Cash Management

Running head: FINANCIAL MANAGEMENT

Financial Management: Cash Management Comparative Analysis

Beverly V. Armour-Thomas

University of Phoenix

February 10, 2008

Introduction

Cash management can have several definitions such as 1) the efficient management of cash in a business in order to put the cash to work more quickly and to keep the cash in applications that produce income. Or 2) accounting for the cash outlays and the recovery of cash or 3) a strategy by which a company administers and invests its cash and finally 4) the control of cash collections. Regardless of the definition, managing cash in a small, medium or large business is an important function for financial managers. Recall your parents referring to a "rainy day fund" or emergency fund? Cash management for corporations has similar characteristics. According to Block and Hirt (2005) A business may have need to use cash to pay for corporate expenses such as supplies, payrolls and taxes and can be used to alleviate long-term debt or fixed assets. In this paper, a review of several cash management techniques will be examined.

Cash Management Techniques

There e are a number of techniques that would assist a business in managing its cash flow. Financial managers will examine the three inputs that form the basis of cash flow: sales, receivables and inventory to determine the best cash management technique. In the following paragraphs, a comparison of various techniques will help to understand the complexities of cash management.

Collecting receivables is a technique that requires aggressive collection of overdue accounts. It reduces the time between delivering the product or service to the customer to assuring payment is received by the customer in a shorter cycle. It is very advantageous to increasing the cash flow in the short run with no negative impacts in the long run. Unlike the implementation of more stringent credit requirements or pricing adjustments that requires the customer to pay cash for purchases. Collecting receivables is a straightforward method for the business and its customers. While tightening credit requirements and adjusting prices will generate positive cash flow in the short run, but create a disadvantage to the business in the long run.

Tightening credit requirements increases the cash on hand and reduces uncollectible accounts, while loosening the credit requirements will increase customer purchases, but also increases the possibility of higher uncollectible.

Collecting receivables, adjusting prices on products or services or tightening or loosening credit requirements, does not require the company to involve an outside party as in the case of acquiring a short-term loan.

Increasing sales could increase cash flow, if large portions of the sales are not made on credit. A substantial increase in sales could decrease the cash reserves, if receivables are not collected until 30 days or more after the sale.

Managing the company expenses for travel, supplies, payroll, purchases and other items will increase the cash flow for the company. Managing expenses may include watching the expenditures for supplies and eliminating overtime payment could help to increase the cash flow. This technique is different than the five above, because it allows internal staff, employees or managers to contribute to reducing and managing expenses on an ongoing basis which has a short term and long term effect on profitability.

Finally, maintaining a cash reserve or rainy day funds can be beneficial to cover unexpected expenses or provide quick money on hand to make large purchases or to cushion the equivalent of one month operating expenses. Unlike the previous cash management techniques, maintaining a cash reserve is not determined by sales, revenue, inventory or customers. It is simply a management decision that is implemented by the financial management team.

Short-Term Financing Methods

The main methods of short-term financing are trade credit, commercial bank loans, commercial paper, and secured loans and cash discount

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