Cash Management

University Of Central Punjab (M.com) F14

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CASH IS KING!

Cash availability is the lifeblood of the organization. With it, assuming there is proper

management and economical, efficient, and effective operations, the company can grow

and prosper—without it the organization perishes. Like the absence of water to anything

living, the absence of cash to the business means death—slow, torturous, physically

painful, and mentally agonizing.

Cash Management

It is concerned with the managing of:

– cash flows into and out of the firm,

– cash flows within the firm, and

– cash balances held by the firm at a point of time by financing deficit or investing surplus

cash

FOCUS OF CASH MANAGEMENT

PROFITABILITY

• How the firm manages its cash in order to minimize costs & maintain a return

LIQUIDITY

• Has enough cash to make payments when required

• Can turn other assets into cash to make payments

• Can borrow money to make payments

SAFETY

• Secure from theft, fraud.

• High risk

Four Facets of Cash Management

• Cash planning

Cash inflows & outflows should be planned to project cash surplus or deficit for each

planning period. Cash budget may be used for this purpose.

• Managing the cash flows

Cash flows should be properly managed, cash inflows-accelerated, cash outflow-

decelerated.

• Optimum cash level

Firms decision, Cost of excess cash & danger of cash deficiency should be matched to

determine optimum cash levels.

• Investing surplus cash

To earn profits, firm should decide between alternative short term investment opportunities

such as bank deposits, marketable securities or inter corporate lending.


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Objectives of Cash Management

• Cash management focuses on making the asset transformation process of the business

work smoothly. To accomplish this, the company needs to be aware of the objectives of

cash management:

• Control and track cash flows.

• Optimize sources and uses of cash.

• Maximize revenues and minimize expenditures.

• Collect for sales as quickly as possible.

• Expend cash only where necessary (i.e. for value-added functions and

• Activities only).

• Pay creditors no sooner than necessary, and minimize the costs associated

• With vendor purchases and payments.

• Provide for adequate external sources of funding.

• Properly manage external short-term borrowing and/or investment activities.

• Effectively utilize any excess differential cash generated.

• Keep the cash conversion gap at a minimum.

MANAGING COLLECTION & PAYMENT OF CASH

Cash Management System

COLLECTIONPresented the

cheque on the day of receipt

Col lecting chequefrom customer’s

premises

Requesting payment through Bank GiroSystem, s tanding

order & direct debit

PAYMENT

Slow down payment


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Collections / Accelerating inflow of cash

Primary objective: speeding up collections

• An important function of the cash management system is the prompt collection of funds.

This process involves speeding up of the conversion of receipts into available funds.

• Expedite preparing and mailing the invoice

• Accelerate the mailing of payments from customers

• Reduce the time during which payments received by the firm remain uncollected

• The difference between balance shown in the firm’s account book and the balance in the

bank’s book represents float.

The three kinds of delays or floats in the cash collection process are;

1) Postal float

2) Lethargy

3) Bank float

Postal float

1. What is Float?

• Bankers define floats as cash obligation that is in the process of collection.

• In simple words, Float is the difference between the cash balance appear in the passbook

and that appear in the firm’s book.

Transit or mailing time, that is, the time takes by the post offices to transfer the cheque

from the customers to the firm. This delay or lag is referred to as postal float.

2. Components/Types of Float


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3. Invoicing Float

The starting point for accelerating cash receipts is the company’s internal systems and the

starting point in the overall collection system is the customer’s invoice. The quicker the

company gets the invoice into the customer’s hands, the sooner the payment process starts.

4. Negative Float-Collection Float:

Enhance the total time between the mailing of the check by the customer and the

availability of cash to the receiving firm.

• It occurs when the firm receive payments.

• It is undesirable for a firm and it should be minimized.

• Collection float is the time which elapses between the times a payer deduct a payment

from its accounts ledger and the time when the payee actually receives the funds in actual

form.

