What is Cash Management

By businesses projecting the inflow and outflow of cash, the financial manager can determine the amount of cash that will be available during a select period. Assorted techniques of this projection can be through a cash flow projection, shortening collection cycles, offer credit, monitor inventory, electronic funds transfer (EFT), and E-Commerce.

Preparing a cash flow projection is a useful tool in aiding the financial manager for future plans. If first starting out, projections should be done on a month-to-month basis, then yearly (Block & Hirt, 2005). Therefore, providing historical data in order to take those values and determine the possible cash level.

As a result of controlling inventory to sales surmises that current assets will not go up and down. Which in turn helps eliminates having to discount items or pay for storage. An example used by Block and Hirt (2005) was McGraw-Hill and textbooks. Too many or too little textbooks produced would mean loss of sales or excess inventory that could not be sold until the following school year. Businesses should buy inventory at the best price and that can be sold within a short time. Service businesses do not have to worry about inventory, but like most firms, they look for vendors that will offer stretch payments. Vendors that allow firms to pay within 30 to 60 day give those businesses more readily available cash. On the other hand, a business wants to expedite their customers payments and can do so by offering incentives like discounts on the entire bill or pushing up the payment cycle and include stiff late fees. (AllBusiness, 2007).

Using EFT is almost certainly is the most efficient and cost savings tool for a firm. Not only will it encompass all the above actions discussed, but it can be used for direct deposit of paychecks, and allow the firm to make their payments to creditors at the last minute. This table shows some of the cost savings of EFT compared to paper checks. Item Typical Cost Saved by Paper check stock $.02 -> $ .25 Payer Paper remittance forms $.02 -> $.15 Payee Envelopes $.02 -> .10 Payer or Payee Postage $.22 -> $.33 Payer, Bank on statementing Photocopies of checks $.02 -> .05 Payee, Bank on research items Filing cabinets, storage space varies Payee, Payer, Bank

While each savings sounds small, they add up quickly, savings can total as much as $.50 per check (Echeck, 2008). Reasonably priced alternatives to EFT are Regional Collection Centers or a lock box system that can cash checks quicker. However, the time period is usually 24 hours and there is an additional cost to the firm. The internet makes E-Commerce a must for business. Purchases and payments can be made 24/7. A wider range of customers can be served, and investments by a company can be made though transactions.

Businesses seeking loans want the lowest interest rate possible. Since the U.S. dollar is the world's international currency, many firms look for Eurodollar loans that offer the London Interbank Offered Rate (LIBOR). The LIBOR rate is lower than the prime interest rate, making these loans more favorable. One of the problems of this loan is that most are given to larger worldwide companies like McDonald's, which has numerous loans in euro-based currencies (Block & Hirt, 2005). Smaller firms seek loans from commercial banks which run from six months to a year, or seek a self-liquidating loan. Consequently, the problem with the latter is that the sale of current assets provides the cash to pay for the loan. Therefore, if the assets are not sold, a business can become bankrupt immediately. Other loans are available that can compensate for a small or large business. This type of loan allows a bank to supply credit to a business, but funds have to be immediately available to cover 20% of the loan fee and 10% of future commitments (Lowe, 2006).

In a trade credit, a company receives goods immediately, but does not have to pay until 30 or 60 days. Depending on the loan and vendor, a discount may be offered if it is paid with a specific time. An example would be using a credit card from Home Depot to purchase a new bathroom. Home Depot will finish the work but will not get paid for the work until later. Trade credits are also used as a signaling effect on the performance of both the seller and buyer. Companies with poor track records will have difficulty in getting longer credit days, so many opt not to see trade credit.

Commercial paper is an unsecured promissory note, money market or certificate of deposit issued by large banks and corporations. The short-term investment is usually for a minimum of $25,000 and to purchase inventory or to manage working capital (Wikipedia , 2007), which is why businesses selling products use this type of financing.

One of the most common tools used in short-term financing is the bank overdraft. A bank issues the overdrafts with the right to call them in at short notice, although most have a certain period attached to them. This type of financing should not be used to purchase machinery or equipment since the bank can call in the loan at short notice. Bank drafts are a good use for companies with season fluctuations in trades such as nurseries which have down times during the various seasons.

Every business should know the best way to manage its money and what finances are available if needed. Mismanaging a firm's cash inflows and outflows may have the company facing a liquidity crunch, which in turn means to borrow funding. If this were to happen, a business may take a loan or line of credit at a higher rate. Planning ahead by a business by means of cash management techniques can prevent this from happening. Cash flow management can also help a company show a profit and productively stay in business.

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