The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going. 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 Management Techniques There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer. In order to facilitate the growth of assets a firm must control its assets by matching production and sales. To manage sales and productions, organizations “employ level production methods to smooth production schedules and use manpower and equipment efficiently at a lower cost” (Block & Hirt, ... ... middle of paper ... ...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005). Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth. References Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill. McHugh, J. M., McHugh, S. M., & Nickels, W. G. (1999). Understanding business. (5th ed.). New York: McGraw-Hill.
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Organizations that have high free cash flow, creditors are willing to invest in these companies since these companies have powerful tools for debt repayment and they clearly have greater financial flexibility. On the other hand, cash enables managers to develop growth opportunities and development programs that will lead to an increase in company 's value. The free cash flow theory was first introduced by Jensen (1986), he stated that “Free cash flow as cash flow left after the firm has invested in all available positive NPV projects”.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Since futures derive their value from a financial asset they can be used by investors to gain exposure to other financial instruments such as, indexes, stocks, commodities and currencies. This makes them a powerful tool in hedging risk because the “futures market attempts to lower transaction costs and generate liquidity. An exchange facilitates trade by removing uncertainty about the reliability of the other side of the trade, and by developing a standardized contract, so that a large enough group of interested traders will exist so that positions can be offset without large price disruptions” (Carlton, 1984, p. 239). Therefore, transactions within a futures market provide a network in which investors can offset price disruptions, effectively hedging
In our business world, ‘Capital is the lifeblood of every business venture’ (Smith, 2012). Capital can build up company, purchases non – current assets for instance machinery or plant and paid off daily expenses for examples wages, lighting, power etc. Every company needs to have someone to manage the finance by thinking different types finance which are internal short term, internal long term, external short term and external long term financial resources. These are the main four ways which can raise the capital but those sources may relate to different repayment rate and length and the amount will be received. When the owner and manager thinking to apply internal or external financial resources they need to consider Purpose, Amount, Repayment, Interest and Security which is name as PARIS. Purpose is identifying what type of finance are suitable to required, amount is how much should be borrow, repayment is how much and when should the business pay the finance back. Interest is how much is the finance cost and security is the business need put down the business assets or personal household as a deposit before receive any finance. These are the main concepts owner and manager need to remember before apply any type of finance. (Cox and Fardon, 2009) Director and manager need to think effectively for rising capital in an effective way which includes lower repayment and the control of the company. (Gillespie, 2001)
When you see a trend that is restricting a positive cash flow, then you need to have tools at hand to correct the problem, fast. When developing a plan to infuse cash into the business, make sure you line up the sources for the appropriate use. For instance, short term cash problems can be handled with credit cards or a line of credit. Longer cash flow needs might be financed through long term secured loans or a capital loan.
Brealey, Richard A., Marcus, Alan J., Myers, Stewart C. 1999, Fundamentals of Corporate Finance, 2nd edn, Craig S. Beytien, USA.
According to (Power!), cash flow management is described as an important process of supervising, analysing and controlling our personal financial situation. Cash flow includes two critical components which is income (inflow) and our expenses (outflow). Developing cash flow management is an important step in order to track your own spending and manage your income proactively. Moreover, you should track this weekly, monthly or even quarterly. To prepare a clear cash flow statements, three steps should be taken. First step, you should make a clear list of your inflows. Second step, you can know how your money have spent by recording your cash outflow monthly. For instance, you should write down all of your expenses and differentiate your fixed
The second important objective of cash management is to maintain the optimum level of cash balance. This implies that the firm should have such amount of cash balance which is neither more nor less than what is required. A higher cash balance leads to idle balances ultimately incurring extra cost to the firm while it maintains low cash balances it can risk the operation of the firm because of delay in making the payments to the vendors, suppliers, etc. Hence, an effective cash management should always focus on most optimal cash balance.
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
The appropriate amount of cash balance to be maintained should be determined on the basis of past experience and future expectations. In case the company maintains less cash balance, its liquidity position will be weak. On the other hand, if it maintains a higher cash balance then an opportunity to earn will be lost. Thus a company should maintain an optimum cash balance which is neither too small nor too large. To ensure this, the company should match the transaction costs and risk of too small a balance with the opportunity costs of too large a
What is more, the author wrote that in the companies with long operating cycles cash flow accounting would be a relatively poor measure of performance in contrast to accrual accounting (Dechow, 1994, p. 7). This research, combined with the statement about accrual method complexity, supports the claim of Professor Feleaga who said “cash accounting has overpassed the accrual accounting. Moreover, nowadays, small enterprises and most of the private businesses use, under different forms, the cash accounting” (as cited in Toma et al., 2015, p.
Cash is a medium of exchange, a store of value and a unit of account and a business needs to have sufficient cash in order to be able to pay its liabilities. Higher cash ratio (ratio of cash and cash equivalents to current liabilities) suggests that the business is liquid (i.e. it is expected not to face any difficulty in paying its very short-term liabilities).
Bodie, Z., Kane, A., & Marcus, A. J. (2011). Investments. (9th ed.). New York, NY: McGraw-Hill/Irwin.