MANAGING FINANCIAL RESOURCES

Managing Financial Resources and Decisions



Managing Financial Resources

Section One - Sources of Finance

Requirement: A

The Dangers and Risk of Overtrading

In the short-term, overtrading may appear as a positive outlook and, it may result in the significant increase of the profits for the company. But, in the long the biggest concern that can be raised by overtrading is the less cash flow available to the company for continuing its operations. The reduced cash flow available to the company may create hindrance in its smooth operations. The primary rationale behind the problem is that all or major part of the investment available to a company is allocated to a particular investment. The concentration of investment is risky because if the customer delays the payment the company will create problems for making payments to other stake holders such as employees, utilities expenses and suppliers. The cash flow is used in addition to the profits for investment, debt repayment and the creation of reserves and is thus a measure of financial strength and profitability of the venture.

Any undesired extension of this gap between the inflow and outflow of cash may create difficulties in the operations of a business.

The management of cash flows is the most important and vital aspect of the all businesses. The effective and efficient management of cash flows is an important aspect for companies and firms (Greenfield 1986, pp. 19-34). Any mismanagement of cash flows can lead the business towards deterioration and eventually it might lead to bankruptcy. Businesses have a limited supply of cash from which they operates and manage their operations. A good cash management ensures that the inflow of cash is greater than the outflows of cash. The cash flow management has further three important functions which are as under;

Operating activities

Investing activities

Financing activities

The cash flow is defined as the sum total of cash flows generated by the firm and the cash flow from operations is the set of cash flows generated by the typical single management (or operational). The set of cash flows generated from ordinary operations (which is a measure of corporate liquidity) is important to determine to what extent and in what way can be paid for the cost centers (Diamond 2002, pp.29-56). The flow of cash is a reconstruction of cash flows (the difference between all cash receipts and expenditures) of a company / project over the period of analysis.

Significance of Cash Flow Management

Many businesses overlook that a critical element of cash flow the lifeblood of any business. Without it, payroll cannot be met, mission and vital services (such as telecommunications and, other utilities) get cut off and suppliers grow impatient and sometimes angry. Often, companies in this position are doing many things right: expanding their customer base, building infrastructure even generating revenues from all the routine activity. Cash is the most important resource any company has, so its proper management is crucial for the proper and efficient operation of the same (Gowthorpe 2008, pp. ...