Introduction
Proper cash management and efficient short-term financing are both important and beneficial to a company in order to maintain a competitive market share, which will increase profit potential and shareholder value through rising stock. Cash management can be used to lower or eliminate idle cash balances that do not earn revenue, using the freed up cash as sources for short-term financing through interest building securities. Short-term financing allows a company to secure needed funds in order to meet production needs and gain maximum profitability.
The first part of this paper will compare and contrast the techniques of cash management that are available to a financial manager and his/her company. Cash management techniques include collection/disbursement float, Electronic Funds Transfer, international cash management, and marketable securities. The second part of this paper will compare and contrast the methods of short-term financing that are available to a financial manager and his or her company. Methods of short-term financing include trade credit, bank loans, commercial paper, foreign borrowing, receivables financing, and inventory financing.
Description of Cash Management Techniques
Float is the difference between a company’s recorded amount of available cash and the amount that has been credited to the company by the bank that results from time delays in certain processes within the banking system, such as mailing and clearing checks. Companies “play the float” in order to decrease collection times or extend disbursement dates, allowing them to have more cash on hand to use for interest building securities. Electronic Funds Transfer is a system that allows funds to be transmitted and credited electronically without the presence of a paper check. Electronic Funds Transfer increases the efficiency of the banking system and decreases collection float time. International cash management is a technique that allows a company to deposit money in countries with high interest returns. International cash management provides opportunities for a company to invest in high return loans that maximize profitability. Marketable securities is a technique that turns non-generating cash into interest generating revenue through treasury bills, treasury notes, CD’s, commercial paper, Eurodollar deposits, and savings accounts.
Compare and Contrast Cash Management Techniques
As stated in the intro, all of the cash management techniques are used to eliminate unwanted cash balances that do not generate revenue, turning them into interest earning securities. This elimination of cash balances is done through the control of collections, or cash inflow, and disbursements, or cash outflow.
...l. If a transaction is missing or the cash on hand is not adding up management should be notified.
This statement is used to report cash payments and cash receipts of an organization’s during a certain period. During 2015, the Group had operating free cash flow amounting to 606 million euros, versus a negative 164 million euros a year earlier (Air france-klm group, 2016). The statement displays the relationship of the net income to the changes in the cash balances. It is important to understand that cash balances can wane despite and increase in net revenue or vice versa Horngren, 2014, p. 674). The statement also aids in the evaluating management’s use of cash and management’s generation, defining a company’s capability to pay dividends and interest to pay debts when the time comes to pay them, and forecasting upcoming cash flows (Horngren, 2014, p. 674).
The decision regarding the level of overall investment in working capital is a cost/benefit trade-off - liquidity versus profitability. Unprofitable companies can survive if they have liquidity. Profitable companies can fail if they run out of cash to pay their liabilities. Liquidity in the context of working capital management means having enough cash or ready access to cash to meet all payment obligations when these fall due. The main sources of liquidity are
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a preson or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors. Debt financing is beneficial because the loaners do not often get involved with the company or any decision making within the company. The downfall is the risk that is assumed with the debt which is, the company may not be able to pay back the loaner. In that case, the loaner would go after the owner or partner personally. There are many forms of debt a company is allowed to take on, such as ‘venture’ debt, even if they are a high-risk corporation. ‘Venture’ debt is a form of senior debt ...
