“A RESEARCH ON WHAT IMPACT CASH MANAGEMENT HAS ON THE FINANCIAL

PERFORMANCE WITH SPECIFIC REFRENCE TO ITC LIMITED “

PRAJWAL.S

PES1PG21MB238

Submitted to:

Professor. Sivashanmugam C
Abstract :

Cash is the most vital but limited asset that certain companies possess. The ongoing study
on cash management has concentrated upon the relationship with a number of key areas,
counting the bearing it can have on liquidity of the organisation, fiscal results, indebtedness,
and net working capital. To understand if there exists any links connecting cash
management and financial performance of a company is the primary objective of this study.
For the purpose of this study we have considered ITC limited as the sample.

This study consists of cash ratio , operating cash flow and the association between these
variables on that of net profit margin ratio ,return on assets ratio ,return on equity ratio.
There exists a positive relationship between cash ratio and the other profitability ratios
mentioned above which is significant. We can observe a positive correlation amid operating
flow of cash with that of profitability ratios mentioned above.

The ratio between operating cash flow and total debt of the company is determined to
analyse how well the company is prepared to meet it’s debt obligation. The ratio is entirely
positive showing that the company is in a way better position to meet the debt obligations it
has.

Consequently, the major insight reached would be that ITC's cash managing procedures
interpret for a major share in the firm ’s fiscal performance. Several vital mechanisms,
including the amount of production contract terms obtained, the brand's societal progress
standing, the bearing of the economic meltdown with respect to demand for commodities
or services, that can have an effect on the cash managing techniques and contribute to a
improved judgment. Managers will use the data to analyse the primary elements that
influence treasury management and where the aspects might can also be addressed.

Key words : Cash management , financial performance , operating cash flow , profitability
ratio.
Introduction :

A company's lifeline is cash, and it has to ensure that sufficient cash out of the operational
activities to meet all the expenditures and still be in possession sufficient left over to
reimburse creditors and grow further. Even though a firm's revenues could be manoeuvred,
the cash stream offers visibility about the actual state of functioning. A establishment can
satisfy its daily operational demands and prevent getting into debt if it generates adequate
cash. As a result, the company can exercise totally regulate the operations. When a firm is
compelled to accept borrowing to for the purpose of covering the expenditures, the lenders
are expected being a part with the functioning of company operations. Whenever they hold
conflicting to ownership's, that might be a deterrent to firm's capability execute the
intended strategies.

Any organisation might scrap for execution of everyday actions like performing the
payments to vendors , sourcing commodities, and salaries, and they are in no position
to invest for expansion, if it fails to create enough income to meet their requirements. They
must possess sufficient cash for payment to dividend yields and meet the shareholder
expectations. Several establishments often employ considerable money to benefit
shareholders through stock repurchases.

Literature Review :

Parmar (2019) executed a detailed comparison of treasury management practises in the

businesses in India, focusing on certain companies. 7 distinct sectors were included in
the studied the paper, with 5 firms from every sector chosen using a survey research
method during a 10 year span . The author calculates 7 statistics based on the information
obtained to examine the cash flow management methods, and then uses regression and
correlation analysis to arrive at the conclusion. Some firms maintain effective cash
management procedures, while others have to enhance their cash management practices
by taking necessary actions and developing appropriate policy.

According to Bekaert and Hodrick (2017), the fundamental functions of cash management
include controlling the various cash flows which enter and leave a organisation to ensure
that the difference is adequate to fulfil company's goals.
According to Javed (2019), the company's financial position plus obligations remain critical
towards the currency handling programme. Money is indeed required to assist debt
settlements whenever organisations have indeed drawn high level of liability. Likewise, the
overall volume for debts incurred by the establishment might have a bearing about how it
places itself and the capability to collect cash flows in the near future.

 Thevaruban (2016) studied the cash handling methods of a group of 20 Ceylon  firms.
Considering CR, cash rotation, and ROE & ROA as primary indicators. Researchers
discovered CR does indeed have a detrimental influence for ROE measurements. As a
consequence, anytime firms held liquid assets as component of cash strategy, they created
surplus cash balances that gave no returns .

