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...