• Collection Float = Invoicing Float + Mail Float+ Processing Float+ Clearing Float

5. Mail Float:

Enhance the time check is in the mail.

6. Lethargy / Processing Float:

Enhance the time it takes a company to process the check internally.


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7. Availability Float:

Enhance the time consumed in clearing the check through the banking system.

8. Deposit Float:

Enhance the time during which the check received by the firm remains uncollected funds.

9. Bank Float:

Bank float is the time it takes to clear the item from the time it was deposited to the time

the funds were credited to the depositing bank. Enhance this time.

Earlier Billing

Accelerate preparation and mailing of invoices

– computerized billing

– invoices included with shipment

– invoices are faxed

– advance payment requests


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Preauthorized Checks (PACs)

Arrangement that allows firms to create checks to collect payments directly from customer

accounts.

• Highly predictable cash flows.

• Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs.

• Customer preference - eliminates regular billing for customers.

• Increased working cash - dramatically reduces mail float and processing float.

Depository Transfer Checks (DTCs)

• Moves cash from local banks to concentration bank accounts.

• Firms avoid having idle cash in multiple banks in different regions of the country.

• Lower levels of excess cash -

• Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs.

• Customer preference - eliminates regular billing for customers.

• Increased working cash - dramatically reduces mail float and processing float.

Field-banking system

• Collections are made over the counter (retail) or at a collection office (utilities).

Mail-based system

• Mail payments are processed at companies’ collection centers.

Electronic payments

• Becoming increasingly popular because they offer advantages to both parties.

The Adjusted Net Income Method

• It involves tracing of working capital flows, also called sources &uses approach.

Two objectives of this method

• To project company’s need for cash at a future date.

• To show whether a company can generate required funds internally, & if not how much will

have to be borrowed /raised form capital market.

The benefits of the adjusted net income method are:

It highlights the movements in the working capital items, and thus helps to keep a control

On a firm’s working capital.

It helps in anticipating a firm’s financial requirements.

The major limitation of this method is:

It fails to trace cash flows, and therefore, its utility in controlling daily cash operations is

limited.


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Decentralised Collections

• Called concentration banking in USA, system of operating through a number of collection

centres, instead of a single collection centre centralized at a firms head office.

• Basic purpose to minimize the lag between the mailing time from customers to firm & time

when the firm can use the funds.

• According to this system, a large number of collection centers are established by the firm

in different areas.

• The firm opens its bank account in local bank in different areas, where it has collection

centers.

• The collection centers are required to collect cheques from their customers and deposit

them in local bank account.

• Instructions are given to the local collection centers to daily transfer funds over a certain

limit telegraphically to the bank at the Head office.

• Disbursements are made on the basis of daily reports from the Head office.

Features of Instruments of Collection


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Finance Charges

Cash discounts are an incentive for customers to pay early; finance charges (e.g., 1percent

monthly on the unpaid balance) are a penalty to customers who do not pay within

established terms. A credit card company automatically hits cardholders with a finance

charge if they do not pay within parameters—no ifs, ands, or buts. This process works well

for them because it is accepted and they have a large volume of customers whom they can

treat rather anonymously

Holding Delivery

If the company has customers—and they occur in every business—who are egregiously

late with payments, it may be necessary to consider discontinuing further shipments or

deliveries. For this to work fairly and effectively, the company’s policies and procedures

must be well established and consistently followed, and strong reporting and follow-up

actions will have to be in place

Remote collections

If there are regional offices in different parts of the country, have customers send or deliver

their payments directly to those local offices closest to them. This process can save mail

time and clearance time, but the control problems associated with this approach and the

nuisance value to employees at the local offices may offset much or all of the benefit.

Wire Transfers

Wire transfers from customers (from their bank to the company’s bank) increase cash

availability markedly since they avoid mail, bank clearance, and internal processing time

delays. However, customers may object to the cost of a wire transfer and to the loss of their

own float.

