Variance Inflation Factors Test Variance Inflation Factors

The sum of purpose most peoples aspect at a balance sheet is to treasure out a banks working capital or present position. It exposes more about the financial situation of a business than almost any additional calculation. It expresses that what would be left if a bank elevated the miniature term resources, and placed them to pay off its small term liabilities.

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The additional working capitals, a smaller amount financial stress a bank considerate. By understanding a bank’s position, you can clearly see if it has the capitals compulsory to develop internally or if it will have to turn to a bank and take on debt. Working Capital is very simple of all the balance sheet intentions. The formula is

Working Capital = Current Asset – Current Liability

One of the highest profits of watching at the working capital situation is being able to prediction any financial problems that may rise. A business that has billions of dollars in fixed assets will rapidly find itself in bankruptcy law court if it can’t pay its scheduled bills. Under the best situations, poor working capital indications to financial burden on a company, improved appropriating, and late payments to creditor – all of which result in a lower credit rating. A cheaper credit rating means banks charge a higher interest rate, which can cost a establishment a proportion of money over time. A rich business with strong returns and high incomes may not be a strong business. Especially if it absences sufficient cash flow to address future working capital needs. By managing of working capital competently, you can guarantee an satisfactory cash flow to meet your short-term overheads and commitments. Your working capital is resolute by three main factors: a) Collections b) Credit Terms c) Inventory Management The effect of working capital management on effectiveness and liquidity is hardly contended. The main thrust of this work is to determine the connection between working capital management and bank cash holding in Mauritius. Sheet data casing the ten-year period 2009 – 2011 was examined within the background of the casual effects technique was used for the exhibition and analysis of conclusions. The outcomes show that while borrowers’ collection period, cash translation cycle, capital structure, bank size have expressively harmful relationship with the cash position of banks, creditors payment period and profitability have significantly positive relationship with the cash position of banks in Mauritius. The revelations in this paper go to inform bank managers and policy makers on the direction of managing bank working capital in order to ensure satisfactory liquidity. As the global economy gets out of the credit crunch- a condition where credit is either not available or expensive to attract-, certain lessons need not be brushed under the carpet so soon. Among the key reasons advanced by experts as the main causes of the crunch were questionable corporate governance practices, inadequate stock market regulation, mismanagement of the general economy and bad practices of market participants. Eventually, banks and other financial institutions were plunged into liquidity problems. In as much as the global economy puts in efforts to handle the major causes of the crunch managers of financial institutions should also search for measures to ensure adequate liquidity. One of such measures that this paper seeks to address is the management of working capital. Working capital management is the instruction, modification, and control of the equilibrium of present assets and present liabilities of a firm such that growing compulsions are met, and the fixed assets are properly serviced. Deakins et al, (2003) assert that this process tends to improve management of cash flow and cash conversion cycle in addition.

Review of Literature:

Theoretical reflection:

The main objective of working capital management is to conserve an optimal balance among each of the working capital contraption. Business success heavily depends on the financial executives’ capability to efficiently manage receivables and loans, account, and payables (Filbeck and Krueger, 2005). Firms can diminish their bankrolling costs and raise the funds available for development projects by reducing the amount of speculation tied up in current assets. Van Horne (1995) explains that, working capital management is the administration of current assets in the name of cash, merchantable securities, receivables and staff loans, and inventories. Osisioma (1997) recognized that good working capital management must guarantee an suitable relationship between the different mechanisms of a firm’s working capital so as to make an efficient mix, which will guarantee capital acceptability. Thus, working capital management should make sure that the necessary amounts of each element of the working capital are available for management. However, the question is “What controls the necessary workings of a bank are working capital and how much of such necessary components can be observed as acceptable or desirable?” The necessary mechanisms of an establishment’s working capital, basically, depend on the type of business and industry. Cash, debtors, receivables, accounts, marketable securities, and redeemable futures can be predictable as the mutual components of organization’s working capital. However, the question is to recognize the factors that regulate the capability of working capital based on growth, size, operating cash flow, etc. The incapability to understand the influential factors and dimension of passable amounts of working capital will main an association to bankruptcy.

