Cash Management Paper

Cash Management Paper

Marlene Elizabeth Fain

University of Phoenix

Cash Management Techniques

Cash is a component of a business' net working capital and its most liquid current asset. To understand the role of cash in and out of a business, lets look first at the concept of current assets and current liabilities.

The working capital cash conversion cycle -- also often called the cash flow cycle -- is the length of time between the payment of what a business owes -- payables -- and collection of what a business is owed -- receivables. Businesses use several techniques to minimize the length of time funds are tied-up in order to reduce the amount of working capital needed for operations before applying any techniques it is necessary to understand the components of working capital that includes cash, marketable securities, accounts receivable, inventories, accounts payable and accrued wages and taxes.

.

.

Working capital policy refers to decisions related to types and amounts of current assets and the means of financing them. These decisions will necessarily involve the management of cash, inventories, credit policy and collection of accounts receivables, short-term borrowing and other financing opportunities such as trade credit, inventory financing, and long-term business decisions. Working capital management policies, target short-term concerns such as receivables financing, availability of raw material and inventories, continuous operation of the production line, granting credit to customers and collecting past-due accounts and management of cash accounts.

Cash flow forecasts provide important data for estimating cash requirements, or investing idle funds not needed for day-to-day transactions, increasing the flow of money that a business takes in requires careful analysis of billing and collection procedures. Here are some points to consider: Should you mail your customers' monthly statements, bill them at the time of the transaction, or both? Vs. Float: mailing checks from more remote areas, then evaluating and taking advantage of the time it takes suppliers to process payments and the time it might take the bank to clear the checks and using the time lapse for investing those funds.

Controlling cash disbursements to improve the availability of cash is a major objective of cash management. Good cash management improves a company's profitability by shortening the collection time line (thus increasing available cash), reducing operational costs, and slowing disbursements of cash. In general, business cash management is concerned with maximizing cash flow, maintaining a cash reserve, managing business lines of credit, and improving operational efficiency. Some of the techniques for cash flow management assisting the CCC (cash conversion cycle) Arranging to pay suppliers accordingly, pay your accounts payable as late as possible without damaging the firm's credit rating, but take advantage of any favorable cash discounts for paying on time. Negotiate for favorable credit terms.

Collections of accounts receivable should be made as quickly as possible without losing future sales because of high-pressure collection techniques. The longer your customer's balance remains unpaid, the less likely it is that you will receive full payment. Conversely, the faster you collect on your receivables, the shorter your operating cycle will be.

Receivables, like inventory, can tie up cash that could otherwise be used to reduce outside financing or be invested in earning assets. Cash discounts for timely payment are often an option for timely receipt of receivables from clients. Wire transfer payments and lockboxes speed up payment receipts and is usually deemed a more customer friendly option, however this option may not be as effective for the business, if the customer has a late payment history, in that case the wire transfer option may be more viable. An electronic funds transfer from the customers' account to the business (very popular option). The use of pre-check authorization allows a customer account to be debited at a certain time of the month the customer signs an authorization form allowing a bank to draw checks against an account at Ð'-every month-which is great unless the customer closes the account without the business knowing until later-which is fraud-but it happens and is a somewhat risky option.

Controlling cash disbursements to improve the availability of cash is a major objective of cash management. Minimizing the effects of cash outflow requires timing payments to maximize your use of funds, while maintaining good vendor relations. This may result in reduced borrowing costs. In addition, reducing operating costs in certain areas can help minimize your expenditures, as in turn over inventory as quickly as possible while avoiding drastic depletions of stock that might result in a loss of sales. Efficient inventory production management involves shortening the production cycle and increasing raw materials turnover. Adoption of the most cost-effective purchasing procedures should be implemented and determining vendors with the most favorable cost-negotiable terms

.

Investing your idle funds in appropriate vehicles earning interest or dividends may increase your company's earnings or minimize tax liabilities, examples of interest earning Ð'-quick cash conversion options are Treasury Bills (T-Bills)-- short-term obligations of the United States government with a smallest denomination of $10,000 and maturing in less than one year

.

Commercial Paper-- unsecured promissory notes of large corporations with high and well-established credit ratings issuers generally provide liquidity by standing ready to buy back the security before it matures.

Certificates of Deposit (CD)-- popular short-term instruments issued by commercial