Electronic Funds Transfers (EFT).

EFT systems are really debit card or preauthorized check (PAC) type transactions whereby

funds are immediately transferred upon processing the transaction. Typically, the customer

signs an authorization agreement with the company that allows checks to be drawn against

their accounts. EFTs can be used for transferring cash from a customer’s account at the

time of shipment or delivery, eliminating the need for other billing, accounts receivable

processing, and collection Procedures.


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Lock-box System

Lock-boxes are post office boxes rented by the firm at one or more locations near its

customers.

A nearby bank collects payments made to that address on behalf of the firm, deposits them

and sends a record of deposit to the collecting firm.

The firm’s local bank is given the authority to pick remittance directly from the post office

box and deposit the cheques in the firm’s account.

Standing instructions are given to the local bank to transfer funds to the Head office when

they exceed a particular limit.

I. WHOLESALE LOCKBOXES

• Low volume levels, with high value per item e.g. 500 checks/month at $5,000/check

II. RETAIL LOCKBOXES

• High volume levels, with low value per item e.g. 100,000 checks/month at <$100/check

• Credit card payments, mail order business payments, utility bill payments, etc.

III. MANUAL LOCKBOXES

• Bank arranges with local postal service to reserve a post office box

• Mail is sorted by the postal service

• Bank picks up and processes checks for deposit in company account

IV. AUTOMATED LOCKBOXES

• Same as above except that relevant customer remittance data captured in machine-readable

form and transmitted electronically to the company for further processing (accounts

receivable recording and management)

CMS (Cash Management Sevices)

• CMS is the process of optimizing receivable and payables ensuring predictability in the

cash flows of CMS clients.

• Cash Management thus means getting funds in time, quick transfers, quick realization of

local and outstation instruments, easy disbursements, accounts reconciliation, controlled

processes and customized MIS.


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Need For CMS

• Geographical spread of the country

• Complex clearing system

• Delays in cash realizations

• Uncertainty in cash flows

• Increased borrowing and associated costs

• Difficulty in collecting data / MIS on the funds collected

CMS Structure

Payable-Through Drafts (PTDs)

Allows the firm to examine checks written by the firm’s regional units.

Checks are passed on to the firm, which can stop payment if necessary.

Deposit Cash Balances in Interest-Earning Accounts

Interest-earning checking accounts are available at most banks today, albeit with a

minimum balance requirement. Since interest rates on these accounts are often below

rates on savings accounts, certificates of deposit (CDs), or money market accounts,

keep the bulk of your funds in these higher-paying accounts. Then, transfer necessary

funds from higher-paying accounts to meet the minimum balance requirement in an

interest-bearing checking account plus the total of the payments expected to come due

that week or month.

Sell or Retire Excess and Obsolete Equipment or Inventory

Idle, obsolete, and non-working equipment takes up space and ties up capital which

might be used more productively. Equipment that has been owned for a longer period

will usually have a book value equal to its salvage value or less, so a sale might result

in a taxable gain. This gain should be reported on your tax filings. If you have to sell

below the book value, however, you will incur a tax loss, which can be used to offset

other profits of the company.

Excess inventory can quickly become obsolete and worthless as customer

requirements change and new materials are introduced. Consider selling any

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inventory which is unlikely to be used over the next 12 months unless the costs to

retain it are minimal and the proceeds from a sale would be negligible.

Require Deposits on Large or Custom Orders

When working with a unique or custom order, require a security deposit equal to a

minimum of 50% of the total price. One-of-a-kind products have a limited sales value,

usually only to the person or company making the order. Without a deposit, you are

subject to the risk of having to take a reduced payment at delivery time.

Stage Payments on Long Contracts to Your Benefit

some customers, due to their size or policies, will refuse to enter into contracts that

require initial deposits. Rather than lose the business, negotiate payment terms and

benchmarks that exceed or parallel your costs.

