Cash management strategies and firm financial performance
A comprehensive literature review
Keywords:Cash (Liquidity), Cash management, cash holding theories, Financial performance
Cash(liquidity) management is at the heart of a firm’s financial management. It is a silver lining between the bankruptcy and the success story of a company. Therefore, this study intends to contribute some insights into cash management practices and how firms can use them to achieve sound financial performance. This study provides a comprehensive literature review on existing theories and cash management practices that are useful in decision making. After the analysis of the available literature, the study highlights important theories including trade-off theory (TOT), transaction model, precautionary measures, financial hierarchy, and cash flow theory. Furthermore, management practices such as stochastic cash management model, speeding up cash collections, centralization & decentralization of management, asset portfolio diversification, and cash disbursement are discussed. The study suggests that a sound financial performance can be achieved through a hybrid approach and through adaptation and embracing innovations in cash management systems.
Abdioglu, N. (2016). Managerial Ownership and Corporate Cash Holdings: Insights from an Emerging Market. Business and Economics Research Journal, 7(2), 29. https://doi.org/10.20409/berj.2016217494
Abioro, M. (2013). The impact of cash management on the performance of manufacturing companies in Nigeria. Uncertain Supply chain management, 1(3), 177-192. https://doi.org/10.5267/j.uscm.2013.08.004
Aksoy, T., & Hacioglu, U. Auditing Ecosystem and Strategic Accounting in the Digital Era. Springer International Publishing. https://doi.org/10.1007/978-3-030-72628-7
Ahmadimousaabad, A., Bajuri, N., Jahanzeb, A., Karami, M., & Rehman, S. (2013). Trade-off theory, pecking order theory and market timing theory: a comprehensive review of capital structure theories. International Journal of Management and Commerce Innovations, 1(1), 11-18.
Amit, R., & Livnat, J. (1988). Diversification strategies, business cycles and economic performance. Strategic Management Journal, 9(2), 99-110. https://doi.org/10.1002/smj.4250090202
Bamber, M., & Parry, S. (2014). Accounting and Finance for Managers: A Decision-making Approach. Kogan Page Publishers.
Basheer, M. F. (2014). Impact of Corporate Governance on Corporate Cash Holdings: An empirical study of firms in manufacturing industry of Pakistan. International Journal of Innovation and Applied Studies, 7(4), 1371.
Blachowicz, P., Baker, A., & Purches, F. (2014). U.S. Patent No. 8,844,804. Washington, DC: U.S. Patent and Trademark Office.
Bloomfield, B. P., & Coombs, R. (1992). Information technology, control and power: The centralization and decentralization debate revisited. Journal of management studies, 29(4), 459-459.https://doi.org/10.1111/j.1467-6486.1992.tb00674.x
Brick, I. E., & Liao, R. C. (2017). The joint determinants of cash holdings and debt maturity: the case for financial constraints. Review of Quantitative Finance and Accounting, 48(3), 597-641. https://doi.org/10.1007/s11156-016-0567-z
Bunce, P., Fraser, R., & Woodcock, L. (1995). Advanced budgeting: a journey to advanced management systems. Management accounting research, 6(3), 253-265. https://doi.org/10.1006/mare.1995.1017
Bundotich, M., & Maina, K. E. (2020). Effect of Portfolio Diversification Practices on Cash Flow Management among National Technical and Vocational Education and Training Institutions in Uasin Gishu County, Kenya. Journal of Finance, 2, 19.
Chen, N., & Chang, M. (2013). Financial crisis and corporate liquidity: Implications for emerging markets. Asia-Pacific Financial Markets, 20(1), 1-30. https://doi.org/10.1007/s10690-012-9156-x
Choi, H., Kim, H. T., & Pae, S. (2018). Abnormal Cash Holdings and the Cost of Equity Capital. Banking & Finance Review, 10(2).
Cui, Q., Hastak, M., & Halpin, D. (2010). Systems analysis of project cash flow management strategies. Construction Management and Economics, 28(4), 361-376.https://doi.org/10.1080/01446191003702484
Dinçer, H., Hacioglu, U., & Yuksel, S. (2017). A strategic approach to global financial crisis in banking sector: A critical appraisal of banking strategies using fuzzy ANP and fuzzy topsis methods. International Journal of Sustainable Economies Management (IJSEM), 6(1), 1-21.
Dittmar, A., & Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of financial economics, 83(3), 599-634.https://doi.org/10.1016/j.jfineco.2005.12.006
Dotsey, M. (1984). An investigation of cash management practices and their effects on the demand for money. FRB Richmond Economic Review, 70(5), 3-12.
