Efficient Cash Management
Efficient Cash Management
Upon preparation of cash budgets after forecasting the receipts and payments, the management will have knowledge about the cash position of the firm. After knowing the cash position, the management should work out the basic strategies to be employed to manage its cash. The strategies of cash management are essentially related to the cash turnover process, that is, the cash cycle together with the cash turnover. The cash cycle is the amount of time cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.
Cash cycle = Average age of Inventory + Average collection period - Average Accounts Payable period
Cash turnover = Number of times cash is used during the year = Number of days in a year/Cash cycle
Minimum operating cash – It is the level of opening cash balance at which a firm would meet all obligations and is computed by dividing total annual outlays by the cash turnover.
Efficient Cash Management Strategies
Cash management strategies are intended to minimize the operating cash balance requirement. The basic strategies that can be employed to effectively manage cash are:
1. Delaying and stretching Accounts Payables
2. Speeding up collection of Accounts Receivables
3. Efficient Inventory-Production Management and
4. Combined cash management strategies.
1. Delaying and stretching Accounts Payables
The firm should pay its accounts payable as late as possible without damaging its credit standing. This is one of the main strategies of efficient cash management. But the firm should take advantage of cash discount, if any, offered by suppliers for prompt payment. The reason is that, the cost of not taking a discount will work out more than the cost of delaying payment.
2. Speeding up collection of Accounts Receivables
By effective collection efforts and by speeding up the collection of accounts receivables, the cash cycle would come down,
Upon preparation of cash budgets after forecasting the receipts and payments, the management will have knowledge about the cash position of the firm. After knowing the cash position, the management should work out the basic strategies to be employed to manage its cash. The strategies of cash management are essentially related to the cash turnover process, that is, the cash cycle together with the cash turnover. The cash cycle is the amount of time cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.
Cash cycle = Average age of Inventory + Average collection period - Average Accounts Payable period
Cash turnover = Number of times cash is used during the year = Number of days in a year/Cash cycle
Minimum operating cash – It is the level of opening cash balance at which a firm would meet all obligations and is computed by dividing total annual outlays by the cash turnover.
Efficient Cash Management Strategies
Cash management strategies are intended to minimize the operating cash balance requirement. The basic strategies that can be employed to effectively manage cash are:
1. Delaying and stretching Accounts Payables
2. Speeding up collection of Accounts Receivables
3. Efficient Inventory-Production Management and
4. Combined cash management strategies.
1. Delaying and stretching Accounts Payables
The firm should pay its accounts payable as late as possible without damaging its credit standing. This is one of the main strategies of efficient cash management. But the firm should take advantage of cash discount, if any, offered by suppliers for prompt payment. The reason is that, the cost of not taking a discount will work out more than the cost of delaying payment.
2. Speeding up collection of Accounts Receivables
By effective collection efforts and by speeding up the collection of accounts receivables, the cash cycle would come down,