Management Cash Comparison
Cash Management Comparison
Many organizations make a financial goal to minimize the amount of cash on hand on a
monthly basis. This goal is based on attempting to reduce the amount of non-earning assets
for the company. Cash on hand that is not required to meet a specific need could be placed in
an interest bearing account or used to pay down on a credit balance, also reducing the amount
of interest a company would have to pay on a loan. Minimizing cash balances as well as
having accurate knowledge of when cash moves into and out of the company can improve
overall corporate profitability. (Block & Hirt, 2004, pg. 175).
As companies find a need to supplement business financial goals, obtaining credit or loans on
a short-term basis is very attractive. Several options exist that organizations can explore when
seeking short-term financing and each has an advantage or disadvantage over the other, based
on the objectives the funds will be used for and or the length the funds will be borrowed.
Cash Management Techniques
Cash flow relies on the payment pattern of customers, the speed at which suppliers and
creditors process checks, and the efficiency of the banking system. The primary consideration
in managing the cash flow cycle is to ensure that inflows and outflows of cash are properly
synchronized for transaction purposes. (Block & Hirt, 2004, pg. 175) When a company has
positive control of the flow cash on a monthly basis the ability to determine the on hand cash
requirements becomes easier to manage. This control can be based on the complexity of the
cash flow process.
Financially savvy companies also take advantage of cash balances recorded and the balances
that the banks credit to the company as short-term ways to accumulate additional funds.
Once a check is received in the mail and a deposit is made, the deposited funds are not
available for use until the check has cleared the banking system and been credited to the
corporate bank account. (Block & Hirt, 2004, pg. 178) This process is known as float.
Some companies actually operate with a negative cash balance on the corporate books,
knowing float will carry them through at the bank. (Block & Hirt, 2004, pg. 179) Float is
based on the ability of the company to improve their collection of accounts receivables and
extending the time of their disbursements. The preference is to have collections to be as short
as possible and for disbursements to extend as long as possible.
Maintaining a sound understanding the organizations cash flow process can be an expensive
process. These expenses must be compared to the benefits that may accrue through the use
of cost-benefit analysis. (Block & Hirt, 2004, pg. 180) Cost-benefits analysis can determine
the amount of funds that a company has to invest in other manners based on the average daily
remittance and the number of time saving days (collections or disbursements).
Methods of Short-term Financing
The firm may hold excess funds in anticipation of a cash outlay. When funds are being held
for other than immediate transaction purposes, they should be converted from cash into
interest-earning marketable securities. (Block & Hirt, 2004, pg. 184) Factors that must be
taken into consideration by the financial manager when selecting the type of short-term
financing are the companys financial goals and the yield, maturity, investment
required, minimum safety, and marketability.
Options available as short-term financing are federal government securities, federal agency
securities, non-government securities. One of the primary differences between the types is the
return on investment and the risk associated with the security type.
Of the securities to be discussed the Treasury Bills (or T-Bill) provide the most stability and
least amount of risk. Treasury bills are short-term obligations of the federal government and
are a popular place to park funds because of a large and active market. Although these
securities are originally issued with maturities of 91 days and 182 days, the investor may buy
an outstanding T-bill with as little as one day remaining (perhaps two prior investors have
held it for 45 days each). (Block & Hirt, 2004, pg. 186) Similar in concept to T-Bills, but
different in the length of term are the Treasury Notes. Treasury notes are government
obligations with a maturity of 1 to 10 years, and they may be purchased with short- to
intermediate-term funds. (Block & Hirt, 2004, pg. 186)
After federal government securities the next tier risk wise is federal agency securities.
Examples include Federal Home Loan Banks and the Student Loan Marketing Associations
that lack the direct backing of the U.S. Treasury, they are guaranteed by the issuing agency
and provide all the safety that one would normally require. (Block & Hirt, 2004, pg. 187)
Non-governmental securities provide the most amount of risk but also carry the possibility
for the highest return of the three categories described. Certificate of deposit (CD), offered
by commercial banks, savings and loans, and other financial institutions. The investor places
his or her funds on deposit at a specified rate over a given time period as evidenced by the
certificate received. (Block & Hirt, 2004, pg. 187)
Comparable in yield and quality to large certificates of deposit, commercial paper represents
unsecured promissory notes issued to the public by large business corporations. (Block &
Hirt, 2004, pg. 187) With the deregulation of financial institution money market accounts,
which are modeled after money market funds, are able to pay competitive market rates on
money market deposit accounts. (Block & Hirt, 2004, pg. 188) This security is less attractive
to corporations with larger cash volumes as these firms may chose to take advantage of more
appealing financial options and are more popular among smaller firms.
Conclusion
As shown, the ability to calculate properly the cash flow of a business can lead to the
streamlining of the collection and disbursement process. The float created by good cash
management techniques can then be placed into short-term finance options that have the
potential, based on the risk level and the yield of the security chosen, to generate additional
funds for the investor. This is why the financial manager must carefully allocate resources
among the current assets of the firmcash, marketable securities, accounts receivable, and
inventory. In managing cash and marketable securities, the primary concern should be for
safety and liquiditywith secondary attention placed on maximizing profitability. (Block &
Hirt, 2004, pg. 174)
References
Block, Stanley and Hirt, Geoffrey. 2004. Foundations of Financial Management (11th
ed.).New York: The McGraw-Hill Companies.