Sample Business Studies Essay on Cash Management Techniques

Cash Management Techniques

Introduction

Cash management techniques are important strategies that many business organizations must put in place for tracking all the finance involved in their operations. The money involved in any business operations may include debits, credits, profits, expenditures, long-term loan, long term, and short-term assets, and account receivables (ACE, 2014). Cash management techniques enable accountants in the firm to know how money transfer occur in and out of the company and helps the company manage it funds properly in order to increase profits and do away with bad debts. Many organizations are currently operating in a competitive environment that needs proper financial management method in order to sat afloat and be on the competitive age (Fontinelle, 2014).

Some cash management techniques that companies can use include tracking expenses, tracking account receivables, forming and managing credit lines, budgeting, investing and generating income. All these techniques among other are deemed important in any company as they enable the management to track, monitor, and evaluate inflow and outflow of cash in their premises (Buch, 2000). They are also able to know how each cent is used and how the usage can either benefit or bring loses into the company.

Cash management strategies of Wal-Mart

Wal-Mart is a company that has stores globally. Research has shown that this company has effective cash management strategies and this is the reason why it has reported increases in profit over the past year (Joseph, 2014). The company uses techniques such as tracking account receivables like returned investments and sales. They closely monitor their expenditures to ensure that the cost of expenses does not exceed the amount of profit they bring in. another strategy used by the firm is that of budgeting. Wal-Mart ensures that all the amount of money needed in the firm is properly accounted for so that they can know which sector that uses many funds. Similarly they management of the company also ensure that they manage their income routs properly to ensure that enough profits comes into the firm (Ehradht, & Bringham, 2013). They also track, monitor, and evaluate the inflow and outflow of cash into the firm.

Factor of credit policy in a company

A company has to consider credit standards, which refers to the credit worthiness of customers in a firm when setting its credits. Terms of credit refers to the conditions of repayment of credits mostly regarding its sales within the firm. A company may also consider a factor like credit collection polices – this refers to how and when the credit awarded to customers should be given back to the company. It also involves calculating interests that might be accrued for paying the credits and the steps to take upon defaulting to pay (Ehradht, & Bringham, 2008). The other main factor refers to credit period, which is the duration that the customers should take to pay the credit. The period over which credit should be paid may vary from weeks, months and even years. All firms should set this period such that they are able to make proper returns on the credit issued to clients.

Financial management policies

A short-term financial management policy is a method used by firms in looking at how their funds operate within a given short period of time say quarterly or semi annually. The benefit of using short-term financial management policy is that the firm id able to know the amount of profits or losses incurred at a glance. They are able to monitor their cash flow and forecast into the future to either increase the profits or fix the losses (Ehradht, & Bringham, 2012). On the other hand, easy short-term financial management policy may only be applicable to managing short-term loans but not credits.

 

Techniques for monitoring account receivables

Once companies have given out credits to their customers, they then need to monitor how the credit will fair on using account receivables. Traditionally, companies use techniques such as days sales outstanding (DSO) and the aging schedule. Day’s sales outstanding are also called the average collection period and refer to the average time taken to collect all the credits back into the company (Ehradht, & Bringham, 2008). This is calculated by dividing annual receivable by weekly receivables to find out whether the collection period is workable or not. They also find out if the given period is enough to help then accrue more interest on the credits. Aging schedule on the other hand refers to how a firm breaks down its receivable account by age. This method allows the firms, and banking corporations to report their account receivable within months so that they are able to know the level of maturity.

Maturity matching approach to financing assets

Maturity matching approach to financing assets refers to the methods used by the firm to bring in more assets. Assets are usually considered as important to any firm because their sales increase account receivable, which then leads to profits in the firm.

Risks of financing long-term assets with short-term liabilities

The risks include an occurrence of bad relationships with the firm’s suppliers and bankers due to failure of paying loans on time. This can also lead to a bad reputation within the sector if the firm is not able to pay debts on time (ACE, 2014). Similarly, the firm is able to meet working capital or urgent business needs of the firm only. Such loans are not fit for financing long-term opportunities that need large capital

 

Risks of financing short-term assets with long-term liabilities

The management must know that   long-term debt are usually costly to service in the since that their interest charges are often very high. Organizations that provide long-term loans normally demand a great amount of information from the company for carrying out their credit evaluation to see if the firm is able to repay the debt on time without defaulting along the way.

Conclusion

Cash management strategies are important factor to consider when carrying daily operations of the business. Sometimes firms need to borrow loans for servicing long term and short-term assets. They therefore need to know the types of account receivable that they have as well as how they will make money used for settling all the available debts. They must ensure that all the money in and out of the firm are able to bring enough profits for repaying the available loans to avoid bad debts and bad reputation with financiers, which might occur due to defaulting their loan payments. Account receivables and credit must also be well monitored to ensure better returns for the compan

Reference

ACE, (2014). Short term debt financing. Retrieved from http://www.dealflow.org.sg/cms/services/financing_for_smes_debt_financing.asp

Buch, V. (2000). Determinants of short term loans. Retrieved from https://www.ifw-kiel.de/ifw_members/publications/determinants-of-short-term-debt/kap994.pdf

Ehradht, M. & Bringham, E. (2008). Corporate Finance: A Focused Approach. Belmont, CA: Cengage Learning

Ehradht, M. & Bringham, E. (2013)Financial Management: Theory & Practice. Belmont, CA: Cengage Learning

Ehradht, M. & Bringham, E. (2012). Intermediate Financial Management. Belmont, CA: Cengage Learning

Fontinelle, A. ( 2014). The 5 Biggest Factors That Affect Your Credit. Retrieved from The 5 Biggest Factors That Affect Your Credit. Retrieved from http://www.investopedia.com/articles/pf/10/credit-score-factors.asp

Joseph, C. (2014). Various Cash Management Techniques. Retrieved from http://budgeting.thenest.com/various-cash-management-techniques-3956.htmls