Cash Management Paper Cash is the lifeblood of companies. Cash provides the liquidity needed to meet everyday obligations owed to suppliers and creditors and the flexibility to take advantage of new opportunities that may arise. Managing cash is a delicate issue for many firms research work as it determines the items for measurement and the statistical relationships being studied. A theory is a reasoned statement or group of statements, which are supported evidence meant to explain some phenomena. Cash Management theory The purpose of cash management is to determine and achieveFile Size: KB Research Papers Cash Management Services, successful defense thesis for students teachers, ielts preparation course british institute of florence, assignment help mba college admission application/10()
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Cash Management Paper Cash is the lifeblood of companies. Cash provides the liquidity needed to meet everyday obligations owed to suppliers and creditors and the flexibility to take advantage of new opportunities that may arise. Managing cash is a delicate issue for many firms.
For businesses cash is the key to daily operations, but cash is a non-earning asset. Dollars tied up in cash could be earning higher rates of return if research papers cash management services in other areas. Large corporations spend considerable time and resources in cash management; dollars are transferred back and forth between marketable securities and cash accounts that earn a higher rate of return.
Negotiated credit lines serve to supplement depleted cash during periods of shortage, research papers cash management services. Short-term financing is a portal that allows firms to operate with a low cash research papers cash management services. The first part of this paper will explain the various cash management techniques. The second half of the paper will address the types of short-term financing a financial manager of a firm has to choose from.
Cash Management Techniques While private citizens are often taught conservative cash management practices, most companies do not want to keep any more cash on hand than absolutely necessary. Multiple techniques can be used by a firm to manage its cash. These techniques are broken down into three separate categories: collections and disbursements, management of accounts receivable, and inventory management.
Companies can use this to their advantage. A company can manage their cash by improving collections by using collection centers or lockbox systems. Collection centers help companies process checks quicker. Lockboxes process checks quickly and at a lower cost. Banks assist firms in controlling disbursements. This allows the firm to time their payments so that they hold their cash as long as possible.
The costs of a comprehensive cash management program can be substantial. The use of disbursement centers and remote collection can be expensive; along with the banks that may charge a fee or require the maintenance of adequate deposit balances, research papers cash management services.
The use of a lockbox system may bring costs down, but overall the costs are significant. The firm needs to run a cost-benefit analysis to compare the expenses of the cash management program to the benefits that will be accrued by having a comprehensive program.
Electronic funds transfer is the process of moving funds from one computer terminal to another without the use of a check.
Automated clearing houses ACH transfer information between one financial institution to another, and from account to account via computer. Direct deposit of checks is one of the most popular uses of ACHs. Corporations that do business in many nations can shift money from country to country. Interest rates are different in all countries; therefore, a company may prefer to take advantage of high interest rates available in a particular country.
Financial institutions and businesses can now make multicurrency payments via computer. Marketable securities are very liquid as they tend to have maturities of less than one year.
Firms will maintain levels of marketable securities to ensure that they are able to replenish cash balances quickly and to obtain higher returns than is possible by maintaining cash. Companies will hold securities with very research papers cash management services risk for their immediate cash needs.
Other highly liquid instruments such as money market funds and certificates of deposit, are also maintained as marketable securities. Management of Accounts Receivable Firms maintain accounts receivables to stimulate sales. Many clients prefer to make purchases on credit. A liberal accounts receivable policy tends to result in increased sales levels.
That is, firms may stimulate their sales levels by relaxing their terms of credit. However, maintenance of accounts receivable represents an opportunity cost to the firm in terms of forgone returns on other assets. Furthermore, accounts receivable represent potential bad debt losses to the firm. The firm must find the appropriate balance of these costs relative to the benefits associated with accounts receivable, research papers cash management services.
This appropriate or optimal balance occurs when the marginal costs of credit policy exactly offset its marginal benefits. Many firms will establish a credit period for their customers but will offer discounts to research papers cash management services them to pay early. Longer credit periods or more liberal credit terms are likely to stimulate sales, but at the same time, the firm forgoes the use of its money for a greater length of time and increases the potential for bad debt losses.
