CHAPTER 1
INTRODUCTION
1.1 Background of the study.
This study deals with, the liquidity management and corporate performance of selected communication firms. All over the world, various corporate firms (particularly communication firms) highly recognized the importance of liquidity management since it helps in increasing profitability and minimize loss. If liquidity management is properly monitored, these firms achieve the desired motives of holding cash, which include transactional, speculative and precautionary motives (Smith, 2000).In business, all motives for holding cash which include transaction, precautionary and speculative seem to be of little importance. It is very diicult for companies to hold cash to satisfy the transactionary motive. (Smith, 2000).states that, the transactionery motive is the need to hold cash to satisfy the normal disbursement and collection activities associated with the firm’s ongoing operation. Many corporate firms having negative cash flows which resulted in difficulties in funding business commitments such as paying suppliers, meeting payroll demands and paying taxes.
Holding inadequate amount of cash or cash equivalent interrupts the normal flow of most business activities. There has been failure by most business organizations to satisfy the precautionary motive. Holding cash for precautionary motive, assumes management, need cash for emergency purposes when the cash flows are less than what is projected (Smith, 2000). It will be difficult for firms to cover for any unexpected needs for cash by acting as a preventive balance. Moreover, due to inaccurate safety margins by many firms, they will experience financial difficulties with organizations failing to take advantage of unexpected investment opportunities. It will also be difficult for organizations to satisfy the speculative motive. According to Wright (2002) speculative motive is holding cash to take advantage of additional opportunities such as a bargain purchase. According to Ranson (2005), defined liquidity management as a set of guidelines established by a firm to ensure that it has optimal cash balance at any time. He further clarified that firms should seek to match the cash receipts and disbursements so that there is no redundant cash balance. In this argument the firm should aim at zero cash balance is cash inflows have covered the cash out flows. Cash management; the main ambition of most organizations is today to present good financial results. An organization’s financial result is, for example, strongly influenced of the efficiency in an organization’s value chain. According to Larsson (2000) the efficiency in the value chain can be improved, if organizations control and perhaps adjust their financial routines. One part of an organization’s financial routines with potential, but which often is neglected, are organizations managing their liquid capital, or cash management.
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