CASH MANAGEMENT

Cash Management

Cash Management

Introduction

“Cash management involves the control over the receipt and payment of cash so as to minimize nonearning cash balances” (Block & Hirt, 2005, p.174). Cash is a nonearning asset to the firm and financial managers use cash management techniques to reduce the amount of cash a firm has available. Of course, a firm needs to have some cash available when required, but minimizing cash balances and having accurate tracking mechanisms for cash flow improve overall profitability for the firm. A firm can use several cash management techniques through the cash flow cycle that is an accounting of cash coming in and going out of the firm on a daily weekly or monthly basis. Firms can manage cash and working capital through the cash budget, float, and collection and disbursement strategies. The financial manager must also be familiar with short-term financing options when the firm requires additional cash inflows, such as lines of credit, commercial bank loans, commercial paper and trade credit (Block and Hirt, 2005).

The cash management function can differ noticeably from one organization to another, creating difficulties on comparison benchmarking of how business organizations collect, pay and invest their cash. Successful business organization most to the time make the efforts to have an effective cash management function by including viable business practices to lower bank charges, to cut the costs of external financing, to overcome any possible risks and effectively manage the short and long-term liquidity.

The cash budget is a widespread instrument used to track cash flow and cash balances. Cash flow is the passage of cash in and out of the firm and is reported on a cash flows statement. The primary purpose of managing cash flow is to guarantee that the inflows and outflows of cash are coordinated for business transactions. This is referred to as the cash flow cycle. The cash flow cycle relies heavily on customer payment patterns, check processing of creditors and suppliers, and banking system efficiency. The cash flow consists primarily of sales, receivables and inventory but can include other business activities. The sales of a firm are what drives cash inflows and are powered by the products that are sold, the kind of customers a firm has, where the customers are located, and the industry of the firm (Block & Hirt, 2005). Excess cash the firm collects will be invested into marketable securities that can be sold ...