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(^166) Financial Management
In defining short term finance, we focus on the cash flows connected with the operations
of a company. Because the cash inflows and cash outflows are not synchronised,
a company needs a temporary parking place for cash, which we can call a liquidity
portfolio. This liquidity portfolio may consist of cash and marketable securities. Since
cash flows for a company are uncertain, both in amount and timing, the amount of
cash in temporary storage may not be adequate for all time periods. Thus, it is necessary
to provide some backup liquidity for periods when the normal store of liquidity is
insufficient.
Also there is a need to move cash from one point to another within a company. We
need to have internal cash flows to connect these various inflows, outflows and sources
of liquidity. The cash system of a company is the mechanism that provides the linkage
between cash flows. The financial manager of the company has the responsibility, at
least in part, to develop and maintain the policies and procedures necessary to achieve
an efficient flow of cash for the companyís operations.
Short term financial management thus encompasses decisions about activities that affect
cash inflows, cash outflows, liquidity, backup liquidity, and internal cash flows. Many
decisions of a company have a short term financial management aspect. For example,
the decision to sell a bond issue in order to raise funds to finance an expansion in plant
and equipment is clearly a long term decision. However, the decision on how to invest
the proceeds from the bond issue until they are needed to pay for the construction is a
short term financial decision.
The use of a 1-year time horizon to separate short term and long term decisions is
arbitrary and, in some cases, ambiguous. To refine the definition of short term finance,
it is helpful to examine the differences and interrelationships between the decisions that
are classified as short term finance and those that are considered long term finance.
Decisions usually classified as long term are difficult to reverse and essentially determine
the basic nature of the business and how it will be carried out. Short term financial
policies take the results of these decisions as a starting point and concentrate on how
they can be efficiently and economically carried out. We can think of short term decisions
as being more operational. Once implemented they are easier to change
Importance of Working Capital Management
Working capital management includes a number of aspects that make it an important
topic for study, and we will now consider some of them.
Surveys indicate that the largest portion of a financial managerís time is devoted to the
day ñby- day internal operation of the firm; this may be appropriately subsumed under
the heading îworking capital management.î since so much time is spent on working
capital decisions, it is appropriate that the subject be covered carefully in managerial
finance courses.