Most companies do not want to keep any more cash on hand than what is absolutely necessary. Most companies must keep some cash for transactions, bank payments, and potential emergencies. The opportunity cost of holding an excess of cash rather than reinvesting it into current assets or growing the firm's fixed assets is often significant. There are multiple techniques that a firm can employ to manage its cash. Some of these techniques include float, short-term investments, and international cash management. These techniques are discussed in the following sections.
Due to the opportunity cost of holding excess cash, most companies try to leverage the minimal amount of cash that they carry to cover as many payables as possible. One way that firms achieve this goal is by employing the use of float. Float refers to the difference between the balance carried on the corporate books and the amount credited to the corporation by its bank (Block & Hirt, 2005). Payables and receivables are entered into corporate books as processed; however, the actual transactions will not be recorded by the bank until the payment has been received and processed by a company and later processed by the bank. Companies frequently work to take advantage of this opportunity to use their cash up until it is claimed by the recipient's bank by improving collections and extending disbursements. The more efficiently a firm can collect on its receivables and the more time it can take in paying its own bills, the lower the firm's cash requirements for payments will be. While some companies take this to the extreme of consistently operating with a negative cash balance in their books, they must be aware of the risk of being caugh...
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... options available in managing the cash of a company. One must carefully consider the best ways to get returns on cash reserves through short-term investments when appropriate. Likewise, he or she must determine the most affordable ways to obtain short-term financing as needed. One of the greatest challenges for a firm's financial manager is that the correct method will not be consistent from one time to the next; the circumstances surrounding the need to invest or obtain cash must be carefully considered. Risks must be weighed against the benefits of each option before any method is selected thus allowing an organization to quickly make the best decision for each cash-related business circumstance, maximizing the firm's returns.
Block, S. B., & Hirt, G. A. (2005). Foundations of Financial Management. (11th ed). New York, NY: The McGraw-Hill Companies.
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