Cash Control And Profitability Of Listed Pharmaceutical Companies

CHAPTER ONE

1.0                                                           INTRODUCTION

1.1       Background Information to the Study

All over the world, various pharmaceutical firms highly recognized the importance of cash control since it helps in increasing profitability. If cash control is properly monitored, these firms achieve the desired motives of holding cash, which include transactional, speculative and precautionary motives (Smith, 2019). In business, all motives for holding cash which include transaction, precautionary and speculative seem to be of little importance. It is very difficult for companies to hold cash to satisfy the trans. transactionary motive. According to Smith (2019) the transactionary motive is the need to hold cash to satisfy the normal disbursement and collection activities associated with the firm’s ongoing operation.

Ranson (2015), defined cash 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 (2020) 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.

According to Larsson (2020), Cash Management is not a new phenomenon and organizations have always considered how their liquid capital in the best way should be managed. Even though managing liquid capital always has been done, the term cash management has brought new light to managing liquid capital with focus on the time- dimension of cash flow. During   the fifties the first cash management – models were presented and the concept cash management was taken in use. Larsson (2020) hold that cash management can be defined as “theories and methods for handling liquid capital”. According to cash management report 580, which Larsson discusses, cash control consists of e.g. cash to sales, cash turnover. Larson holds that many organizations neglect their work with cash management. This neglect arises from the shortcoming of e.g. efficient payment routines and trade receivables. Larsson describes that these routines easily can be obsolete if organizations don’t focus enough on follow up and developing existing routines

Cash flow management is vital to the sustenance of a firm’s liquidity. Pharmaceutical companies require large capital outlay to effectively carry out their operations. A situation where the available capital is not properly managed will be detrimental to the financial health of the company. Proper cash flow management systems in business help the managers to: Control spending with respect to the specified budget, minimize borrowing and maximize the opportunity cost of its company’s resources (Bari et al., 2019). Cash flow management as defined by Ward (2020) is the “process of monitoring, analyzing, and optimizing the net amount of cash receipts minus cash expenses. Net cash flow is an important measure of financial health for any business”. Cash flow management entails frequent cash flow analysis so as to solve cash flow problems like illiquidity. Pharmaceutical companies in other to maintain a healthy financial system need effective cash flow management. This event has given rise to this study on cash flow management and financial performance of listed pharmaceutical companies in Nigeria.

Profitability is a concept that has received serious attention all over the globe, this is because the growth and development of any profit-oriented business enterprise depend on its ability to remain profitable at all times, even in the period of the visible current financial crunch of the world economy. Siyanbola and Raji, (2017) stated that profitability has attracted considerable importance in finance and accounting literature. Also, Malik, (2016), have emphasized profitability has been one of the primary objectives of financial management and control which is to maximize the owners’ wealth. Hence, profitability is cardinal determinants of performance for wealth maximization. A business that is not profitable cannot survive in the long run. Furthermore, the current intensity of competition in the business environment has made running a successful business a function of its ability to be profitable and survive. Therefore, the ultimate goal of a business is to earn enough profit to ensure sustainability in prevailing market conditions. (Adebayo and Onyeiwu, 2018).

A great deal of research has been done on the determinants of profitability in manufacturing (see Schmalensee, 1989). The focus of this debate has been on the appropriate measure of profitability. Most of the prior work in this area has been on inter-industry studies of profitability with the exception of Leahy (1998), which examines the profitability of distributors and Leahy (2004), which examines the profitability of liquor manufacturers. As in Leahy (1998, 2004) this study focuses on inter-firm determinants of profitability for a manufacturing industry, i.e., that of Standard Industrial Classification (SIC) code 2834—Pharmaceutical Preparations.. The SIC Manual (1987) defines this industry as consisting of establishments primarily engaged in manufacturing pharmaceutical preparations for human or veterinary use. This includes pharmaceutical preparations promoted primarily to the dental, medical, or veterinary professions and pharmaceutical preparations promoted primarily to the public (SIC, p. 138). Politicians and others have criticized the pharmaceutical industry by asserting that its products are overpriced and its profits excessive.Increasing profitability is an important goal for businesses in order to stay in business and avoid competition from other companies in similar industries. It is critical to take pride in the company’s success or to prioritize other business objectives (Gitman & Zutter, 2012).

Profitability is an important component of its financial reporting. It reveals the company’s ability to generate revenue and the rate of sales, as well as the level of assets and capital products at a given time (Margaretha &Supartika, 2016). As a result, firm profitability and strategies for increasing it have sparked heated debates in economics, finance, accounting, and management. Profitable firms create value, hire people, tend to be more innovative, more socially responsible and are beneficial to the entire economy through payment of taxes. Profitability is a factor based on the “Static Trade-off Theory” and “Pecking Order Theory” of capital structure. Businesses seek debt levels that balance the tax benefits of additional debt with the costs of potential financial distress, according to the trade-off theory. According to the tradeoff theory, tax-paying businesses will borrow moderately. The pecking order theory states that when internal cash flow is insufficient to fund capital expenditures, the firm will borrow rather than issue equity