Cash Management

Cash Management Paper - Week 3

Introduction

Today's global financial market has progressively become more volatile, and driven by the demand for growth and bottom line profitability. Cash is a company's livelihood. If managed properly a company remains healthy, strong and vibrant. However, if a company manages the cash-flow poorly, then the company can suffer some form of a cardiac arrest. Companies that do not value cash management as an important issue are probably undermining the company's short-term stability, and its long-term survival.

Short term financing is not ideal for all kinds of capital shortfalls; generally, short term debt should fund business activities that will generate cash flow to repay the loan. Business people need to distinguish between a temporary investment in current assets and a permanent investment. With temporary investments, companies can finance the purchase of the asset with the intent of liquidating the asset in the normal course of the business.

The best way to manage business cash and short term financing better is to start with understanding how good cash management and short term financing practices can influence a company's growth and survival, then start maximizing cash-flow, which can be done by making certain the billings, collections, and payables are operating efficiently (Find Articles, 2006). In this report a comparison and contrast of both cash management and short-term financing will be explored, as well as, examples of how the two terms are compared and contrasted in detail.

Cash Management Compare and Contrast

Cash management strategies include budgeting, keeping financial records, maximizing the interest earned on checking and savings accounts, and regularly preparing financial statements, such as net worth and cash flow (AnswerIndex, 2006). One of the soundest pieces of financial advice is for a company to spend less than it earns. It may sound very simple, but if a company is not fully aware of how it needs to spend money, the company may end of spending more than they realize. After companies tracks its income and expenses, following a budget that is adjusted to the company's situation and goals is an excellent strategy to plan for spending (AnswerIndex, 2006).

To estimate the value of a company's assets and chart its financial progress, each year the company should add together all assets, and then subtract the debts. This summary of assets and debts is called an annual net worth statement or balance sheet. It will help a company analyze the way it currently manage its finances and make decisions to improve the company's financial situation (AnswerIndex, 2006).

Companies want its net worth to increase yearly. During the early stages of a company's existence, during the time it is beginning to establish itself as an important entity in the market, and accumulating wealth, the company's net worth may rise slowly. Companies should make it a plan of action to review and update its net worth annually (AnswerIndex, 2006). The actual date of your review is not important; what is most important is that the company remembers to complete a yearly review of records, and undergo annual checkups. Companies should regularly reconcile bank and other financial statements as needed.

A vital aspect of the cash management building block is financial record-keeping. An effective record-keeping system should be convenient and not too complicated to maintain. A number of systems are available commercially, or you can design your own (e.g., with file folders) (AnswerIndex, 2006). It is important that the system makes sense to companies and that they utilize it consistently.

When the economy is strong, companies can lapse into somewhat sloppy cash-management practices. The following cash management tools offer companies hope:

Ð'* Sweep accounts Ð'- used to generate income from your company's spare funds (AnswerIndex, 2006).

Ð'* Controlled-investment accounts Ð'- checking accounts with the ultimate in zero balances (AnswerIndex, 2006).

Ð'* End-of-day sweep accounts Ð'- these accounts wait until a late-hour cutoff to determine how much to sweep into the company's overnight investments (AnswerIndex, 2006).

Ð'* Lock-box accounts Ð'- cash-management system that helps you collect your funds quickly. This type of account is usually set up with the assistance of a big money center or regional bank, lock boxes provide a company with a special zip code, and usually, quicker deliveries from regional post offices (AnswerIndex, 2006).

Short Term Financing Compare and Contrast

The main sources of short-term financing are trade credit, commercial bank loans, commercial paper, a specific promissory note, and secured loans (Encyclopedia Britannica, 2006). What is short term financing? Short term financing is essential to providing capital deficit businesses with funds for a short term period of a year or less. What is short term financing for? These funds are usually for businesses to run their day-to-day operations including payment of wages to employees, inventory ordering and supplies.

An example of short term financing could be when a firm places an order for raw materials; it pays with finance and anticipates recouping this finance by selling these goods over the period of a year.

In contrast the difference between short-term and long-term financing is that long-term financing decisions involve a firm purchasing a special machine that will reduce operating costs over the next five years (Ross, Thompson, Christensen, Westerfield, and Jordan2001).

Industries with seasonal peaks, troughs, and those engaged in international trade will be heavy users of short term borrowing finance. Short term financing and lenders favor businesses that exhibit strong management, steady growth potential and reliable projected cash flow for demonstrating the business ability to pay the monthly interest payments on this line of credit from its projected (Ross, Thompson, Christensen, Westerfield, and Jordan, 2001). However, lenders normally charge a higher base rate of interest for operating loans reflecting this relatively weaker security position, some examples of short term financing sources and methods for which a firm can seek short terms financing include (Ross, Thompson, Christensen,