Managing Cash Within Online Gaming Companies Registered

Published Date: 02 Nov 2017

Managing cash within online gaming companies registered in Malta.

Background to the study

Cash management in general

"Cash is the engine that drives a business" Maringh (2008).

Given all the obstacles that come with the daily operation of a business, monitoring cash levels may seem far down on the ‘to-do list’. However, unprosperous cash management could possibly be the most frequent stumbling block for entrepreneurs and by understanding the fundamental concepts of cash flow, one would be able to plan for the unforeseen contingencies that practically, every business faces (FindLaw).

The financial controller usually faces a situation where earnings are not consistent, and the timing and amount of cash flow is encircled by uncertainty. So there needs to be continuous vigilance to seek out ways of improving cash flows in order to promote an attitude of cash consciousness. In addition to this, an aspect which is commonly disregarded is the cost of excess liquidity. One must establish a balance between holding adequate cash to cover unanticipated shortfalls and excess cash that will reduce profit. The financial controller must be constantly attentive for favourable circumstances which ameliorate cash flow and to a considerable degree he can be regarded as the internal banker to the company (ProQuest, 1997).

Pike and Neale (2009) argued that good cash management lies at the heart of a healthy business and is considered as being the lifeblood of the business. Cash may sometimes be compared with inventories since it is also something of a raw material and of which the company needs to do business with (Rehn, 2012).

As declared by Martinson (2000), effective cash management strategies have become of utmost importance nowadays due to the accelerating business settings. Given that each business encounters diverging situations which vary according to the industry, corporate goals, risk management and the product mix, each business is aforethought as being unique and such business requires the adoption of a tailor-made cash management approach which is in line with its needs.

Cash operating cycle

"The cash gap is the number of days between a business's payment of cash for goods and services bought and the receipt of cash from its customers for goods or services sold. Hence, that interval must be financed." (Boer, 1999) The longer the time gap, the more it becomes costly for the business.

Even though a desirable cash gap deviates with different economic sectors, locations and seasons, this approach is used to ameliorate the management of cash in any company, irrelevant which industry. In managing cash, businesses need to ensure that the cash inflows and outflows are well synchronized to a certain degree in order to avoid any leakages (Amy Jo Borg: 2010).

Motives for holding cash

Keynes, the well-known economist, emphasized about the three chief reasons why companies prefer to have cash on hand:

Transaction motive – this holds that cash balances are held to meet the routine cash needs.

Precautionary motive – this suggests that cash balances are held to meet unexpected cash needs.

Speculative motive – this relates to the holding of cash in order to take advantage of profit making opportunities (Martinson, 2000).

Gaming

The LGA is the single, independent and authoritative regulatory body responsible for all gaming activities conducted in or from Malta (De Marco, 2011). As stated by the LGA (2013), the remote gaming sector is the most dynamic and expeditious growing sector in Malta. In addition, Xuereb (2013) declared that to-date the LGA manages an active number of 425 licences.

"With the introduction of online gaming, the aspiration to provide fair play has become more complex and increased regulation was needed. Malta has reacted to this happening in a discreet yet realistic manner" (Alexia Graziella). By this we mean that "consumer protection and responsible gaming are at the centre of Malta’s regulatory regime" (Borg, 2011). As a matter of fact, Borg (2011) stated that Malta was the first EU member state in 2004 to give a certain level of confidence to the customer by putting into effect a number of measures which were intended to protect the consumer at large.

Online gaming falls under the Remote Gaming Regulations (Legal Notice 176 of 2004) and as a result of this legal notice, the LGA strives to protect its consumers and this is even recognized in Article 3 where it states that in order for remote gaming operators to provide services in or from Malta, they need to obtain a license of the relevant class which is appropriate to their operations (Remote Gaming Regulations, 2004).

The Remote Gaming Regulations (2004) define remote gaming as "any form of gaming by means of distance communications", given that in the eyes of the Law, gaming symbolizes a game of chance for which a reward is provided to the winner (Azzopardi, 2009).

The First Schedule to the Remote Gaming Regulations (2004) lays down four classes of licences that are available in Malta.

Classes of licences

Class 1

Remote Gaming Licence

Class 2

Remote Betting Office Licence / Online Betting Exchange Office Licence

Class 3

Licence to promote and, or abet remote gaming from Malta

Class 4

Licence to host and manage remote gaming operators

Caruana (2010) stated that the LGA performs the monthly checks to confirm that operators are financially stable and solvent at all times. In the interest of players, it checks that the amounts affirmed by licensees as player deposits are indeed held in a ring fenced bank account where these are to be kept separate from the other funds of the business. This is a requirement in view of Article 40 of the Remote Gaming Regulations (2004).

