Cash Management Paper
INTRODUCTION
Cash management techniques provide a framework for companies to follow that will enable it to maintain cash that is needed to operate the business. The primary goal of cash management is to maintain low balances of cash on hand but at the same time striking a balance so that necessary cash is available to pay for planned transactions, unexpected transactions, and compensating balances to banks for services provided (Block & Hirt, 2005). As part of the cash management strategy, a company may also look to short term financing to maintain its cash reserve. This paper will compare and contrast the various cash management techniques and the various methods of short-term financing that are available to companies to manage cash flow.
CASH MANAGEMENT TECHNIQUES
One cash management technique involves the study the company’s daily, weekly, and yearly cash flow cycle and cash balances (Block & Hirt, 2005). “Cash flow relies on the payment pattern of customers, the speed at which suppliers and creditors process checks, and the efficiency of the banking system.” (Block & Hirt, 2005, p. 175). Once a sale is completed, the company either receives an immediate cash payment or an account receivable which will be collected at a future time to assist in purchasing or manufacturing additional inventory (Block & Hirt, 2005). The rise of ecommerce has also provided a cash flow benefit to companies in that all sales require a credit card (Block & Hirt, 2005). When customer’s use credit cards issued by other venders, the company will receive its cash payment within 7 to 10 days, as compared to the typical 30 day wait if their own credit card were used (Block & Hirt, 2005). Therefore, the company’s cash flow will help the financial manager to forecast the available cash for the company.
Companies may also manage cash through collections and disbursements. One strategy is dependent upon float, the difference between the corporations...