Cash Management

The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.

Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.

Cash Management Techniques

There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.

In order to facilitate the growth of assets a firm must control its assets by matching production and sales. To manage sales and productions, organizations “employ level production methods to smooth production schedules and use manpower and equipment efficiently at a lower cost” (Block & Hirt, 2005, Chapter 6, p 3).

Short term financing

There are many short-term financing methods that are used by firms. In the business world companies are always trying to maximize their earning potential by strategically investing in short-term financing. In terms of finance short-term may mean months or even a couple of years. The type of finance method that is used is contingent on the specific needs of the corporation. These methods include trade credit, bank credit, financing through commercial paper, foreign borrowing, and the use of collateral, accounts receivable financing, inventory financing and hedging to reduce borrowing risk.

Trade credit is the practice of purchasing goods now and paying for them later. Trade credit is widely used and “is the least expensive and most convenient form of short-term financing” (McHugh, McHugh & Nickels, 1999, p. 573). When a company purchases goods on credit an invoice is received outlining the terms of repayment. An invoice contains terms such as 2/10, net 30. The total bill is due in 30 days, but the supplier has extended a discount if the amount is paid in full within 10 days. Finance managers use the information on the invoice to perform an analysis to find out if the discount is worth paying the invoice in advance or if there is opportunity for more earning potential if invested elsewhere.

Banks issue credits to organizations seeking funds for there ventures. The bank usually “prefers a self-liquidating loan in which the use of funds will ensure a built-in or automatic repayment scheme” (Block & Hirt, 2005, Chapter 8, p. 3). The bank uses credit ratings to assess a company’s risk level and determines the rate that the company will be charged. This rate is known as the prime rate and fluctuates with the movement of the economy. Organizations not only borrow money from US banks but also London banks as well. Companies who acquire loans from London banks pay the London Interbank Offered Rate (LIBOR) which is usually lower than the US prime rate.

Commercial paper is used by organizations that are in need of funds for a few months and are seeking lower rates than that offered at the bank. “Commercial paper consists of unsecured promissory notes, in amounts ranging from $25,000 and up, that mature (come due) in 270 days or less” (McHugh, McHugh & Nickels, 1995, p. 577). The promissory note states