections. A number of methods are designed to speedup the collection process and they include the following;
-Reducing the period it takes for payment from clients to reach the account of the school. According to Kakuru (2001) the school could use a system of pre-authorized debts where an arrangement is made in advance that clients could automatically transfer funds from the client account to the school account at a specified future date.
-Reducing the collection float; according to Pandey (2003),the collection float is the total time it takes a cheque to reach the business, from the time it is put in the mail by the client to when cash is actually available for use in the school. Usually this is affected by the time the cheque spends in transit (mailing float), the time it takes the school to process the cheques internally (processing float) and the time it takes the clearing process of the banking system. This can be managed efficiently by two ways i.e. using a lock box system and billing up multiple collection centers. The main advantages of a lock box system are that the bank handles the remittance prior to deposit at a lower cost and cheques are deposited imediately upon receipt of remittances and their collection process starts soon than if the school would have processed them for internal accounting purposes prior to their deposit (Mills 1994).
Mills (1994), in his discussion, he recognized that lock box system involves a cost to run and therefore the school will only be profitable if the benefits of its use exceed the cost of financing it .
2.2.3 Managing surplus and deficit cash balance.
According to van holme (1995), the purpose of managing cash balance is to avoid having idle cash reserves or having deficits that cannot be invested preferably in short term ventures like treasury bills and other forms of commercial paper. Since investments are near cash, the liquidity of the organization is not comprised by the investment plan while profitability is also enhanced. The investment selected for this purpose should meet the following criteria.
- They should be safe in that search for profitability does not increase the risks of liquidity. The instruments should have a low default risk so that interest and principle repayment will be realized (Kakuru 2001). He further notes that such investments in Uganda include fixed accounts and government treasury bills. Investments can easily and quickly be converted into cash with minimum possibility of a loss.
- In case of deficits, arrangements for financing should be in advance to avoid hurried solutions which rob the business of the opportunity to strike a fair deal and hence acquiring the resources at costs higher than those of the decisions that were taken in a relaxed atmosphere (Pandey 2003).
2.2.4 Managing of cash outflows
Generally different scholars argue that cash disbursements should be delayed as much as possible without hurting corporate image of the organization or defaulting on the obligations of the organization. The principle is that cash should be paid only at moment when delay is no longer necessary and possible and non beneficial (Kakuru 2001, Van Horme 1995, Pandey 2003).
The way of delaying disbursements that were generally agreed upon by above scholars include;
- Predicting banking habits of the work force and paying out the wage bill accordingly. Wages should not be paid in advance when workers are willing to accept delayed payments. During this period the school will be able to make profits out of that money. In the same payments should be cheque as the bank clearance will always delay for some days.
- Maximising the disbursement float through selecting geographical optimal disbursement banks. These banks should be such that cheques drawn on them will maximize the days the cheques remain un collected.
2.3.0 Indicator of cash management
2.3.1 Cash control
This is the overall attitude and actions of management regarding control system of cash in the entity. A strong control is one with tight budgetary control over cash received, cash banked, cash cheques, and effective control cash balances, cash brought down. According to Hamilton (2001) an obivious aim of a school is to control and manage its cash affairs in such away as to keep cash balance at a minimum level and invest surplus cash in investment opportunities.