For example, a typical construction contract might allow a 15% payment when

engineering is completed, an additional 25% when material is delivered to the site,

and 50% of the contract amount at specific progress benchmarks. The remaining 10%

of the contract price is usually held by the buyer until final inspection and acceptance.

Recognize “Scope Creep” and Use Change Orders Where Applicable

If your product is sold with any condition attached, or the service you are to provide is

defined in a contract between you and the buyer, you must be aware of the exact

requirements expected of you as a result. Any change in those requirements might

enable you to seek extra payment for the ancillary work performed. Failure to seek

appropriate compensation hurts your company in two ways: You don’t receive the

additional proceeds, and your costs increase.

Offer Discounts for Quick Payment

Develop a discount program to encourage quick payments, collecting cash owed to

you as fast as possible. Normal payment terms allow a 30-day period for remittance

after the receipt of an invoice, with a 2% discount if paid within the first 10 days. You

can offer more, less, or no discount for payment, depending upon your needs and

your customers’ previous pay habits.

Remember, however, that your ability to institute a collections policy will depend upon

your relative strength versus that of your customer. A major account might take an

offered discount and still pay late.

Contract with a Collections Agency for Old Accounts Receivable

Pursuing old accounts receivable requires dedication and time, and can quickly reach

the point of diminishing returns for your staff. Few small businesses have the


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resources, training, or experience to effectively pursue delinquent accounts.

Furthermore, customers who exceed 60 days for payment without a justifiable reason

seldom warrant a continued relationship, and usually require firm measures to extract

payment.

Third-party collection agencies are adept at working with such accounts, and generally

are willing to pursue collection at their own expense in return for a set percentage of

the collected proceeds. In some cases, the agencies will simply purchase the

delinquent debt from the business at a discount and assume all subsequent risks of

collection. While the costs of third-party collection when compared to the original

account balance are exorbitant, your alternative may be no payment at all.

Utilize Subscription Sales

if your product is regularly consumed and repurchased several times a year, institute a

subscription program in which customers prepay for the product and delivery.

Newspapers, magazines, cable television, landscaping, and pool maintenance are

examples of products and services which lend themselves to a subscription model. In

addition to receiving upfront cash to cover future costs, you have the advantages of

securing future sales and easier resource scheduling.

Institute a Layaway Sales Program

Layaway programs were very popular prior to the widespread use of personal credit

cards in the late 1950s. A layaway program allows customers to select a specific

product, which is then reserved for a future purchase and delivery when payment has

been completed. The seller has the use of the cash prior to incurring the cost of the

product. Special accounting treatment of the cash received is required, so be sure

your accountant is aware of the program.

Initiate an Accounts Receivable Line of Credit

Despite their best efforts, even the best-managed companies suffer a lag between the

expense of producing a product – a cash outflow – and receiving payment after the

sale – the cash inflow. This lag is represented by the accounts receivable balance as

a current asset on the company books.

Most banks are willing to lend up to 80% of the accounts receivable balance, thereby

providing cash to the borrower at the time of the loan, rather than waiting until the

account is collected. The loan amount varies up and down as old accounts are

collected and new accounts are added to the loan. While the loan is collateralized with

the accounts receivable, the company – and possibly the company’s owners – remain

as guarantors of the debt.

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Establish an Inventory Line of Credit

Inventories of raw materials, products in the process of being manufactured, and

finished products awaiting sale are considered current assets, and require significant

cash expense to acquire and maintain. Lenders, recognizing the value and the

likelihood that the inventoried materials will be converted into sales in the near and

intermediate future, will accept inventory as collateral and loan variable percentages

of the inventory balance based upon its composition – in most cases, up to 50% of its

value.

Like an accounts receivable loan, the balance will vary up and down as inventory

levels change and the borrowers will remain as guarantors. Inventory loans are

troublesome for the borrowers as a physical inventory must be regularly taken and

valued at current market prices, usually monthly, and subsequently reconciled with the

company’s and the bank’s book value.