 Jindal, Jain, and Vartika (2017) investigated the association of treasury management by
implementing those techniques in India's heavy vehicle sectors. They observed a
positive connection for debtors mgmt., funds, and firm annual growth by studying turnover
ratio and earnings. This indicated the magnitude of a firm's increase in the income
levels would be dependent on the selection of effective cash management.

Methodology :

The research has been primarily carried out with the objective of understanding the impact
of cash management on financial performance using various indicators of cash flow and
financial performance.

The research has been carried out by collecting financial statements and ratios from
secondary data sources of the company ITC. Various research works and articles have been
analysed for the purpose of this research .

Research :

ITC Company Profile :

ITC Limited was started on in the year 1910 with the registered title of Imperial Tobacco Ltd.
It is a conglomerate that operates in packaging , agribusiness , FMCG , software , hotels ,
specialty papers and paperboards and Tobacco. It’s products are available in more than 90
nations through more than 6 million retailers. The company has it’s headquarters in the city
of Kolkata and is listed on National Stock Exchange and Bombay Stock Exchange.
Importance of Cash management

Increasing Cash Flow Management Efficiency

Just because a firm is profitable since it produces greater income compared to that of what
it can use as expenditures, it is needed to control their cash flow suitably to really be
sustainable. Cash flow directly linked with the firm's operating interests, including that of
investing for expansion and growth and finance actions like procuring debts or equity
investments . The money generated by a firm's activities directly linked with the primary
core operations and gives the finest cash flow prospects.

Account receivables and payable, and stock are indeed sectors where greater cash control is
possible. When a corporation gives credit to everyone without checking their credibility of
repayments and doesn't check upon delayed payment, it will result in a slower inflow of
cash, while also defaulted obligations. So having a credit strategy and following up on late
pays is essential. Payables, meanwhile like payment made to vendors subsequently instead
of early is a superior cash management strategy. Furthermore, it is critical for not much
capital being held with that of stock, but rather maintain enough inventory just needed for
the short term operations.

Finding the Perfect Mix

There really is a fine line with possessing excessively money on hand for creating safety net
and holding insufficient supply. When a company possess excess cash , it losses chance to
make investment for earning more money. When keeps low cash, it'll take loans and make
payments for interest, or selling of l assets to meet the required cash needs. Various ratios
like that of acid-test ratio and company's current ratio, can give insight into how well it
manages its cash. Resultant ratio higher than 1 suggests a solid current assets condition,
but anything higher than that signal that perhaps the company has more than required cash
and must invest.
Data Analysis :

For the purpose of this study secondary data was collected about various aspects of ITC
financial performance and cash flow

Cash ratio Return on Assets Return on Equity Net Profit Margin Operating Cash Flow (rs) Total Debt (rs)

2.2 18.2 22.08 28.65 1,25,27,00,00,000.00 3,29,00,00,000.00

3.13 20.11 23.63 33.17 1,46,90,00,00,000.00 3,32,00,00,000.00
2.28 17.85 21.5 27.7 1,25,83,00,00,000.00 11,13,00,000.00
1.95 17.99 21.83 27.62 1,31,69,00,00,000.00 17,99,00,000.00
2.44 18.81 22.49 25.44 1,06,27,00,00,000.00 25,84,00,00,000.00
The cash ratio data , return on assets ratio data , net profit margin percentage , operating
cash flow , total debt of ITC for the period of 5 years starting from 2017 to 2021 has been
collected through secondary sources.
Table 2

Operating Cash Flow (Rs) Total Debt (Rs) OC and Debt ratio

1,25,27,00,00,000.00 3,29,00,00,000.00 38

1,46,90,00,00,000.00 3,32,00,00,000.00 44

1,25,83,00,00,000.00 11,13,00,000.00 1,131

1,31,69,00,00,000.00 17,99,00,000.00 732

1,06,27,00,00,000.00 25,84,00,00,000.00 4

The above table represents the operating cash flow and Total Debt of the company ITC for a
period of five years from 2017 to 2021.

