Cash Management Essay

1332 words - 5 pages

Cash Management PAGE \* Arabic 1
Running Header: CASH MANAGEMENTCash ManagementUniversity of PhoenixAugust 13, 2007Cash ManagementTo help control the cash balance of the business, a number of models have been proposed. A model developed proposes the use of upper and lower control limits for cash balances and the use of a target cash balance. Such model assumes that the business will invest in marketable investments that can easily be liquidated. As necessary, these investments will be purchased or sold, to keep the cash balance within the control limits (Atrill & McLaney, 2001 p.318).For the businesses cash balance, upper and lower limits are set by management. Action will have to be taken when the balance goes beyond either the upper or lower limits, unless it is clear that the balance will return fairly quickly to within the upper or lower limit, respectively. If the upper limit is breached, some cash will be used to buy some marketable securities. The business will need to sell some securities or borrow some cash, if lower limits are breached. The model banks heavily on management judgment to determine where the control limits are set and the period within which breaches of the control limits are acceptable. Past experience may be useful in helping managers decide on these issues. Other models are used that do not rely on management judgment and which instead, use quantitative techniques to determine the optimum cash policy (p.318).Another technique to manage cash effectively is for a business to prepare a cash budget. This is a very important tool for both planning and control purposes. These enable the managers of a business to see the expected result of the planned events on the cash balance. The cash budget will identify periods when there are expected to be cash surpluses and when there are cash shortfalls expected. Managers must decide on the best use of the surplus funds when a cash surplus is expected to arise. When a cash deficit is expected to rise, management must make provisions by borrowing, liquidating assets or rescheduling cash payments or receipts. Cash budgets are also useful in helping to control the cash on hand. The actual cash flow can be compared with the budgeted cash flows for the period. Any significant divergence between the budgeted cash flows and the actual cash flows, management has to make the necessary corrective actions (p. 319).It is important to be aware of the operating cash cycle of the business when managing cash. This is the time between the outlays of cash necessary for the purchase of goods and the receipt of cash from sale of goods. In the case of purchases of goods on credit and the subsequent resale on credit, no immediate cash outflow arises from the purchase. Similarly, there will be no immediate cash inflow as a result of the sale. This method is important because it has a significant influence on the financing requirements of the business, the longer the cash cycle, the greater the...

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