EVALUATION OF CASH AND CREDIT MANAGEMENT POLICIES AS AN INSTRUMENT FOR AVOIDING ILLIQUIDITY

CHAPTER ONE

INTRODUCTION

1.1   General introduction and background of the study

The management of an organization’s capital relates to the finance and investment of non-human resources, that is, physical and monetary assets, for the purpose of maximum benefit in terms of profitability.  According to Frear (1980) profitability is determined in part by the way in which a company manages its working capital elements, especially the company’s management policies in respect of cash and account receivable/payable.  Basically, there would be a drop in profit if the basic element of working capital were raised without a corresponding rise introduction or margins. So one of the principal functions of a financial manager is to provide the correct amount of each elements of working capital at the right time and in the appropriate place to realize the greatest return on investment. A business which is basically profitable in a capital intensive industry with high level of inventory turnover but does not have an effective/efficient policies for it’s’ working capital constituents, especially cash, can easily be stopped by a temporary set-back into liquidation because it has no room to maneuver.

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