Determination of cash level of Bank:

Among the key factors which inspiration level of cash situation of firms comprise but not incomplete to leverage, firm size, growth occasions, efficiency of firms, firm productivity, age, previous level of cash and firm risk. (Kim et al., 1998; Ferreira and Vilela, 2004; Ozkan 2004) establish a discount in cash levels when firms raise their financial influence. This may be because the advanced the financial leverage, the higher the budgets of the funds used to advance in liquid assets (Baskin, 1987). According John (1993) maintains, firms that can access the debt market can alternative to providing as a additional for liquid assets. Size is another momentous variable that affects cash holdings. The traditional models to determine the optimal cash levels (Baumol, 1952; Miller and Orr, 1966), or more recent models such as that of Mulligan (1997), demonstrate that there are economies of scale associated with the cash levels required to confront the normal transactions of the firm, so that larger firms can keep lower cash holdings. Moreover, firm size is related to another set of factors that may influence liquidity levels. More specifically, smaller firms suffer more severe information asymmetries (Berger, Klapper and Udell, 2001), more financial constraints (Fazzari and Petersen, 1993) and they are more likely to suffer financial distress (Rajan and Zingales, 1995). Also, financial distress is related with high fixed costs and these costs are consistently better for minor firms. Therefore, we would imagine a adverse relation between firm size and cash properties.

Expressive Statistics:

Figure 1 shows the expressive statistics of the element used in the study. The mean (average Deviation) quantity of cash detained by banks to total assets, over the study dated was about 24%. Banks seemed to have a cash translation rotation of 18years on a 365-day. This loans support to the much established view that most banks are extremely levered. Accordingly it is not amazing that total debt accounted for about 88 % of total resources. The log of bank assets had a mean (standard deviation) of 7.8 while bank growth is around at about 58% but these ends seemed to be attained by few banks as the difference is extensive. Also, on the regular, about 5% of banks are listed on the Mauritius Stock Exchange. Finally, banks achieved well based on the ratio of incomes before interest and taxes to equity (with a mean of about 88%).

Figure 1

Variable

Definition

Sign

CTA Ratio of cash to Net total Asset for Bank

Â

CPP Creditor payment period Positive DCP Debtor collection period Negative CCC Cash conversion cycle Negative TDA Leverage= Ratio of total Debt and Asset for bank Negative GRO Banking growth Negative PROF Profitability Ratio Positive CTAC Change in cash position Positive

Correlation analysis and variance inflation Test:

Two main tests were used to test the presence of multi correlation among the regresses. The results of the two tests are reported in figure 2. Virtually all the variables are not highly associated. Because of the high level of correlation between Cash Conversion Cycle (CCC) and Creditors Collection Period (CCP), the stepwise reversion method was accepted. This gave rise to two models: model 1 which accepted CCC but included CCP and DCP; and model two which only used CCC. Then the variance inflation factors for the two representations were appraised. The variance inflation factors means of model 1 and 2 of 1.50 and 1.43 correspondingly, fall within the standard for accepting that the regresses are not highly connected and therefore the presence of multi correlation is not important.

Research Plan:

Research Perceptions:

Working capital related problems are cited among the most important reasons for the failure of country and community banks in Mauritius (Owusu-Frimpong, 2008). As working capital management is related to short-term financial planning and cash level or liquidity in general represents a major indicator for short-term performance, the effective and efficient working capital management should be of crucial importance, hence this study. The important role played by banks in developing countries like Mauritius has been acknowledged, over the past years. Not only are banks important for vitality of retail and microfinance business sectors, but they also serve as a major source of funding for non-financial firms (Abor, 2005) and provide new jobs for citizens in the country. Besides, banks also have a important qualitative input to the Mauritian economy through development of innovative financial products. In addition, the importance of banks to the development of the Mauritian economy is much more thoughtful, given the low level of development of our capital market. The banking industry also appears not to be unappealing, given the recent invasion of both Mauritian and foreign banks into the country.

Research Design:

The paper proceeds as followings. Chapter 1 presents the background of this empirical literature, chapter 2 presents theoretical models of the banking cash holdings; Chapter 3 describes the theoretical background of Working capital management; Chapter 4 discusses the literature review of relationship between the corporate cash holdings and working capital management; Chapter 5 correction analysis and variance inflation test; Chapter 6 concludes. Here, after all I mention the Referencing.

