Various cash management techniques: – if your idea of effective cash management techniques involves putting the bills in your wallet in numerical order, you probably need to do a bit more. Effective cash management is vital to ensuring a healthy financial future. Some tried-and-true techniques that don’t necessarily involve arranging currency can be of help.
By loancirrus.com – Budgeting: – A budget is the cornerstone of any sound financial plan. Budgeting is simply the process of tracking your monthly expenses to determine how you’re really spending your money. By making a list of monthly expenses you can discover areas where you can reduce or even eliminate spending and expenses. By preparing a budget, there’s a good chance you will free up extra cash to use for another purpose, like investing.
Investing: – speaking on investing, there is no shortage where you can put the extra cash you uncovered by budgeting.
An effective way to manage your investment dollars is to start a systematic program that allows you to invest with little fain and effort. If you have a 401(k) plan at work, for example, you can set it up so that money is automatically deducted from each paycheck and invested into the plan. You’ll get used to the “missing’ income and you’ll be ensuring that you’re saving for the future.
Credit: – credit can help you in times where you’re a little short on cash or facing a financial emergency. Credit cards are probably the most common and easily accessible form of credit, but they must be used judiciously to avoid falling into debt. If you own a home, and built up some equity, you can borrow against it in the form at a relatively low interest rate.
Generating income: – Don’t overlook the option of generating additional income as effective cash management techniques. There are many ways you can bring in more dollars, such as getting a second job, selling unwanted stuff on eBay or adjusting your tax withholding on your W – 4 forms to reduce the amount deducted from your paycheck. If you have a set of unique skills, you could put them to use by starting a small side business online or out of your home.
The concept of cash and cash management: –
- Cash concept – According to (Davidson et al, 1999), cash is any medium of exchange, which is immediately negotiable. It must be free of restriction for any business purpose. Cash has to meet the prime requirement of general acceptability and availability for instant use in purchasing and payment of debt. Acceptability to a bank for deposit is a common test applied to cash items. This is a process of planning, controlling and accounting for cash transaction and cash balances. It is channelling available cash into expenditures that enhance productivity, directly or indirectly.
In addition, cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These might be converted cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll, profit growth does not necessarily mean more cash. (Davidson et al 1999). Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis: It is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less.
Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain idle. Without contributing anything towards tints profitability. Thus, a major function of the financial manager is to maintain a sound cash position (Pandey, 2007).
Cash is the money which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm, and balance in its bank accounts. Sometimes near-cash items such s marketable securities or bank times deposits, are also included in cash. The basic characteristics of near-cash assets is that they can readily be converted into cash. Generally, when a firm has excess cash, it invest it in marketable securities. This kind of investment contributes some profits to the firm. (Hampton, 2001).
Cash management concepts: – Waltson and Head (2007), explained cash management as the concepts which are concerned with optimizing the amount of cash available, maximizing the interest earned by spare form not required immediately and reducing losses caused by delays in the transmission of funds.
According to Zimmerer et al (2008), cash management is the process of forecasting, collecting, disbursing, investing and planning for the cash company needs to operate smoothly. They further added that cash management is a vital task because it is the most important, yet least productive asset that is more business owns. A business must have enough cash to meet its obligations or it will be declared bankrupt. Creditor, employees and lenders expect to be paid on time and cash is the required medium of exchange.
However, some firms retain an excessive amount of cash to meet any unexpected circumstances that might arise.
Cash Management Techniques: –
Introduction – Proper cash management, efficient short-term financing, are both important and beneficial to a company in other to maintain a competitive market share, which will increase profit potential and shareholder value through rising stock. Cash management can be used to lower or eliminate idle cash balances that do not earn revenue, the freed up cash as sources for short term financing through interest building securities. Short term financing allows a company to secure needed funds in other to meet production needs and gain maximum profitability.
The first part will be to compare and contrast the techniques of cash management that are available to a financial manager and his or her company. Cash management techniques include collection/disbursement float electronic funds transfer, international cash management and marketable securities. The second part will compare and contrast the methods of short term financing that are available to a financial manager and his/her company. Methods of short term financing include trade credit, bank loans, commercial papers, foreign borrowing, receivable financing and inventory financing.
Description of cash management techniques: – float is the difference between a company’s recorded amount of available cash and the amount that has been credited to the company by the bank that results from time delays in certain processes within the banking system such as mailing and clearing checks. Company’s “Play the float” in other to decrease collection times or extend disbursement dates, allowing them to have more cash on hand to use for interest building securities. Electronic funds transfer increases the efficiency of the banking system and decreases collection float time.
This dormant cash have an income – earning potential that owners are ignoring and this restricts a firm’s growth and lowers its profitability. Investing cash, even for a short time, can add to company’s earning.
Cash management techniques – managing cash flow constitute two important parts: –
A: – Speedy cash collections
B: – Slowing Disbursement
- Speedy cash collections: – Business concern must concentrate in the field of speedy cash collections from customers. For that, the concern prepares a systemic plan and refined techniques. These techniques aim at the customer who should be encouraged to pay as quickly as possible and the payment from a customer without delay. Speedy cash collection business concern applies some of the important techniques as follows: –
- Prompt payment by customers – Business concern should encourage the customer to pay promptly with the help of offering discounts, special offers, etc. it helps to reduce the delaying payment of customers and the firm can avoid delays from the customers. The firms may use some of the techniques for prompt payments like billing devices, self-address cover with stamp et.
- Early conversion of payments into cash – Business concern should take careful action regarding the quick conversion of the payment into cash. For this purpose, the firm may use some of the techniques like postal float, processing float, bank float and deposit float.
Concentration Banking: – It is a collection procedure in which payments are made to regionally dispersed collection centres, and deposited in local banks for quick clearing. It a system of decentralized billing and multiple collection points.
- Slowing Disbursement: – An effective cash management is not only in the part of a speedy collection of its cash and receivables buts also it should concentrate to slowing their disbursement of cash is not the meaning of delaying the payment or avoiding the payment. Slowing disbursement of cash is possible with the help of the following methods.
- Avoiding the early payment of cash: – The payment should pay its payable only on the last day of the payment if the firms avoid early payment of cash, the firm can retain the cash with it and that can be used for another purpose.
Centralized Disbursement system: – Decentralized collection system will provide the speedy cash collections. Hence centralized disbursement of cash system takes time for collection from our accounts as well as we can pay the date.