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Cash Management Essay

1010 words - 4 pages

IntroductionOne of the most critical functions of a firm's financial manager is that of cash management. Unlike long-term forecasting or choosing to expand a company's fixed assets, cash management requires constant, immediate, and responsive decision-making. Because inventory and demand for cash change daily, the financial manager must be well-versed in the most effective ways to manage the cash a firm has, along with the most efficient ways to obtain cash as needed.Cash Management TechniquesWhile private citizens are often taught conservative cash management practices, most companies only maintain the necessary cash on hand. There are multiple techniques that a firm can employ to manage its cash. Some of these techniques include float, short-term investments, and international cash management.FloatFloat refers to the difference between the balance carried on the corporate books and the amount credited to the corporation by its bank (Block & Hirt, 2004). Payables and receivables are entered into corporate books as processed; however, the actual transactions will not be recorded by the bank until the payment has been received and processed by a company and the bank. Companies frequently work to take advantage of this opportunity to use their cash up until it is claimed by the recipient's bank by improving collections and extending disbursements. In short, the more efficiently a firm can collect on its receivables and the more time it can take in paying its own bills, the lower the firm's cash requirements for payments will be. While some companies take this to the extreme of consistently operating with a negative cash balance in their books, they must be aware of the risk of being caught without cash in unforeseen circumstances or upon the start of a tight money cycle.Short-Term InvestmentWhile some very aggressive companies carry negative cash balances by utilizing the float, more conservative companies may hold excess funds when anticipating a cash outlay. While these funds are being held, they should be converted from cash to more profitable interest-earning marketable securities (Block & Hirt, 2004). There is a wide range of securities from which to choose; the financial manager should consider yield, maturity, minimum investment required, safety, and marketability when selecting a security (Block & Hirt, 2004). As a rule, the longer a security's maturity period, the higher it's yield. However, as with any cash management decision, there is risk to consider. If interest rates increase during the security's maturity period, the company's cash may be tied up when it would have had the opportunity to purchase higher-yielding securities resulting from the increased interest rates.International Cash ManagementWhile the float stretches cash on hand by delaying payables and increasing speed of receivables, and short-term investments attempt to maximize the cash on hand in various ways, international cash management takes advantage of...

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