Cash Management Paper (Week 3)
One of the most critical functions of a firm financial manager is that of cash management.
Unlike long-term forecasting or chosing to expand a company fixed assets, cash
management requires constant, immediate, and responsive decsion-making. There is no
opportunity to carefully consider each possibility and wait to further observe trends within
the market. Because inventory and demand for cash change daily, the financial manager
must be welltiversed 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 Techniques
While private citizens are often taught conservative cash management practices, most
companies do not want to keep any more cash on hand than absolutely necessary. While
companies must keep some cash for transactions, bank payments, and potential
emergencies, the opportunity cost of holding an excess of cash rather than reinvesting it
into current assets or growing the firm fixed assets is often significant. 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.
Float
Due to the aforementioned opportunity cost of holding excess cash, most companies try to
leverage the minimal amount of cash that they carry to cover as many payables as possible.
One way that firms achieve this goal is by employing the use of float. Float refers to the
difference between the balance carried on the corporate books and the amount credited to
the corporation by its bank (Block & Hirt, 2005). 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 later processed
by the bank. Companies frequently work to take advantage of this opportunity to use their
cash up until it is claimed by the recipient 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 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.
Health Management Organizations (HMO) are an example of an industry that is
