Managing and Monitoring Cash

Managing and Monitoring Cash - Managing and Monitoring Cash...

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Managing and Monitoring Cash Many companies struggle, not because they fail to generate sales, but because they can't manage their cash. A real-life example of this is a clothing manufacturing company owned by Sharon McCollick. McCollick gave up a stable, high-paying marketing job with Intel Corporation to start her own company. Soon she had more orders from stores such as JC Penney and Dayton Hudson (now Target) than she could fill. Yet she found herself on the brink of financial disaster, owing three mortgage payments on her house and $2,000 to the IRS. Her company could generate sales, but it was not collecting cash fast enough to support its operations. The bottom line is that a business must have cash. 6 A merchandising company's operating cycle is generally shorter than that of a manufacturing company . Illustration 7-12 shows the cash to cash operating cycle of a merchandising operation. 7-12 Operating cycle of a merchandising company To understand cash management, consider the operating cycle of Sharon McCollick's clothing manufacturing company. First, it purchases cloth. Let's assume that it purchases the cloth on credit provided by the supplier, so the company owes its supplier money. Next, employees convert the cloth to clothing. Now the company also owes its employees money. Next, it sells the clothing to retailers, on credit. McCollick's company will have no money to repay suppliers or employees until it receives payments from customers. In a manufacturing operation there may be a significant lag between the original purchase of raw materials and the ultimate receipt of cash from customers. Managing the often-precarious balance created by the ebb and flow of cash during the operating cycle is one of a company's greatest challenges. The objective is to ensure that a company has sufficient cash to meet payments as they come due, yet minimize the amount of non-revenue- generating cash on hand.
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Basic Principles of Cash Management study objective 7
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Managing and Monitoring Cash - Managing and Monitoring Cash...

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