(^200) Financial Management
Evaluation of these operational objective, and a conscious attempt on the part of
management to meet them, gives rise to the needs for some typical cash management
decisions.
Decisions
Two conditions would allow the firm to operate for extended periods with cash balances
near a level of zero: (1) a completely accurate forecast of net cash flows over the
planing horizon and (2) perfect synchronisation of cash receipts and disbursements.
Cash flow forecasting is the initial step in any effective cash management programme.
This is usually accomplished by the finance functionís evaluation of data supplied by
the marketing and production functions in the company. The device used to forecast
the cash flows over the planning period is the cash budget. Cash-budgeting procedure
are explained in the latter part of new chapter it is emphasized though, that the net cash
flows pinpointed in the formal cash budget are mere estimates, subject to considerable
variation. Thus, a totally accurate cash flow projection is only an ideal, net a reality.
Our discussion of the cash flow process depicted in Figure 1 showed that cash inflows
and outflows are not synchronised. Some inflows and outflows are irregular; other are
more continual. Some finished goods are sold directly for cash but more likely the sales
will be on account. The receivables, then will have to be collected before a cash inflow
is realised raw materials have to be purchased, but several suppliers are probably used,
and each may have its own payment date further, no law of doing business collections
to coincide with raw material payments dates. So the second criterion that would permit
operation of the firm with extremely low cash balances is not met in actual practice either.
Given that the will as a matter, of necessity, invest in some cash balances, certain types
of decisions related to the size of those balances dominate the cash management process.
These include formulation of answers to the following questions:
- What can be done to speed up cash collections and show down or better control
cash outflows? - What should be the composition of our marketable securities portfolio?
- How should our investment in liquid assets be split between actual cash holdings
and marketable securities?
Cash Forecasting
One objective of cash management is clearly to ensure that the business does not run
short of cash. There must always be enough cash available to meet liabilities as they
fall due. Equally the business should not have much more cash than what it requires.
The financial manager must be alert for opportunities to make use of any cash temporarily
in excess of current needs.