Cash Management

Cash Management

One of the most critical functions of a company’s financial manager is that of cash management. Since inventory and demand for cash change on a daily basis, the financial manager must be knowledgeable in the most effective ways to manage the cash a firm has, along with the most efficient ways to obtain cash as needed. Both cash management and short term financing will be discussed throughout this paper. Managing your working capital, managing business risks, and monitoring costs and inventory are cash management techniques to be discussed. Managing working capital is very essential in cash management. A company’s working capital is closely related to the flow of cash into and out of the business.

“Working capital management involves the financing and management of the current assets of the company. The financial executive devotes more time to working capital management than to any other activity” (Block & Hirt, 2005). Current assets change daily driving short term managerial decisions regarding items such as inventory and funding. These short term decisions on working capital determine the long-term future of the company.

The goal of cash management is to keep cash balances as low as possible while maintaining sufficient funds for transactions purposes and compensating balances (Block & Hirt, 2005). The financial manager attempts to use cash management techniques to hasten the inflow of funds and defer the outflow of funds by managing the company’s float. Float is the difference between the amount of money recorded in a company’s financial statements and the amount credited to the company by the bank. Float is created from delays in mailing processing and clearing checks. To compensate for float one method of cash management is the slowing of disbursements. Banks offer corporations services that control disbursements and allow the company to time payments such that cash balances as held as long as possible. Electronic funds transfers are used decrease the time required to receive payments as well as reduce float. Electronic funds transfer uses terminal communication between the store and the bank to automatically charge a payment to a bank account. Cash should be converted to interest-earning marketable securities when a company holds excess cash in anticipation of a cash outlay such as the purchase of assets. Various securities are available for the financial manager to select. The factors influencing which securities offer the best return on investment are yield, maturity, minimum investment required, safety, and marketability.

“The key to current asset planning is the ability of management to forecast sales accurately and then to match the production schedules with the sales forecast” (Block & Hirt, 2005). Self-liquidating assets are all current assets that are sold at the end of a specified period. As a business grows and offers new products, its inventory must also grow creating permanent current assets. For example, a scuba diving school may begin by offering the basic equipment, such as fins, mask and wet suits, required to perform a successfully dive. As the enrollment in the diving classes grows the business may realize the need to expand the types of diving equipment demanded by students. Permanent assets are the items that form basic stock for a business. As the business expands this “permanent aggregate stock of current assets will continue to increase.”

Temporary assets under level production is a cash management technique used by companies that experience seasonal sales and project a yearly forecast in a smaller time frame to supply the entire year (Block & Hirt, 2005). “When a business produces or offers more products than it sells, inventory rises. When sales rise faster than production, inventory declines and receivables rise.” To smooth production schedules and efficiently use equipment and manpower some companies use level production methods. The down side of level production is that it can create large seasonal bulge or sharp reductions in current assets. Other companies try to match sales and production