Institute a Factoring Arrangement

Factoring typically involves a third-party, non-bank finance company, or “factor,” which

advances a negotiated percentage, 75% to 80%, of the individual accounts in the

accounts receivable balance. As the accounts are collected by the company, the

advance is paid off, plus a fee to the factor. In some cases, the factor may purchase

the accounts at a discount and assume the responsibility and risks of collection.

Whether the company or its owners remain guarantors of the accounts is a matter of

negotiation between the company and the factor. Factoring arrangement are typically

more expensive (but less restrictive) than accounts receivable loans at regulated

banks, so an arrangement should be pursued only after a standard accounts

receivable loan arrangement has been rejected.

S-l-o-w-I-n-g D-o-w-n Cash Payouts

There are the following techniques to slow down the Payments:

Playing the Float

Net Float

The dollar difference between the balance shown in a firm’s (or individual’s) checkbook

balance and the balance on the bank’s books.

Control of Disbursements

Firms should be able to:

1. Shift funds quickly to banks from which disbursements are made.


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2. Generate daily detailed information on balances, receipts, and disbursements

Payable through Draft (PTD):

A check-like instrument that is drawn against the payable and not against a bank as is a

check After a PTD is presented to a bank, the payable gets to decide whether to honor or

refuse payment.

• Delays the time to have funds on deposit to cover the draft.

• Some suppliers prefer checks.

• Banks will impose a higher service charge due to the additional handling involved

Payroll and Dividend Disbursements

• The firm attempts to determine when payroll and dividend checks will be presented for

collection.

• Many times a separate account is set up to handle each of these types of disbursements.

• A distribution scheduled is projected based on past experiences. [See slide 9-28]

• Funds are deposited based on expected needs.

• Minimizes excessive cash balances.

Zero Balance Account (ZBA):

• A corporate checking account in which a zero balance is maintained. The account requires

a master (parent) account from which funds are drawn to cover negative balances or to

which excess balances are sent.

• Eliminates the need to accurately estimate each disbursement account.

• Only need to forecast overall cash needs.

• Different divisions of a firm may write checks from their own ZBA.

• Division accounts then have negative balances.

• Cash is transferred daily from the firm’s master account to restore the zero balance.

• Allows more control over cash outflows.

Remote and Controlled Disbursing

Remote Disbursement A system in which the firm directs checks to be drawn on a bank that is geographically

remote from its customer so as to maximize check-clearing time. This maximizes

disbursement float.

Controlled Disbursement

A system in which the firm directs checks to be drawn on a bank (or branch bank) that is

able to give early or mid-morning notification of the total dollar amount of checks that will

be presented against its account that day. Late check presentments are minimal, which

allows more accurate predicting of disbursements on a day-to-day basis.

Positive Float- Disbursement /payment Float

• Positive Float occurs when the firm makes the payment

• It allows the firm to maintain a control over the cash for a long period of time.


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Disbursement Float

It is the time between when a firm writes a cheque on available bank account fund and

when the bank deduct the corresponding amount from the bank balance.

Prompt Pay

Bulk Demand Draft issuance on IDBI Network. Instruments are handed over to the

customer/beneficiary.

Prompt Pay Plus

Bulk Demand Drafts on Correspondent Bank Network. DDs are printed centrally, on

The Correspondent bank stationary.

Quick Cheque

Cheque Writing/Payable at Par on own bank Network with Facsimile signatures of the

client.

Export Pay

Bulk Instrument issuance on IDBI Network in the customized format. . The data is

uploaded in the Finacial system and instruments are printed centrally and handed over to

the customer.

