LIQUIDITY MANAGEMENT IN THE SERVICE INDUSTRIES

By

DOUGLAS OGADINMA A.

Presented To

Department of Accountancy

ABSTRACT

The significance of the service industries in the economic development of Nigeria cannot be undermined. However, liquidity problems constitute a major constraint on the development of this industry.

This study addresses the practical measures in the service industries needs to adopt and effectively manage their liquid resources especially taking cognizance of the current economic recession in the country.

This study shows that economic recession and over investment in stock are the major causes of liquidity problems in the service industries. The researcher discovered that the firms in the service industries have adopted several measures in an attempt to solve the problem. The basis of recommendation is a more efficient liquid management practice as well as the need for the government to revert the distress economy. The recommendation outlined in Chapter three, if meticulously implemented, will ease the liquidity problem of service industry.

TABLE OF CONTENTS

TITLE PAGE II

APPROVAL PAGE III

DEDICATION IV

ACKNOWLEDGEMENT V

ABSTRACT VI

TABLE OF CONTENTS VIII

CHAPTER ONE

1.1 INTRODUCTION 1

1.2 STATEMENT OF THE PROBLEM 2

1.3 OBJECTIVES OF THE STUDY 3

1.4 SIGNIFICANCE OF THE STUDY 3

1.5 DELIMITATION, SCOPE AND LIMITATIONS 4

1.6 DEFINITION OF TERMS 5

CHAPTER TWO

2.0 REVIEW OF RELATED LITERATURE 7

2.1 THE CONCEPT OF LIQUIDITY 7

2.2 LIQUIDITY VS PROFITABILITY 8

2.3 ENHANCING LIQUIDITY THROUGH

EFFICIENT MANAGEMENT OF CASH AND MARKETABLE SECURITIES. 9

2.4 ENHANCING LIQUIDITY THROUGH EFFICIENT RECEIVABLE MANAGEMENT 11

2.5 ENHANCING LIQUIDITY THROUGH EFFICIENT INVENTORY MANAGEMENT 14

2.6 LIQUIDITY CIRCULATION FLOW SPEED'S 16

CHAPTER THREE

3.0 FINDINGS, RECOMMENDATIONS AND CONCLUSION19

3.1 DISCUSSION OF FINDINGS 19

3.2 CONCLUSION 19

3.3 BIBLIOGRAPHY 21

CHAPTER ONE

Liquidity has been given different definitions by different authors. Most definitions revolve around the fact that liquidity is the ability to convert assets into cash or obtain cash required. Hornby et al (1982) defined liquidity as the state of being able to raise funds easily by selling assets. "Hidmarch (1981) regards liquidity as closely related to solvency. Researchers view liquidity as the availability of cash resources required to meet the obligation of an organization as they take due. We have to note that liquidity is as significant to the firm as is the blood to the human beings. The cost of liquidity is very high, moreover, as firm which is not able to pay its debts as it becomes due mat be declared insolvent, and wound up by the court. This is provided for in the company and Allied matter Decree of 1990.

In spite of severe implications of liquidity squeeze, many firms in the service industry experience liquidity shortage. Economic recession, increased inflation as well as poor financial management causes:

1.2 STATEMENT OF THE PROBLEM

The liquidity problem of service industries has worsened in recent years. This situation stimulated interest in the liquidity management of the service industry in order to ascertain whether existing capital is efficient and effectively managed. Are they being down too much capital in fixed assets? Is working capital vice visa capital employed adequate? Has working capital been properly managed to enhance liquidity? For instance, have non-cash items e.g stock and debtors been maintained at high level while allowing cash position to drop too. Does the problem lie in their inability to squeeze or is it as a result of too much competition form competitors within the industry.

1.3 OBJECTIVES OF THE STUDY

The principal objective of the study is to evaluate the effectiveness of liquidity management strategies in the service industry. The specific objectives are as follows:

v To identify the major liquidity management strategies of the service industry.

v To evaluate their liquidity problem and suggest ways of solving them.

v To identify the possible strengths and weaknesses of liquidity management strategies of the firm under study.

v To recommend liquidity management strategies suitable for service industry.

1.4 SIGNIFICANCE OF THE STUDY

Poor liquidity position leads to business failure, this study is therefore useful too:

a) Existing service firms to correct poor v management practices.

b) Potential service firms to avoid the current weak v management strategies.

c) It should serve as a guide to others who will carry out research work on related fields.

1.5 DELIMITATION, SCOPE AND LIMITATION

The topic v management is a very broad but due to certain limitation, it could not be exhaustively discussed.

As detailed stud of the management of various components of the operating cycle would have been made. For instance, cash budgeting computation of economic order quantity and re-order point of the firm is inevitably absent. The management of current asset will be viewed concerning liquidity. Liquidity circulation flow speed, the theory of liquidity and profitability as well as cost benefit of trade off will be discussed.

The date obtained will be presented, duly analyzed and recommendation. The research work is limited to the service industries. The limited financial resources of the researcher are thus a major handicap. Time factor also provided an influential constraint.

1.6 DEFINITIONS OF TERMS

Liquidity: State of being able to raise funds easily by selling assets.

Liquidity Management: the ability of the firm to manage liquidity position so that neither liquidity nor profitability suffers.

Working capital current assets : Less current liabilities.

Profitability: The ability to make and sustain profits.

Solvency: Ability to pay the firm debt when ever it becomes true.

Receivables: Amount owned the firm by outsider e.g. debtors and bills receivables.

Inventory: stocks of goods available for sales for production or use.