Introduction
Cash management is a complex task though it seems to be an easy job. It is a highly complex as well as detail oriented task. It is very necessary to effectively manage the cash that the company have. If the company fails to manage the cash effectively, then there will be problem in meeting the financial obligations. Failing to manage the cash effectively will affect the company’s operating, financing and investing activities. In sum, the whole cash flow system will be affected. To facilitate the cash management, the company prepares the cash budget and implements the proper cash management strategy. This will help the company to reduce its financing cost while increasing the cash flow. It is very important to know the market and economic forces that can have impact on the cash management to be successful in its activities.
Cash Budget
One of the helpful tools for the manager is the cash budget. Cash budget helps manager to in the effective cash management. A cash budget provides a clear picture about the company’s cash inflows and cash outflows to the manager in the timely manner so that it helps to formulate the appropriate cash management strategies. This is something different than the cash flow statement. While cash flow statement shows the deficits or surplus in cash position during the particular period, cash budget highlights the change in the cash position highlighting the future cash position of the company. Cash budget is future oriented and helps the management to know the estimated cash position in the future. This will help management to take appropriate step to manage the cash position, which is directed in minimizing the financing cost and increasing the cash flow.
Minimizing Financing Cost
Minimizing of the financing cost is very important for the company. If the company fails to collect its accounts receivables on time, then it will have to finance its activities through the borrowed funds, thereby increasing the cost. The company must reduce this cost as reducing this cost will increase the profitability. The new companies have to reduce this cost to avoid bankruptcy. To minimize the financing cost, the company must prepare financial plans. The company’s financial plan will define the projects to be undertaken, cash needed in the future, probable sources of cash to finance those projects, etc. Timely monitoring of the project progress is also very important. Analysis of revenue and expense trend can be very useful in determining the cash requirements in the future.
The company must maintain strict and effective collection policy. If the company fails to collect its receivables, then this will force company to take loan to finance its operating activities. This will increase the cost unnecessarily. The company should shorten its cash collection period by providing discounts. The company can also start lock-box system to collect the cash faster where the debtors will send the pay checks directly to the post box accessible to the bank rather than to the office.
Other way of reducing the financing cost is by delaying the payments so that the company does not have to borrow money. By delaying the money, the company can use the money to finance its operations rather than paying it. Delaying the cash outflows will help the company to optimize the earnings. To do this, the company can adopt the centralize payment policy whereby all the payments that needs to be made will be made by the central authority. This policy will delay the paychecks and the money will remain in the company’s account for longer time that will reduce the financing needs. Apart from that, the company can put the limit on the amount that can be disbursed by the particular unit of the company over the period of time (Quinn, 2016).
Increase Cash Flow
There can be several techniques that the company can adopt to increase the cash flows. One of the ways to increase the cash flow is by providing discounts and reducing the credit period. When the company provides shorter discount period, then the debtors will pay faster to take the advantage of discount. If the company has a good reputation and has some degree of monopoly in the market, then it can adopt the prepayment system whereby the customers will have to pay in advance for the goods and service. This will ensure that no outstanding receivables are seen in the balance sheet. If the company can find the ways to reduce its fixed cost, then the company will have more cash available. The company must have appropriate inventory policy so that its capital does not get tied in the excess inventory. Inventory policy will help company to determine the appropriate level of inventory and avoid overstocking of the inventory. In this way, the company can increase its cash flow.
Economic and Market Force
Different economic and market forces make the business volatile. These not only affect the company’s operation in terms of production and marketing, these forces will also affect the company’s cash position and financial health. These forces are beyond the control of the organization. When the economy suffers recession, then it will affect the sales of the company. Recession might cause problems to the debtors as a result of which the company’s bad debts figure is likely to increase. The company’s cash position might be seriously affected. Another economic factor can be the interest rate. When the interest rate increases, it increases the financing cost of the company that will reduce the profitability of the company (Gran, 2016). Increase in the inflation might reduce the purchasing ability of the customers as a result of which the sales of the company can be affected (Oner, 2012). If the government imposes higher tax, then it will reduce the free cash for the company (Bush, 2016). This will reduce the company’s ability to invest. Fiscal and monetary policies, employment, economic status of the consumer etc. can have serious influence on the business operation.
Apart from economic factors, there are several market forces that affect the financial plan of the company. With the increase in the number of competitors in the market, the company will face the drop in the sales and revenue. In such condition, the company cannot impose the strict credit policy. The company is forced to provide longer trade credits and big discounts. No prepayment system is possible in the market with many competitors. Hence, the company will have long aged receivables. This will impact the cash position of the company. Apart from this, the changing preference of the consumer will affect the sales of the company (Sexton, 2014). The technological developments will shift the consumers’ preference. The company will be forced to update its production and other process with recent technological developments. This unplanned investment requirement will demand for the more cash. The product that is selling today might become obsolete tomorrow and the sales fall affecting the cash position (Max, 2016). With the cold war going between the countries, there is high possibility of war among the countries. The war might seriously affect the financial plan of the company. The company might have to step aback from its investment activities even when the big chunks of money would have been already invested on those projects. This will tie up the fund in unproductive sectors and increasing the cost to the company.
Conclusion
It is very important for the company to manage its cash position in the most efficient way. If the company fails to manage its cash position, then it will have to face serious consequences. In the lack of necessary funds on time, the company’s financing cost will increase and profit decreases. Even at worst condition, the company might have to lose the best profitable project because of its inability to manage required funds. There are several strategies to increase the cash flow and reduce the financing cost. While doing so, the company must also evaluate the market forces constantly for better results.
References
Gran, B. (2016, March 17). How Anticipated Changes in Interest Rates Will Impact your Business. Retrieved from https://www.pnc.com/content/pnc-cfo/en/home/challenge/interest-rates-impact.html
Bush, T. (2016, July 04). What Is Bargaining Power in Business? Retrieved August 17, 2016,
Sexton, K. (2014, August 24). Sales Strategy: 23 Facts about Buyers and Purchasing | LinkedIn Sales Solutions. Retrieved from https://business.linkedin.com/sales-solutions/blog/s/sales-strategy-23-facts-about-buyers-and-purchasing
Max, B. (2016) What Are Some Ways in Which Global Forces Affect Business Today? Retrieved
August 19, 2016, from http://smallbusiness.chron.com/ways-global-forces-affect-business-today-67573.html
Oner, C. (2012, March 28). Finance & Development. Retrieved August 22, 2016, from
http://www.imf.org/external/pubs/ft/fandd/basics/inflat.htm
Quinn, M. (2016). 5 Ways to Improve Cash Flow. Retrieved from
http://www.inc.com/guides/2010/06/how-to-improve-cash-flow.html