Legitimate administration of working capital parts empowers the organizations to hold abundance free trade streams which can out turn be interest in productive speculations to create benefits for the firm. Cutting of expenses significantly affects the free income held by the firm; this allows the firm to have extra funds to exploit beneficial speculation extends that can yield higher returns. Free income does not just effect on incomes and gainfulness of the firm additionally the administration of the monetary record. In the event that the firm neglects to deal with its net working capital appropriately then free money streams may be lower than the net income of the firm. Late research by Hubbard (1998) demonstrates that there is a noteworthy positive relationship between free money streams and benefit, an expansion in the level of money stream of a firm prompts a comparing increment in benefits of the firm. This is accomplished through contributing. The firm ought to consider settling on key venture choices to make utilization of extra money streams. For instance firms that hold abundance trade may utilize it out purchasing overrated firms as opposed to paying out profits to the shareholders. This is conceivable notwithstanding when the organizations have a low budgetary limit in the wake of making acquisitions since they put resources into non productive speculation ventures (Carolyn, Carroll and Griffith, 2001). Firms can choose to hold free money streams for theoretical reason as they sit tight for a productive venture that can guarantee better returns in future. The firm can likewise choose to put resources into danger ventures that have higher returns; these speculations may later yield better returns which could be beneficial to the firm. Then again if6 inadequately contributed free
Inventory being another reason it is hard for Jackson Company to use in the expenses management (Kinney, Raiborn, and Raiborn, 2010). The challenge arises where investment of the products are needed in the event of carrying them for your customers purchase and counterbalance its cost. The company takes a loan to equalize inventory charges as it also remains updated on customers and the trending needs without injuring its flow of cash. As a third reason Cash flow has become challenging for Jackson Company and it still poses a challenge when working with clients who do not pay for their services offered or having unsold stock that requires clearance(Kinney, Raiborn, and Raiborn, 2010). Jackson Company finds the situation tricky when involving the daily expenditures on rent, utilities, staff and inventory. The loan offers money in utilization of daily operations and assists the company survive during the low profits. By having cash flowing in, you can proceed in providing new customers in running revenue ensuring that the losses are catered
Cash is disbursed for a variety of reasons, such as to pay expenses and liabilities or to purchase assets. Generally, internal control over cash disbursement is more effective when payments are made by cheques rather than by cash, except for incidental amounts that are paid out of petty cash. Payments are made by cheques generally only after specified procedures have been followed. In addition, the paid cheques provide proof of payment. (Kloot and Sandercok 1991)
Therefore, the company looses cash, which could aid further business operations. Increase numbers of creditors - countless businesses acquire credit to operate, however, too much credit can become a problem for a business, especially, if it also offers credit to customers. This is because you’re ability to pay your credit is dependent on whether your debtors pay you in due time. Therefore, in case they don’t, the business will surface cash flow problems. Over-financing – excessive borrowing to finance your business can result in higher interest rates and tougher repayment schedules and this can lead to cash flow challenges. Over-trading – when a business sells over and above its capability on credit, it results to loans or overdrafts to finance the transactions. If the customers do not pay on time, cash flow problem occurs. Over-investment – often times, a company may be tempted to utilise available cash for investment; purchase vehicles, machinery, premises, and other assets. Too much investment in assets and failure to budget for the future can cause a business to run out of cash and consequently, fail to finance
Transactions Motive – A company is required to hold cash to conduct its business in the ordinary course. It needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends etc. The need to hold cash would not arise if there were perfect synchronization between cash receipts and cash payments, i.e. enough cash is received when the payment has to be made. However cash receipts and payments are not perfectly synchronized.
The main purpose for the working capital management is to continue its operations with the sufficient ability in satisfying both maturing short-term debt as well as upcoming operational expenses in a firm. Inventories, accounts receivable, payable, and cash are all managed by the working capital management with the necessary of a well working capital management system needs to continue to be a way for many companies to improve their earnings. Ratios analysis and management of individual components of a working capital are two main aspects of this capital.
Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.
Cash is known as the king in business world. Thus king (cash) should be managed well to be in the business and also to grow financially. Cash management is key to run the business efficiently that will also avoid the bankruptcy. Cash management is all about collecting, managing, investing and disbursement of the cash. A very important and key factor for the company 's stability. Cash management are generally taken care by treasurers of the company or the business managers.
Working capital is the most important of all the financial concepts a business owner should understand. By definition, it is the money needed to sustain the day-to-day operations of a business (Staff, 2013). When you first start a business, you will be required to have a sufficient working capital in order to keep the business running smoothly. Conversely, lack of working capital may cause businesses to fail. Working capital can come from net income, long-term loans, sale of capital assets and fund contributed by investors, but many business owners use their personal financial resources to fund their businesses. Working capital also gives confidence on a business. Having sufficient of it makes it easy to attract investors or get business loans. Working capital is really important in business because it helps the business to continue its operations. However, it is not only important to maintain your capital but also business owners should know how to manage it. Another concept related to this is the working capital management. According to Sunday (2011), working capital management is very essential concept in a business. It maintains the financial stability of the business and keeps the smooth running of the business. Working capital management also ensures the cash flow of a business. This allows the business to cover all its liabilities and obligations in time and it also prevents the risk of bankruptcy. A successful working capital management helps the business to stay solvent and ensure that the business has good working capital stability. Working capital management includes managing inventories, accounts receivable and payable, and cash. In a small and medium scale enterprise, it is very important to apply this concept becau...
Sources of finance are the different methods for a business to earn and obtain money. There are lots of ways to obtain money but two large basic sources of finance, which are the “owner’s capital” and “capital borrowed”. They are also called internal sources of finance and external sources of finance. In those sources, they are mainly divided in two groups, which are short-term sources of finance and long-term sources of finance.