Data collection methods:

Secondary data:

Secondary data will be exploited for the research, among which rank textbooks, journals, research papers, websites and so forth. The textbooks are mainly available in the library of Oceana Isitech Business School, and the journals and research papers are accessed mainly through E-Library of Amaron, By cross-searching databases such as Academic Search Complete ∫ Journals online, Business Source Complete, using key words “Working capital management”, “Cash flow process of banks” and “Mauritius economic report”, around twenty relevant journal articles were obtained. Therefore, the numbers of relevant journal articles are rather limited. More textbooks and journals articles need to be accessed for future detailed research purpose. My first research question will be mainly based on these secondary data.

Primary Data:

My primary data will typically base on questionnaires and relatively less on interviews. The questionnaires serve to answer the second and part of the third question. The first type of evaluation may involve issues related to the financial strategy of the MPCB bank. The second type of evaluation will explore issues such as ∫∫. To understand the logic of Working Capital and Cash holding management, I intend to do questionnaires both at MPCB, HSBC. It will be easy to do the survey at HSBC since I am working there as a trainee and our line manager promised to help me if necessary. For the questionnaire at the MPCB bank, I still need to contact the parties involved. The detailed questions to be employed also need further consideration.

Research Principles:

Ethical issues:

As a part of a desirable dissertation, it is required that we MBA Finance candidates follow the ethics method established by the Coventry University. “Ethics” in relation to research, according to BES, refers to the processes involved in conducting research to the highest standards of moral conduct thereby protecting the rights, feelings and welfare of all those involved in the research whether directly or indirectly (Jewell & Hardie, 2008: 149) I will follow every detail of the BES Ethical Guidelines, making all efforts to avoid harm to anyone, to conduct the research honestly, to acknowledge others’ input, to respect subjects’ privacy, to protect subjects’ physical or mental wellbeing and to ask for permission from the owners before using others’ intellectual property. Also I will complete the relevant information required in the Ethics Compliance Form. All the questions involved in the interview and questionnaire I will discuss with my supervisor. I will first gain the permission of my subjects and any relevant party before doing the interview and/ or questionnaire and express my appreciation for their help and cooperation.

Plagiarism:

I have gained a clear thoughtful of what ‘plagiarism’ means, of which a typical case is copying from a source without expressing acknowledgement, and I also realize how to avoid plagiarism. In any case when I use information from other sources, I will acknowledge the relevant contribution by providing appropriate in-text citation and a list of references at the end of the dissertation. I promise this dissertation is my own work.

Referencing:

Filbeck, G. and Krueger, T. (2005), “Industry Related Differences in Working Capital Management”, Mid-American Journal of Business, Vol. 20, No. 2, pp. 11-18. Osisioma, B. C. (1997). “Sources and management of working capital”. Journal of Management Sciences, Awka: Vol 2. January. Lyroudi, K. and Lazaridis, Y. (2000). “The cash conversion cycle and liquidity analysis of the food industry in Greece (Electronic Version)”. EFMA 2000 Athens. Marfo-Yiadom, E. and Agyei, S. K. (2011). “Determinants of Dividend Policy of Banks in Ghana” International Research Journal of Finance and Economics, Issue 61 pp. 99-108. Michaelas, N., Chittenden, F. and Poutziouris, P.(1999) “Financial Policy and Capital Structure choice in UK SMEs: Evidence From Company Panel Data”. Small Business Economics; 12 (2): 113-130. Miller, M. H. and Orr, D. (1966). “A Model of the Demand for Money by Firms”. Quarterly Journal of Economics, 80, 413-435. Minton, B. A. and Schrand, C. M. (1999). “The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing”. Journal of Financial Economics, 54, 423-460. Mulligan, C. B. (1997). “Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms”. Journal of Political Economy, 105, 1061-1079. Myers, S. (1977). “Determinants of Corporate Borrowing”. Journal of Financial Economics, 5, 147-175. Myers, S. and Majluf, N. (1984). “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have”. Journal of Financial Economics, 13, 187-220. Titman, S. and Wessels, R. (1988). “The Determinants of Capital Structure Choice”. Journal of Finance, 43, 1-19.

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