Effect of Key Financial Drivers on Organizational Performance: Evidence from Public Establishments in Nigeria

Abstract

This paper examined the effect of key financial drivers on organizational performance of public establishments in Nigeria. There exists difficulty in achieving continued exercise and growth, poor management funding, failure to adequately anticipate cash flow, technology or reaction to competition with private establishments, indiscipline among members in public ministry and ill-timed financing. The objectives of this study are therefore to; examine the effect of cash flow management on organizational performance of public establishments in Nigeria and examine the effect of cost management on organizational performance of public establishments in Nigeria. The research design for this study was experimental design used to test the hypothesis in reaching a valid conclusion. The population of the study comprised of the public establishments in Ogun State, and the target population of the study was Agbado District Comprehensive High School, Oke Aro, Ogun State using purposive sampling. The study employed the use of primary data through the administering of questionnaire. Multiple regression models were used to analyze the data. Based on the findings, the study recommended that public establishments should take advantage of the excellent benefits derivable from the adoption of well-designed cash flow management. Also, public establishments should carefully implement cost management techniques to aid business performance and ensure continuity. Corresponding author: Lawal Babatunde Akeem Email address for corresponding author: ab400level@yahoo.com First submission received: 3oth November 2018 Revised submission received: 28th March 2019 Accepted: 30th March 2019 1.0 Introduction Organizational performance concept is core to public enterprises because the objective of government companies is to achieve profit, productivity and success. Mutindi, Namusonge and Obwogi (2013) observed that one of the important questions in business have been why some organizations succeed and why others fail, and this has influenced a study on the drivers of organizational performance. Kangangi (2014) highlighted performance measurement as one of the tools, which help firms in monitoring performance, identifying the areas that need attention, enhancing motivation, improving communication and strengthening accountability. Gichuki (2012) describes performance in terms of four perspectives, which are the financial, customer, internal processes and innovativeness. The financial perspective identified the key financial drivers of enhancing performance that are profit margin, asset turnover, leverage, cash flow, and working capital. Financial drivers of performance involve the translation of business strategies into deliverable results. It combines financial and operating principles to gauge how a company is able to meet its targets International Journal of Business and Economic Development, Vol. 7 Number 1 March 2019 www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 60 (Mshenga & Owuor, 2009). Financial drivers of performance are closely linked to specific key drivers in order to maximize organizational performance. Cash flow management as an important financial driver on performance of Public establishment. Waltson and Head (2009) explained cash management as the concept which is concerned with optimizing the amount of cash available, maximizing the interest earned by spare funds not required immediately and reducing losses caused by delays in the transmission of funds. Public establishments must have enough cash to meet its obligations or it will be declared bankrupt. Creditors, employees and lenders expect to be paid on time and cash is the required medium of exchange. Mutti and Hughes (2002) on cash flow management of public establishments in the UK revealed that insolvencies are higher in public establishments as compared to other sectors, siting the major cause of failure as lack of financial control and poor management. The study elaborates that with a good cash flow management such establishments can be kept operating and financially healthy. Failure can be prevented using models of cash flow management and forecasting that form a basis for mangers to rethink their cash flow management practices. Cost management as an important financial driver on performance of Public establishment. Stenzel (2010) discussed that cost management means knowledge of resources used by company, forecast amount of additional financial resources necessary, and the ability to ensure the maximum efficiency level of resources used. It is also the ability to save resources and at the same time maximize their efficiency. Cost management is among the most important activity in an organization that has an impact over the business functions in a company. There are arguments that imply that cost management is another factor that is likely to level up competitive advantage. Cost management is described as the approaches and activities of executives and top-level managers in the short run and long run planning and control decisions to increase customer satisfaction as well as reduce costs of production. A number of public establishments have continually experienced shortage in performance and finance in relation to their business and service operations, despite its importance to the success of these establishments. This could be lack of sound knowledge in utilizing financial drivers by the Board of directors or financial managers. In addition, there is difficulty in ascertaining whether comprehensive finance schemes that satisfied the laws under which it was incorporated had been kept. The broad objective of this study is to examine the effect of key financial drivers on the performance of public establishments in Nigeria. Specific objectives are to: • Investigate the effect of cash flow management on the performance of public establishments in Nigeria. • Examine the effect of cost management on the performance of public establishments in Nigeria. However, to attain the desired results, managers need statistical figures and costs of the actual performance of the establishment to compare them with the planned budget performance in order to supervise and control costs (Crossman, 1953). 2.0 Literature Review 2.1 Theoretical Review Baumol’s Cash Management Model The model was designed to minimize the sum of opportunity cost associated with holding cash and trading costs associated with converting other to cash. The procedure is very similar to the EOQ Model for inventory size, but it deals with different variables. It assumes that the firm holds a portfolio of marketable securities which can easily be converted into cash (Baumol, 1952). According to this model, cash is assumed to start from a replenishment level, C, and then declines smoothly to a value zero. When cash declines to zero, it can be immediately replenished by selling another C worth of marketable International Journal of Business and Economic Development, Vol. 7 Number 1 March 2019 www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 61 securities, for which the firm has to pay a trading cost of F (Cornett 2009). In Baumol model, the financial manager has to decide on the repartition of liquid funds between cash and marketable securities (Pandey, 2008). Transaction Cost Theory Transaction cost theory is used to explain a number of different behaviors. Often this involves considering as transactions not only the obvious cases of buying and selling but also day to day emotional interactions and informal gift exchanges (Williamson, 1975). The transaction cost theory suggests that there are certain costs that people normally incur without knowing that they are a cost to them. These costs must be incurred whenever a transaction takes place. These costs are known as transaction costs. John R. Common introduced the idea that transactions form the basis of an economic thinking in 1931 (Williamson, 1975). Transaction cost theory focuses on transactions and costs that attend completing transactions by one institutional mode rather than another (Williamson, 1975). The theory’s central claim is that the transactions will be handled in such a way as to minimize the costs involved in carrying them out (Muchina & Kiano, 2011). A transaction, a transfer of good or service is the unit of analysis in transaction cost theory and the means of effecting the transaction is the principal outcome of interest (Williamson, 1975). 2.2 Conceptual Review A conceptual framework is a set of broad ideas and principles taken from relevant fields of enquiry and used to structure a subsequent presentation (Kombo & Tromp, 2006). The conceptualization of variables in academic study is important because it forms the basis for testing hypothesis and coming up with generalizations in the findings of the study (Wael, 2017). In this study, the independent variables are the conceptualized key financial drivers of public establishments’ performance. The independent variables of the study include cash flow management and cost management. The dependent variable is performance. The independent variables thus affect the dependent variable, which is organizational performance. The study, therefore, seeks to determine how the independent variables influence the dependent variable in public establishments in Ogun state. Independent Variables Dependent Variable Fig. 2.1 Conceptual Model Cash Flow Management Cash flow management is the process of planning and controlling cash flows into and out of business, cash flows within the business, and cash balances held by a business at a point in time (Pandey, 2008). Naser, Nuseibel and Al-Hadeya (2013) see cash management as the process of ensuring that enough cash is available to meet the running expenses of a business and aims at reducing the cost of holding cash. Efficient cash management involves the determination of the optimal cash to hold by considering t