Payment Policy

The normal procedure for most companies regarding vendor payments is to pay on the due

date, but not before. However, in a strapped cash position, the company could consider

paying later than the date specified by the terms of the invoice. Before pushing this idea

too far, remember that vendors want to get paid just as badly as the company wants to get

paid bytes customers. A slow pay factor may have been added to prices charged to certain

customers, and company vendors may be making similar pricing adjustments. Slow-

paying customers also tend to get less service when they have a need than do prompt-

paying customers

Disbursement/Payment Float

Company Mail the cheque to Supplier

Supplier receive the cheque

Bank process and credits Supplier's

account

Supplier deposits the cheque

Mail Float

Processing Float

Clearing Float

31/10/2014 25


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Managing Cash Disbursement Systems

Managing cash disbursements systems can be handled in any one of several ways

To control cash outflow and keep money in interest-bearing accounts for as long as

possible.

There are three types of funding systems available.

Prefunding system:

The simplest, safest, but least effective from the stand point of holding money back is a

prefunding disbursements system.

Estimated funding:

A more economical and efficient, but slightly riskier, cash disbursements system is

estimated funding, in which checks are written at one time and the funds to cover those

checks are deposited in the disbursements bank account based on estimates of when the

checks will clear. This method is effective in situations such as dividend accounts or

payroll accounts in which historical patterns of clearance can be studied and predicted with

reasonable accuracy. The danger, of course, is predicting inaccurately in which case there

is the possibility of bounced checks. This method should be entered into only after

thorough analysis and careful consideration due to the greater possibility of inaccuracies

and bounced checks, which is likely to be detrimental to the company’s reputation.

Controlled disbursements funding:

A method of disbursements cash management called controlled disbursements funding

works in conjunction with the company’s banking institution. The bank notifies the

company each day about the amount of checks that have been presented for payment. The

company then arranges to transfer just enough funds to the disbursements account to cover

those checks. Use of float is maximized, the company’s money remains in interest-bearing

form for the maximum time, and the possibility of bounced or dishonored checks is

virtually eliminated. The company’s bank is likely to require a fee for this service, which

will offset part of the savings generated, and the company

Bank Accounts

A key factor in determining what kind of disbursements system to establish for the

company is to]understand the amount of its disbursements and the balances it needs to

service transactions, to cover transaction costs, and to meet compensating balance

requirements. This will allow the company to calculate any excess balances it is able to

generate and the amount of earnings potential they represent. This information will enable

the cash manager to make intelligent estimates of the advantages and disadvantages of

available systems.

Some of the types of bank accounts available include the following:

Demand deposit accounts


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These accounts are the basic no frills checking accounts that have been the staple of bank

business for many years. A number of years ago, banks began paying interest on these

checking accounts in certain instances. However, according to federal regulations, banks

may not pay interest on corporate business checking accounts.

Imprest accounts

These are accounts with fixed, usually small, balances that are reimbursed as checks are

drawn against them. For example, payroll accounts, small vendor payment accounts, travel

expense reimbursement accounts, and the like are appropriate.

Zero balance accounts

These accounts are zeroed out, usually daily, by transferring any remaining balances to a

concentration account, or by transferring from a concentration account sufficient funds to

cover the checks that have been presented for payment. The transfers between the

concentration and zero balance accounts can be handled automatically by the bank or by

specific company authorization. These are also referred to as sweep accounts. Vendor

payment is an appropriate use for zero balance accounts

Automatic balance accounts

These accounts have receipts and disbursements processed through them and are

automatically closed out daily to an agreed-upon amount by the bank by transferring

money to or from an interest-bearing account. Automatic balance, zero balance, and

imprest accounts are basically variations of the same theme.

Place Payroll on a Bimonthly Cycle

A bimonthly pay program requires 24 pay cycles per year as opposed to 26 pay cycles for a

bi-weekly pay program, thereby reducing the administrative cost of collecting, verifying,

and tabulating payroll information.

Additional cost savings are available by utilizing direct deposit into employees’ bank

accounts, rather than writing and delivering paychecks. Transfer funds for payroll

immediately prior to the payroll period from the company’s regular interest-earning

checking account.