Increasing the percentage discount will help speed the collection process, but at the expense of total cash flows from sales. Many firms will ease credit terms for products that take longer to sell. Such low turnover goods are more likely to be tied up longer as inventory; using liberal credit terms to defer cash receipts from their sale is less costly if the alternative is higher inventory levels. Before extending credit, the firm will probably wish to investigate the credit-worthiness of the customer.
Inventory Management Inventory falls into three categories raw material, work in progress, and finished goods.
The firm needs to decide if they are going to follow a level or seasonal production plan. It also must take into account inflation and deflation.
It must hedge by using a futures contract to sell at a certain price in the near future. The firm must develop an inventory model. It can do this by first assessing various costs, including those resulting from ordering inventories and those associated with carrying inventory.
Order costs will include all expenses resulting from obtaining inventory such as administrative ordering costs incurred by the firm, fees to agents, and in some cases, shipping costs. Inventory carry costs will include storage expenses such as warehouse heating and lighting costs. With this information the firm can then determine the economic ordering quantity EOQ. This is the most advantageous amount for the firm to order each time. The equation is:. If an entity runs out stock it could lose sales to a competitor.
This may cause a firm to hold what is called safety stock. Even though the company will determine the optimum order quantity, they cannot predict the delivery schedules for suppliers or the fact that there will be stock to purchase when the old inventory reaches zero.
This safety stock will help reduce these risks. Just-in-time inventory JIT is a way to keep inventory costs down. This concept started in Japan with Toyota. Three components must be present: quality production with customer satisfaction; close ties between suppliers, manufacturers, and customers; and, low inventory. The benefits of JIT include cost savings from lower levels of inventory and reduced financing costs, research papers cash management services.
Methods of Short-Term Financing Short-term research papers cash management services opportunities are available in a variety of ways to companies. Most of short-term transactions covered by financing are for periods of days or less. Short-term financing is required when the need to increase inventory is present.
Inventory is then converted to sales. When extended payment terms are given to these sales, research papers cash management services, accounts receivable are created. Inventory and accounts receivable are short-term and provide a collateral base for a lender to provide financing. A company may need financing when the inventory and accounts receivable grow at a fast pace as a result of continually increasing sales; this creates the need for funds to support the increase in the accounts that are growing at a faster rate than the accounts receivables can be converted to cash.
The many different types of short-term financing will be explored throughout the rest research papers cash management services the paper. A firm will use its accounts payable to fund future operations, research papers cash management services is called trade credit. The usual payment period for trade credit is 30 to 60 days. Many companies allow a research papers cash management services discount to encourage early payment. Failure to do so will result in the full amount being due in 30 days.
Because of bank deregulation an entity now has access to many different kinds of banks that can be used for short-term financing; commercial banks, savings and loans, credit unions, brokerage houses, and new companies offering financial services are just a few options that firms can choose from. When using a bank for short term financing prime rates need to be considered.
Since London is the center of the Eurodollar deposits, United States businesses can borrow from London banks quite easily. The London Interbank Offered Rate LIBOR is usually lower than the prime rate in the U. Many banks require a compensating balance when money is borrowed. This must be looked at closely by the financial manager. This requires the company to borrow more than is needed because a portion of the loan will be kept in research papers cash management services account with the bank.
When a company takes a term loan or secures a loan with interest and a compensating balance a cost-benefit analysis needs to be done by the financial manager, research papers cash management services. The cost for borrowing money these ways can be high.
The amount of money the company might expend on securing short-term financing through a bank might not be a financially smart decision. Commercial paper is broken down into two categories: finance paper and dealer paper.
Finance paper is sold directly from the finance company to the lender. Dealer paper is sold by small companies such as utility firms, industrial companies, and financial firms. The commercial paper is then distributed by intermediate dealers for the small companies. Financial managers like using commercial paper for their short-term financing needs because they have no compensating balances and the charged interest rates are usually below the prime interest rate.
Accounts receivable financing is a way for the research papers cash management services to get the funding. A company can either pledge the accounts receivable or factor them.
If the borrower defaults on the loan the lender will have full recourse against borrower. Interest rates are generally well above prime for this type of loan, research papers cash management services.
Factoring the accounts receivables means that research papers cash management services company sold those accounts directly to the lender. The borrowing firm will pay the factoring firm a commission fee as well a lending rate for assuming the risk of the accounts receivable.
Introduction to Cash Management Process
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