Azzopardi (2009) stated that whilst it is the norm to presume that companies will safeguard their own interests, it may not always follow that they will provide and use adequate controls to safeguard against abuses that could adversely affect players. That being said, Article 37 (1) of the Remote Gaming Regulations tries to protect the players with the fact that upon the request of the registered player, the licensee must remit the funds to the player within five working days after the receipt of such request.

Azzopardi (2009) affirmed that the gaming industry accepts various mechanisms to affect transfers of funds, yet the obvious choice would tend to be credit cards since these enable the funds to be transferred at that point in time. Furthermore, payment gateways are used to provide clearing services of credit cards. These validate the payment transactions for the company against credit card companies. Yet, a major drawback of credit cards is the charge backs, which is why businesses tend to prefer e-wallets. E-wallets resemble bank accounts which are provided by commercial banks, however their main aim in this setting is to be used when purchasing over the internet. An enticing aspect of e-wallets is their preservation with regards to privacy of the persons making use of them, in other words, the gamblers (Azzopardi, 2009).

Keeping in mind that the gaming industry is one which is constantly changing as a result of the impacts from changes in regulation, advances in technology and the changing trends of the industry, the aforementioned corresponding developments have impacted the industry with significant risk management confrontations. Nevertheless, online gaming offers potential growth opportunities regardless of the changes in regulations present a number of risk exposures (Cook et al,2004).

Rationale for research

Considering how much this industry has grown over the last few years and the after-math that it had on the local economy, one should not disparage the importance that this sector plays in Malta. In fact, according to the Remote Gaming Update (2013), the LGA declared that "today the LGA manages an active 425 licences - and growing"; this manifests the imperative role that such companies have on our economy.

Previously, it was argued that "Cash is King" since proper management of cash assists in building trust amongst stakeholders of the company, and this could be done by ensuring the prompt payments when requested by customers. This will have a cyclical effect, in the sense that the players will be induced to leave positive feedback in forums, thus impacting the public relations positively which consequently continues to build up the reputation of the company. This conforms with the fact that cash is of great importance for the survival of the business.

Currently there has been no research on this aspect of remote gaming and whether these companies are really ensuring the financial protection of their players and stakeholders. For that reason, this gap could be filled by this study.

Remote gaming companies have reporting obligations towards the LGA, and consequently, they need to comply with the requirements as instructed in the Remote Gaming Regulations (Legal Notice 176 of 2004). Yet, public awareness about this ‘cycle’, the cash gap and the relevant procedures incorporated is low, if not non-existing. Complementing this, the LGA declared that "… these regulations find the balance between effective regulation that properly protects players..." (Remote Gaming Update, 2013). But in actual fact how are these companies protecting their players vis-à-vis proper cash flow management?

Remote gaming companies have a lot of fluctuations in the Statement of Financial Position, especially when it comes to cash flow. This is because they are not like any other business; for example a normal business either makes an immediate profit or else the company’s profit remains unchanged. In contrast to this, remote gaming companies are exposing themselves to two extremes since either they win (therefore making a profit) or else they lose (thus making a loss), and this is what causes continuous fluctuations. In this study I am going to examine what causes such fluctuations, the main ways that are used to hedge for these fluctuations and whether they are really achieving their intended purpose.

It is a relative new industry worldwide which is evolving on a daily basis and there are only a few who truly know this industry and hence there is a need to spread more knowledge and education in such industry.

The objectives of the study

The aim of the study is to identify the ‘cash cycle’ within such companies and to highlight the way they manage cash together with the challenges that they face. The objectives of the study are:

To examine the deposits system (since these are the only trading income of remote gaming companies) while focusing on the effects that charge backs can leave on cash when utilizing payment providers, as opposed to the different impacts on cash when utilizing an e-wallet system.

To identify and analyze the extent of how such companies mitigate cash flow fluctuations by utilizing risk management tools appropriately.

To establish what measures are taken to ensure that the company has sufficient working capital to satisfy financial commitments other than players’ withdrawals.

Limitations of scope

Due to practical limitations:

I shall only be focusing on remote gaming companies registered in Malta;

Although there are other means of how players deposit funds, I shall only be focusing on credit cards and the effect of payment providers & e-wallets, since these are the two main techniques which in my opinion can have an important bearing on cash;

Due to practical limitations, only a selection of remote gaming companies will be interviewed.

Research methodology

Primary data will be composed by means of a qualitative research methodology, through the use of semi-structured and in-depth interviews with financial controllers working within this industry to establish their attitudes and perceptions towards this concept. Furthermore, it would be interesting to interview practicing auditors of remote gaming companies as well as personnel working within the LGA to identify those paramount areas with regards to cash flows.

Additionally, even secondary data will be used such as LGA publications, the regulations underpinning remote gaming, journals and any reliable magazines on gaming companies. This data will be informative to understand the grass-roots of gaming operations and thus provide information for the literature review.

Support

At this preliminary stage I have made contact with two financial controllers operating within this sector, to give me more detailed information for the understanding of such industry. Nevertheless their anonymity will be respected.