Repair, Rather Than Replace, Capital Equipment

Motor vehicles, properly maintained, easily deliver 100,000 miles of use or more. Modern

machinery also is durable and provides years of services. For example, John Deere tractors,

Caterpillar bulldozers, and road equipment from the 1950s and 1960s are still in use across

the country. Office machinery usually becomes obsolete before it wears out.

Buy Used Equipment, Not New

Used equipment in good condition can generally do the necessary work as well as a new

piece of machinery. If you need equipment, search the local advertisements and auctions in

your area, specifically looking for companies whose assets have been foreclosed and are


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being sold by the lender. You may be able to buy quality, used equipment for savings up to

80% off the price of new equipment, without a comparable degradation of capability.

Renegotiate Fixed Debts to Lower Payments

In recent years, interest rates have dropped. And as a result of the recession, the federal

government has also initiated a number of programs to stimulate bank lending to small

business, as well as guarantees from the U.S. Small Business Administration to facilitate

loans.

Review your existing credit lines to determine whether you might be eligible for a lower

interest rate or an extended term. If available, consider adding a line of credit (LOC) which

can be used in the event of emergency. Always be sure to read and understand the

conditions attached to a LOC, including its costs, duration, and any conditions to be able to

use it.

Delay Product Upgrades

Technological upgrades – software and hardware – occur several times per year. Often, the

change between one version and the next is minimal or adds features which you will not

use. Be prudent when buying or upgrading desktop computers, cell phones, etc. Consider

open-source software, which is generally free or available for a small donation. If the

software provides increased security over your data by thwarting hackers who would

destroy your business operation for thrills, you should think seriously before deciding not

to upgrade. Safety and security always come first.

Defer Payments to Vendors

Delay payment to vendors to the last possible date consistent with the terms of the sale. If

there is no penalty for late payments, set a pay cycle of 45 to 60 days from the receipt of

the invoice. While slowing the outflow of cash is important, it is equally important to

maintain a good credit rating and cordial relations with critical vendors.

Be aware that slowed payment might result in contact from the vendor that has been

affected. In those cases, be vigilant that all future payments are as promised.

Approach those suppliers that are also customers about a “trade” in which each company

receives all or a portion of their respective payments in the form of finished products.

A barter agreement effectively provides a “discount” in an amount equal to the net profit

margin on your product and allows you to maintain cash that would otherwise be used.

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CONCLUSION

In order to be able to effectively manage the cash receipts and disbursements of the

organization, it is necessary to fully understand what those receipts and disbursements are,

where they come from, and how they affect and are affected by company operations. Since

the company’s balance sheet and income statement both are intimately interwoven with the

company’s cash flow, a review of these basic financial statements is a good place to start

for this management process. Cash receipts primarily derive from collections from

customers for sales made either from cash sales or accounts receivable collections. While

we advocate the desirability of cash sales, most businesses will incur at least some

accounts

Receivable because of competitive necessities. Controlling those receivables and ensuring

their timely collection is one of the most effective methods of assuring positive cash flow

for the organization. Good record keeping, strong credit and collection policies, and

effective follow-up on overdue accounts will help ensure that the money flows into the

corporate coffers on a timely basis. Once the money is on the way or has been received, it

then becomes necessary to utilize those funds appropriately, either by temporarily

investing them for short-term earnings or by reinvesting them back into the business to

secure long-term benefits for company stockholders.

The other side of the cash flow coin is cash disbursements, and an effective cash

management system will focus a lot of attention on keeping those disbursements under

control. Paying only bills that are due when they are due is the most obvious and arguably

most effective procedure to follow, but it is often short-circuited or overlooked. As in the

case of cash receipts, understanding systems that are available to help manage those cash

outflows are important as well, which requires a good working relationship with the

company bank and awareness of the services the bank can offer the company.

Cash Management

Business

cash flows cash flows

cash surplus

absence of cash

cash obligation

cash availability

cash outflow

cash balances

cash budget