CASH
and
CASH MANAGEMENT
CASH
refers to money in the physical form of currency, such as banknotes and coins.
In bookkeeping and finance, cash refers to current assets comprising
currency or currency equivalents that can be accessed immediately or near-immediately
Cash is seen either as a reserve for payments,
in case of a structural or incidental negative
cash flow or as a way to
avoid a downturn on financial markets.
MARKETABLE SECURITIES
are short-term, interest-earning, money market instruments
used by the firm to obtain a return on temporarily idle funds.
THE EFFICIENT MANAGEMENT of CASH
Cash and Marketable Securities are the most liquid of the firm’s assets.
Together they act as a pool of funds that can be used to pay bills
as they come due and to meet any unexpected outlays.
CASH CONVERSION CYCLE
the amount of time a firm’s resources are tied up.
CASH TURNOVER
the number of times per year the firm’s cash is turned into a
marketable product and then back into cash.
OPERATING CYCLE
is the time from the beginning of the production process to the collection
of cash from the sale of the finished product.
CASH CONVERSION CYCLE
CASH TURNOVER
C C = AAI + ACP - APP
C T = 360 / C C
OPERATING CYCLE
O C = AAI + ACP
where
CC
AAI
ACP
APP
C T
=
=
=
=
=
Cash Cycle
Average Age of Inventory
Average Collection Period
Average Payment Period
Cash Turnover
OPPORTUNITY COST
the cost to the firm of forgone returns due to its failure to
undertake available investment opportunities.
MINIMUM OPERATING CASH
=
TOTAL ANNUAL OUTLAYS
———————
CASH TURNOVER
CASH MANAGEMENT STRATEGIES
STRETCHING ACCOUNTS PAYABLE - to pay bills as late as possible
without damaging its credit rating.
EFFICIENT INVENTORY-PRODUCTION MANAGEMENT - to minimize
required cash is to increase inventory turnover.
ACCELERATING the COLLECTION of ACCOUNTS RECEIVABLE - to reduce
the operating cash requirement is to...