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(^196) Financial Management
A thorough understanding of why and how a firm holds cash requires an accurate
conception of how cash flows into and through the enterprise. Figure depicts the
process of cash generation and disposition in a typical manufacturing setting. The
arrows in the Jingle show the flow is, whether the cash balance is being increased or
decreased.
The firm experiences irregular increases in its cash holdings from several external
sources. Funds can be obtained in the financial markets from the sale of securities,
such as bonds, preference shous and equity shares or through debt contracts with
lenders such as commercial banks. These irregular cash inflows do not occur on a daily
basis. They tend to be episodic, in that the financing arrangements that give rise to them
are effected at wide intervals. The reason is that external financing contracts usually
involve huge sums of money stemming from a major need identified by the companyís
management, and these needs do not occur every day. For example, a new product
might be in the process of launched, or a plant expansion might be required to provide
added productive capacity.
In most organisations the financial officer responsible for cash management also controls
the transactions that affect the firmís investment in marketable, securities. As excess
cash becomes temporarily available, marketable securities will be purchased. When
cash is in short supply, a portion of the marketable securities portfolio will be liquidated.
Whereas the irregular cash inflows are from external sources, the other main sources
of cash to the firm arise from internal operations and occur on a more regular basis.
Over long periods the largest receipts will come from accounts receivable collections
and to a lesser extent from direct cash sales of finished goods. Many manufacturing
concerns also generate cash on a regular basis through the liquidation of scrap or
obsolete inventory. In the automobile industry large and costly machines called chip
cruisers grind waste metal fine scrap that brings considerable revenue to the major
producers. At various times fixed assets may also be sold, thereby generating some
cash inflow. This is not a large source of funds except in unusual situations where, for
instance, a complete plant renovation may be taking place.
Apart from the investment of excess cash in near-cash assets, the cash balance will
experience reductions for three key reasons. First, on an irregular basis withdrawals
will be made to (1) pay cash dividends on preferred and common shares, (2) meet
Chapter-8
Cash Management and Marketable Securities