Introduction to Corporate Finance

ONLINE CHAPTERS

transaction details, including

identification for third-parties

involved. By tying e-invoicing and

reporting together, companies are

effecting a real-time audit.

Logistics last. An e-invoice can

behave as the delivery docket. That

means that authorities can seize

goods immediately that are deemed

smuggled.

Source: Used with permission. ‘What Latin America can teach South-east

Asia about e-invoicing’, Spend Matters, 26 February 2015. http://

spendmatters.com/2015/02/26/what-latin-america-can-teach-southeast-

asia-about-e-invoicing-part-3/. Accessed 12 September 2015.

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

understand float, its components and the

financial manager’s responsibilities with

regard to cash position management

review the objective of cash collections,

the key types of collection systems and

the role of lockbox systems in cash

collection

describe the role of cash concentration

and various mechanisms used by

companies to transfer funds from

depository banks to concentration banks

explain accounts payable management

with regard to the average payment

period and the effect of cash discounts on

timing the payment of accounts payable

discuss popular disbursement products

and methods and recent developments in

accounts payable and disbursements

describe popular investment vehicles for

short-term surpluses and the key sources

of borrowing used to meet short-term

deficits.

LO19.1

LO19.2

LO19.3

LO19.4

LO19.5

LO19.6

Chapter 18 described the operating and

cash conversion cycles and then focused on

management of the two key components of the

operating cycle: inventory and accounts receivable.

Here we shift focus to cash, accounts payable

and liquidity. Clearly, cash is the lifeblood of the

company. Thus it is a primary focus of the financial

manager, who must conserve it by gathering cash

receipts and making cash disbursements in a cost-

effective manner. Additionally, the financial manager

conserves cash by using efficient mechanisms for

transferring it within and between the company’s

operating units. As noted in Chapter 18, short-term

financing decisions should result from an analysis of

cost tradeoffs with the goal of minimising total costs

and increasing shareholder value.

Accounts payable are also an important

component of the cash conversion cycle. The

company must manage them in a way that

lengthens the payment period while preserving

the company’s credit reputation. This strategy will

help shorten the cash conversion cycle and reduce

the company’s resource requirements. The financial

manager also will use other strategies and tools to

slow down disbursements.

Of course, all of these cash management

strategies are predicated on the company’s ability

to maintain adequate liquidity to preserve the

company’s solvency. Specifically, the company

must be able to both earn a positive return on idle

excess cash balances and obtain low-cost financing

for meeting unexpected needs and seasonal cash

shortages. This important activity is commonly

called liquidity management.

This chapter emphasises the key procedures for

managing cash, payables and liquidity. We begin

liquidity management
Activities aimed at both
earning a positive return on
idle excess cash balances and
obtaining low-cost financing
for meeting unexpected needs
and seasonal cash shortages