The Operating cash flow and total debt ratio is computed

For each of the five years there exists a positive ratio between the two depicting that the
company is in a much better position to pay off the debts it has as the operating cash levels
are high compared to the total debts.

Table 3

Variables Involved Pearson Correlation R-Squared

Operating Cash Flow and ROA 0.452363936 0.20463313

Operating Cash Flow and ROE 0.449925549 0.202433
Operating Cash Flow and NPM 0.917377739 0.841581915

Cash Ratio and ROA 0.945522141 0.894012119

Cash Ratio and ROE 0.907484248 0.82352766
 Cash Ratio and NPM 0.737937844 0.544552261

The above Table 3 gives the Pearson Correlation coefficient for two variables and the value
of R-squared is computed which shows the levels to which the one variable explains the
other variable.

OCF and ROA

There exists a strong positive correlation between operating cash flow and Return on assets
ratio with correlation coefficient of 0.452, showing that as the as the levels of operational
cash flow raises the return on assets raises which is good for the company .The R-squared
value is 0.204 meaning that each variable explains the other to an extent of 20.4%.

OCF and ROE

There exists a strong positive correlation between operating cash flow and Return on equity
ratio with correlation coefficient of 0.499, showing that as the as the levels of operational
cash flow raises the return on equity raises which is good for the investors .The R-squared
value is 0.202 meaning that each variable explains the other to an extent of 20.2%.

OCF and NPM

There exists a very strong positive correlation between operating cash flow and net profit
margin with correlation coefficient of 0.917, showing that as the as the levels of operational
cash flow raises the net profit margin which is good for the company as there margin for
profit increases .The R-squared value is 0.841 meaning that each variable explains the other
to an extent of 84.1%.

Cash Ratio and ROA

There exists a very strong positive correlation between cash ratio and Return on assets ratio
with correlation coefficient of 0.945, showing that as the as the levels of cash ratio raises the
return on assets raises which is good for the company .The R-squared value is 0.894
meaning that each variable explains the other to an extent of 89.4%.

Cash Ratio and ROE

There exists a very strong positive correlation between cash ratio and Return on equity ratio
with correlation coefficient of 0.907, showing that as the as the levels of cash ratio raises the
return on equity raises which is good for the company .The R-squared value is 0.823
meaning that each variable explains the other to an extent of 82.3%.

Cash Ratio and NPM

There exists a strong positive correlation between cash ratio and Return on assets ratio with
correlation coefficient of 0.737, showing that as the as the levels of cash ratio raises the net
profit margin raises which is good for the company as there margin for profit increases .The
R-squared value is 0.544 meaning that each variable explains the other to an extent of
50.4%.

Limitation of the Study :

The influence of cash management on financial performance was examined using 5 ratios
under this analysis. Net income, receivables, as well as invoice processing, among other
things, could be applied to assess the influence of cash management on financial
performance and create improved judgments. The current research was restricted to ITC
Limited in India, however there is more room for further research in terms of data collection
and subject domain. Several firms from the industrial and service sectors could be chosen
for future investigation.

Conclusion:

One of the most critical things to successfully address business concerns has been
highlighted as cash management. A company having a solid policy for the management
of liquidity will almost surely increase profits and minimise the insolvency risk . Strong
correlation was found between various cash flow variables i.e. operating cash flow and cash
ratio with that of profitability ratios indicating how important cash management is for
profitability of a firm. The ability of the company to clear it’s debts is also analysed in the
study.

Bibliography :

Parmar K. N. (2019) : A comparative study of cash management practices of Indian

corporate sector analysis of selected companies

Thevaruban, S. (2016) : Influence of cash management on financial performance of the

Lanka industrial companies

Jindal D, Jain S and Vartika K (2017) : Effect of receivables management on profitability:

Vehicle industry in India

Bekaert G and Hodrick R (2017) : International financial management.

Javed J (2019) : Cash management and financial performance