Cash Management And Short-Term Financing

Introduction

It is important for companies to manage their cash because holding a lot of cash is not necessarily a good thing. In fact many companies will not hold onto excess cash and will in fact invest it into short term investments. Choosing how to manage cash and how to invest the excess is a decision that is up to the company, and is not necessarily an easy one. If a company does not have any, or not enough, excess cash they may need to consider short-term financing to augment their supply. How they choose which financing to use is often more complicated then deciding whether or not they need it.

Managing Cash

Cash management in handled though the cash-flow cycle. This cycle relies on when and how funds are collected as well as paid out and how fast the banking system is (Block and Hirt, 2004). For instance if a supplier cashes a check too soon, and the bank is slow to process checks from customers, there may be a negative balance of cash in the company's account.

Cash flow has become a complicated issue for companies in this technological age we live in. With the advent of online shopping companies are speeding up the collection process by use of credit card. When buying online customers have to pay with credit card, which the card companies than pay the company within one to two weeks of purchase. Another benefit of the digital age is how stores can link to each other and to a central bank in order to speed up the cash management process. At the end of the day all of the stores computers talk to each other, and any excess cash balance can be put into the central bank and used for investments (Block and Hirt, 2004). There is a big draw back to all of this technology, and that is safety. High-tech thievery is on the rise and companies have to be careful how they choose to transfer information over the internet or any other way that has the potential to be hacked into.

Cash management is not only about how companies keep track of their cash, but also how they use it. Many companies gamble with their cash balances. They use the Ð''floats' to their advantage by writing checks before there is actual money in the bank (Block and Hirt, 2004). The idea is that a company knows how much money they have received from customers and adds that to current cash balance. They do not count only the money in the bank but the checks that they are waiting to come through. They may have received a check from a customer for a good or service, but it has not officially entered their bank account because they are waiting for this check to clear. However the company will write a check to a supplier for an amount that may exceed what is in the account banking on the fact that the supplier will not cash the check until after the check they are waiting for has cleared.

This system can work well in illuminating certain late penalties that a company may incur due to delay in payment, but it can also be dangerous if a check does not clear as soon as anticipated and in turn the outgoing check does not clear.

One way for a company to keep a handle on floating is to speed up collection and slow down dispersement. There are several way to do this including processes such as the Ð''lockbox system' of check processing. This system makes it faster and less expensive for companies to process checks, which speeds up collection. The can also use things such as electronic funds transfers and Automated clearinghouses (ACH) to virtually eliminate the waiting time. In addition to speeding up collection times it is cheaper to use these tools to process payments (Block and Hirt, 2004).

To slow down the payment process many companies may send checks through banks which are located in places where it takes longer to process the check. Companies also have banks which will control the float in a way that optimizes their cash balances at all times (Block and Hirt, 2004). Some may not see this as a particularly ethical practice, but many companies do this.

Finally, cash can be managed through marketable securities. When a company has excess cash they may choose to invest this excess in short-term investments. They may chose to go with ones that have a better payoff over time, or ones that will payoff sooner. It is important for some to choose a security that will be easy to get rid of quickly in case their cash balance is lower than their desired minimum. Many companies will choose to sell off these investments in order to avoid short-term financing, which tends to be more expensive.

Short-Term Financing

Often companies have a minimum cash balance that they work from, and if something happens and they are not able to meet this minimum they have to resort to other methods of obtaining the cash. This can be done through the selling of certain assets, long-term, or short-term financing. Long-term financing is often the optimal choice as interest rates are more steady with long-term versus short-term loans. Short-term loans usually end up being more expensive in many ways. However, long-term financing is not always available and a company has no other choice.

An easy and commonly used form of short-term financing is done through suppliers. They simply extend the line of credit and the payment period for the company. Instead of having 30 days to pay they may give 60. This is good for a company