Cash Management Paper
Cash management techniques provide a framework for companies to follow that will enable it to maintain cash that is needed to operate the business. The primary goal of cash management is to maintain low balances of cash on hand but at the same time striking a balance so that necessary cash is available to pay for planned transactions, unexpected transactions, and compensating balances to banks for services provided (Block & Hirt, 2005). As part of the cash management strategy, a company may also look to short term financing to maintain its cash reserve. This paper will compare and contrast the various cash management techniques and the various methods ...view middle of the document...
One strategy is dependent upon float, the difference between the corporations recorded balance in its books and the balance showing on the banks books (Block & Hirt, 2005). Float occurs as a result of delays that can be caused by “mailing, processing, and clearing checks through the banking system” (Block & Hirt, 2005, p. 178). A company may also manage its cash balances through decreasing the time to collect accounts receivables and increasing the time to disburse payments (Block & Hirt, 2005). This strategy may use lockbox systems or have collection and disbursements centers in different regions (Block & Hirt, 2005). Lastly, a company may use electronic funds transfers through the automated clearinghouses, which allows the transfer of funds without a check (Block & Hirt, 2005).
SHORT TERM FINANCING
Various short term financing methods are available to companies to assist them in maintaining their cash balances. The most readily available short term financing is that offered through trade credit from suppliers (Block & Hirt, 2005). Trade credit is usually available in increments payable in 30 to 60 days (Block & Hirt, 2005). When cash discounts are available for paying the balance early, the company must examine the costs associated with failing to take the cash discount (Block & Hirt, 2005). If the costs of using the cash discount are minimal, the company may forgo the discount to extend the payment period and cash balance of the company.
Another short term financing option available to companies is bank loans from financial institutions (Block & Hirt, 2005). Generally, banks prefer self-liquidating loans which have a built in repayment schedule for the use of the funds (Block & Hirt, 2005). Interest rates also play a role in determining if a company will use a bank loan versus the other short term financing options available to it. Creditworthy companies may obtain short term bank loans at interest rates lower than the prime rate (Block & Hirt, 2005). Companies may also turn to foreign banks to finance short term loans, as they are easier to obtain and may offer lower interest rates than those in the United States (Block & Hirt, 2005). Banks may also require compensating balances, or a “minimum average account balance,” the payment of fees for the services offered to the company, or both (Block & Hirt, 2005, p. 215).
Large companies are also able to turn to commercial paper to...