Duchin, R. (2010). Cash holdings and corporate diversification. The Journal of Finance, 65(3), 955-992.https://doi.org/10.1111/j.1540-6261.2010.01558.x
Faque, M., & Hacioglu, U. (2021). Investigating the impact of Covid-19 pandemic on stock markets: Evidence from global equity indices. International Journal of Research in Business and Social Science (2147-4478), 10(7), 199-219. https://doi.org/10.20525/ijrbs.v10i7.1461
Ferreira, M. A., & Vilela, A. S. (2004). Why do firms hold cash? Evidence from EMU countries. European financial management, 10(2), 295-319.https://doi.org/10.1111/j.1354-7798.2004.00251.x
Gitman, L. J., Forrester, D. K., & Forrester Jr, J. R. (1976). Maximizing cash disbursement float. Financial Management, 15-24.https://doi.org/10.2307/3665176
Gitman, L. J., Moses, E. A., & White, I. T. (1979). An assessment of corporate cash management practices. Financial Management, 32-41.https://doi.org/10.2307/3665408
Gormley, F. M., & Meade, N. (2007). The utility of cash flow forecasts in the management of corporate cash balances. European journal of operational research, 182(2), 923-935. https://doi.org/10.1016/j.ejor.2006.07.041
Hacioglu, U. (Ed.). (2020). Digital Business Strategies in Blockchain Ecosystems. Springer International Publishing. https://doi.org/10.1007/978-3-030-29739-8
Hacioglu, U. (Ed.). (2020b). Handbook of research on strategic fit and design. IGI-Global. https://doi.org/10.4018/978-1-7998-1125-1
Hacioglu, U., & Sevgilioglu, G. (2019). The evolving role of automated systems and its cyber-security issue for global business operations in Industry 4.0. International Journal of Business Ecosystem & Strategy (2687-2293), 1(1), 01-11. https://doi.org/10.36096/ijbes.v1i1.105
Hacioglu, U. (2019). Blockchain Economics and Financial Market Innovation: Financial Innovations in the Digital Age. Springer International Publishing. https://doi.org/10.1007/978-3-030-25275-5
Hacioglu, U., & Aksoy, T. (Eds.). (2021). Financial Ecosystem and Strategy in the Digital Era: Global Approaches and New Opportunities. Springer International Publishing. https://doi.org/10.1007/978-3-030-72624-9
Harford, J. (1999). Corporate cash reserves and acquisitions. The Journal of Finance, 54(6), 1969-1997.
Islam, S. (2012). Manufacturing firms' cash holding determinants: Evidence from Bangladesh. International Journal of Business and Management, 7(6), 172. https://doi.org/10.5539/ijbm.v7n6p172
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.https://doi.org/10.1016/0304-405X(76)90026-X
Keynes, J. M. (1934). The applied theory of money (Vol. 2). Macmillan and Company.
Keynes, J. M., & Waeger, F. (1936). Allgemeine Theorie der Beschäftigung, des Zinses und des Geldes (Vol. 6). München^ eLeipzig Leipzig: Duncker & Humblot.
Leland, H. E. (1978). Saving and uncertainty: The precautionary demand for saving. In Uncertainty in economics (pp. 127-139). Academic Press.https://doi.org/10.2307/1879518
Lian, Y., Sepehri, M., & Foley, M. (2011). Corporate cash holdings and financial crisis: an empirical study of Chinese companies. Eurasian Business Review, 1(2), 112-124.
Martínez-Sola, C., García-Teruel, P. J., & Martínez-Solano, P. (2018). Cash holdings in SMEs: speed of adjustment, growth and financing. Small Business Economics, 51(4), 823-842.https://doi.org/10.1007/s11187-018-9990-y
Martínez-Sola, C., García-Teruel, P. J., & Martínez-Solano, P. (2013). Corporate cash holding and firm value. Applied Economics, 45(2), 161-170. https://doi.org/10.1080/00036846.2011.595696
Miller, M. H., & Orr, D. (1966). A Model of the Demand for Money by Firms. The Quarterly journal of economics, 80(3), 413-435.https://doi.org/10.2307/1880728
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 48(3), 261-297.https://www.jstor.org/stable/1809766
Morgan, W., Mason, G., King, G., Baker, A., Boland, K., & Purches, F. (2011). U.S. Patent Application No. 11/924,055.
