Cash Management Techniques And Methods Of Short-Term Financing

Cash Management Techniques And Methods Of Short-Term Financing

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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.

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In the past, companies have chosen to use float because it gives them the most control over their cash flow when compared to the other techniques of cash management. While improving collection time and decreasing collection float is important for a company and can be done through an increase in collection centers, the float associated with disbursements can in fact help a company hold on to an interest earning cash balance. However, as beneficial as float may be to a company’s control of their collections and disbursements, it is being limited by the Check Clearing Act of 2003 and by the increasingly popularity of Electronic Funds Transfer. Electronic Funds Transfer limits the ability of a company to use float because the transaction takes place immediately and there is no time delay between the deposit and crediting of funds. While float is good for extending disbursements, Electronic Funds Transfer increases the speed of collections. The prices associated with Electronic Funds Transfer can be as much as 2 times cheaper than the fees associated with processing a check. However, both float and Electronics Funds Transfer can be applied to collections in order to maximize return. While international cash management allows a company to shop around for high interest returns that may not be possible in the United States, it is more complex than other techniques because funds need to be managed across different geographical locations and time zones. International cash management is also subject to changing interest rates and risk of currency fluctuations, which may devalue the initial amount deposited. Marketable securities, although probably the best technique of cash management, run the risk of increasing interest rates that will result in a loss to the company. However, marketable securities are gaining popularity because of their high returns. As one can expect, international cash management and marketable securities carry the highest risk of the cash management techniques, but provide the best possible returns.
Description of the Methods of Short-Term Financing
Trade credit occurs when a manufacturer or seller of goods gives a company advance credit in the form of accounts payable. Bank Loans can be sought-after to provide funds for the financing of product line expansions and long-term growth. Commercial paper, another method of short-term financing, is a certificate issued to the investor, by the company, to signify a debt that will be repaid. Foreign borrowing allows a company to seek outside sources of financing at lower interest rates. Receivables financing and inventory financing both allow a company to secure loans based on their current asset value.
Compare and Contrast the Methods of Short-Term Financing
While all the methods provide ample short-term financing, trade credit accounts for approximately 40%. Trade credit carries the benefit of a possible cash discount, which is a reduction in price if payment is made within a certain period. This gives flexibility to the company when deciding on how long to carry their trade credit debt. Both bank loans and trade credit are generally short-term and provides spontaneous funds of financing. However, bank loans run the risk of compensating balance requirements. When interest rates increase, banks may require a higher compensating balance, which decreases the amount of actual money lent to the company. Commercial paper methods of financing are also short-term, but also have the advantage to be issued below the prime interest rate of bank loans.
Commercial paper does not run the risk of compensating balances, like bank loans, but these papers can be lost, stolen, misplaced, or damaged. Because of this risk, commercial paper is becoming computerized, which lowers the cost and simplifies administration when compared to other methods. Commercial paper only allows for companies with good credit rating to enter the market. In contrast, bank loans offer a degree of loyalty and commitment that is unavailable with commercial paper. Foreign borrowing allows a company to take advantage of overseas loans that can be cheaper then domestic loans. Foreign borrowing, like the other techniques, is also short-term in, but runs the risk of foreign currency inflation. The use of receivables and inventory as collateral in financing is also short-term. Receivables financing is popular because it fluctuates with the level of asset expansion. As the level of accounts receivables or inventory increases, so does the amount that can be borrowed by the company. This method of financing is relatively expensive when compared to the other methods.
Whether it is cash management or short-term financing that is being considered, both have the goal of ensuring sufficient funds for the company in order to maximize profitability. Cash management involves control over the receipt and payment of cash so as to minimize non-earning cash balances and to earn interest in short-term financing with the freed up cash.


Block, Stanley B. (2005). Foundations of Financial Management (11th Ed.). Current Asset Management. Chapter 7; p. 174-209. Retrieved October 14, 2006 from rEsource from the University of Phoenix Student Website.
Block, Stanley B. (2005). Foundations of Financial Management (11th Ed.). Sources of Short-Term Financing. Chapter 8; p. 210-235. Retrieved October 14, 2006 from rEsource from the University of Phoenix Student Website.
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