Moussawi-Haidar, L., & Jaber, M. Y. (2013). A joint model for cash and inventory management for a retailer under delay in payments. Computers & Industrial Engineering, 66(4), 758-767. https://doi.org/10.1016/j.cie.2013.09.021
Mucelli, A., Alon, A., Venturini, C., & Lepore, D. (2020). Cash pooling: An organizational response to institutional complexity. Journal of Transnational Management, 1-15. https://doi.org/10.1080/15475778.2020.1799659
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have informationthat investors do not have (No. w1396). National Bureau of Economic Research. https://doi.org/10.3386/w1396
Oliveira, B., & Fortunato, A. (2006). Firm growth and liquidity constraints: A dynamic analysis. Small Business Economics, 27(2-3), 139-156. https://doi.org/10.1007/s11187-006-0006-y
Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of financial economics, 52(1), 3-46.https://doi.org/10.1016/S0304-405X(99)00003-3
Orlova, S. V., & Sun, L. (2018). Institutional determinants of cash holdings speed of adjustment. Global Finance Journal, 37, 123-137.https://doi.org/10.1016/j.gfj.2018.05.002
Ozkan, A., & Ozkan, N. (2004). Corporate cash holdings: An empirical investigation of UK companies. Journal of banking & finance, 28(9), 2103-2134.https://doi.org/10.1016/j.jbankfin.2003.08.003
Polak, P. (2010). Centralization of treasury management in a globalized world. International Research Journal of Finance and Economics, (6).
Powell, G. E., & Kent Baker, H. (2010). Management views on corporate cash holdings. Journal of Applied Finance, 20(2), 155.
Purnamasari, K., & Fitdiarini, N. (2016). Corporate diversification and cash holding. Journal of Administrative and Business Studies, 1(1), 21-27.
Reider, R. (2005). Understanding effective cash management. Journal of Corporate Accounting & Finance, 17(1), 7-15.https://doi.org/10.1002/jcaf.20161
Richards, V. D., & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial management, 32-38.https://doi.org/10.2307/3665310
Roy, A. (2018). Corporate governance and cash holdings in Indian firms. Governance and regulations’ contemporary issues (contemporary studies in economic and financial analysis, volume 99), 93-119.https://doi.org/10.1108/S1569-375920180000099005
Salas-Molina, F., Rodriguez-Aguilar, J. A., & Pla-Santamaria, D. (2020). A stochastic goal programming model to derive stable cash management policies. Journal of Global Optimization, 76(2), 333-346.https://doi.org/10.1007/s10898-019-00770-5
Soenen, L. A. (1986). International cash management: a study of the practices of UK-based companies. Journal of Business Research, 14(4), 345-354.https://doi.org/10.1016/0148-2963(86)90025-1
Steele, A., Eisert, S., & Gabow, P. (2001). Improvements in billing processes and information systems increase cash collections in a public health care system. The health care manager, 20(1), 29-36. https://doi.org/10.1097/00126450-200120010-00005
Tahir, M. S., Alifiah, M. N., Arshad, M. U., & Saleem, F. (2016). Financial theories with a focus on corporate cash holding behavior: A comprehensive review. International Journal of Economics and Financial Issues, 6(3S).
Tobin, J. (1956). The interest-elasticity of transactions demand for cash. The review of Economics and Statistics, 241-247.https://doi.org/10.2307/1925776
Tran, Q. T. (2019). Corporate cash holdings and financial crisis: new evidence from an emerging market. Eurasian Business Review, 1-15.https://doi.org/10.1007/s40821-019-00134-9
Uyar, A. (2009). The relationship of cash conversion cycle with firm size and profitability: an empirical investigation in Turkey. International Research Journal of Finance and Economics, 24(2), 186-193.
Uyar, A., & Kuzey, C. (2014). Determinants of corporate cash holdings: evidence from the emerging market of Turkey. Applied Economics, 46(9), 1035-1048.https://doi.org/10.1080/00036846.2013.866203
Yilmaz, M. K., Hacioglu, U., Nantembelele, F. A., & Sowe, S. (2021). Corporate board diversity and its impact on the social performance of companies from emerging economies. Global Business and Organizational Excellence, 41(1), 6-20. https://doi.org/10.1002/joe.22135
How to Cite
Copyright (c) 2022 Mustapher Faque
This work is licensed under a Creative Commons Attribution 4.0 International License.
Bussecon Review of Social Sciences by Bussecon International Academy is licensed under a Creative Commons Attribution 4.0 International License.