Explore BrainMass

Explore BrainMass

    Cash Management

    Cash management is not as complex a topic as other disciplines in corporate finance such as valuation and capital budgeting. However, cash management is a critical activities of a corporate financial manager because it ensures the continuation of the firm's operations. 

    When the firm has cash on hand, we say that the firm is investing in cash, since cash is an asset. However, cash in a bank account earns little to no interest. That means that holding cash incurrs an opportunity cost equal to the amount of return that could be earned by its next best use. As a result, firm's try to limit their amount of investment in cash while still having enough cash on hand in order to meet their short-term operating needs. 

    Cash management typically involves two main activities: (1) collecting and disbursing cash efficiently, and (2) investing excess cash in marketable securities. 

    Float management: There often exists a difference between the amount of cash shown on a firm's accounting books and the amount of cash in the bank. This difference is known as the float, and result from the collection float (cheques that are received from the firm but take several days to be processed) and the disbursements float (the delay it takes to process cheque payments). The firm is helped by the disbursement float (it increases bank cash) and hurt by the collections float (it increases book cash but not bank cash). 

         Mail float: the time during which cheques are trapped in the mail. 
         In-house processing float: the time it takes for the receiver to process the cheque and deposit it in the bank. 
         Availability float: the time it takes the bank to clear the cheque. 

    Accelerating collections: Accelerating collections here means implementing cash and cheque handling policies that allow the firm to process cheques or payments as quickly as possible. (It is differentiated from credit management, which involves negotiating credit terms with customers.) Lockboxes and cash concentration are two important tools for accelerating collections.

         Lockboxes: Lockboxes are special post office boxes set up at a bank branch. Accounts receivable payments are mailed to lockboxes and
         processed directly by the bank branch. Details of the deposits made are recorded by the bank and sent to the firm. 

         Cash concentration: For large businesses, concentration accounts consolidate the surplus deposits from the corporation's subsidiaries or
         units by crediting one central account. These funds are available same-day. Pooling or consolidating funds allows a company to use a
         positive balance in one account to offset negative balances in others, avoiding overdraft costs and bounced payments. Excess pooled
         funds can also be used by central financial managers to pay down debt or invest in marketable securities. Cash concentration systems are
         used to optimize the cash management of all the different units of the business. 

    Controlling disbursements: Slowing down disbursements is a method of cash management that is also a sensitive area and can affect supplier relations. In practice, these methods are slowly dissappearing because of the ethical and legal ramifications of deliberately delaying payments. 

         Zero-balance accounts: Banks will transfer needed funds to cover disbursements over the course of the day from a mass account to zero-
         balance accounts. In the typical case, a firm maintains a master account, a zero-balance account for payroll and a zero-balance account for
         other payments. The firm doesn't need to keep a safety stock of cash in the zero-balance accounts, because cash can be transferred from
         the master account when needed. 

         Sweep accounts: At the end of the day, excess cash in a firm's sweep account is automatically transferred to an interest-bearing account or
         money market fund. 

    Photo by Jp Valery on Unsplash

    © BrainMass Inc. brainmass.com April 17, 2024, 8:20 am ad1c9bdddf

    BrainMass Solutions Available for Instant Download

    The Greek Connection: Net Working Capital and Cash Conversion

    The Greek Connection had sales of $29.2 million and a cost of goods sold of $11.7 million in 2015. A simplified balance sheet for the firm appears below: THE GREEK CONNECTION Balance Sheet as of December​ 31, 2015​ (thousands of​ dollars) Assets:

    Question touches various aspects of individual cash management

    Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requirement. Her monthly income is $4,200. Alexis has a "target" cash balance of around $1,200, and whenever it exceeds that amount she

    Question Deals with seasonal fund requirements

    Dynabasae Tool has forecast its total funds requirements for the coming year as shown in the following table. Month Amount Month Amount January 2,000,000 July 12,000,000 February 2,000,000 August 14,000,000 March 2,000,000 September 9,000,000 April 4,000,000 Octo

    The Impact of Asset Sales on Financial Statements

    Last year Apple charged $3,416,267 depreciation on the Income Statement of Andrews. If early this year Apple sold all its depreciable assets for their book value, the effect on Andrews financial statements would be (all other items remaining equal): Just impact the balance sheet No impact on Net Cash from operations Decreas

    Walmart cash management

    Please write an essay in Word that addresses the following questions about Walmart: Would you estimate that Walmart has an effective cash management strategy? Why or why not? Please justify your decision. In general, what are the four main factors in Walmart's credit policy? Please name and describe each of these factors.

    Finances, Financial Planning, Strategic Planning and Financial Statements

    Assistance needed with finding background information on these financial questions. Please include in-text citations and references used. Thank you! 1. Fixed vs variable costs - What are the basic differences between fixed and variable expenses and how do you consider these in a financial plan? 2. Financial planning - Ho

    Inventory Ratio and Working Capital

    Business Depot consistently sells $20,000,000 (Cost of Goods Sold) in office supplies each year. Their inventory turnover ratio has be 2 for the past few years. A new CFO with extensive industry experience has recommended a new Inventory Control System that promises to increase the inventory turnover ratio to 4 at the same lev

    Incremental Cash Flows and Misleading Statements

    1. Which of the following should be treated as incremental cash flows when deciding whether to invest in a new manufacturing plant? The site is already owned by the company, but existing buildings would need to be demolished. Explain please a. The market value of the site and existing buildings b. Demolition costs and site c

    Purchasing Companies for Cash Flow

    Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, Marko feels ABC will be worthless. Marko has determined that a 14% rate of return is applicable to this potential purchase. What is Marko

    Importance of Cash Flow Estimation

    According to one website, cash flow estimation is a must for assessing the investment decisions of any kind. To evaluate these investment decisions there are several principles of cash flow estimation that must be taken into consideration. This concept and its principles will be the subject of this week's assignment. Using this

    Calculating the Net Required Investment

    1. Assume a company will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000. The equipment will replace an existing machine that has a salvage value of $75,000 and a book value

    Short Term Liquidity

    I would like to have the workings and explanations of the various ratios used in the case study (attached) to answer the questions. The answer should be descriptive enough to explain the pros and cons adequately. Q1. Refer to AKP's financial statements. If she was a loan officer at the nearest bank would she be willing to len

    Evaluation of Cash Management Techniques

    What is a Cash Management Technique? Is it essential for companies to have cash management system? Who uses cash management technique? What are some advantages or disadvantages of having/not having cash management techniques?

    Cash Management Controls

    Please respond to the following: For Illinois Explain three or four state and local cash management controls that are in place in your system. Do you believe that these controls are necessary? Why or why not?

    Working Capital & Cash Management

    Please help me with this. Please use an original example, not one copied off internet. Thank you. 1) What is working capital and how would you calculate it? 2) How can a hospital improve their working capital? 3) What are the great approaches for cash management? 4) If you are the controller who is in charge of managing

    Cash Management: Dome has a credit sale of $ 144000 yearly

    Problem 1: Dome has a credit sale of $ 144000 yearly with credit term of net 30 days,which is also the average collection period.If Dome offers a 2% discount for payment in 10 days and every customer took advantage of the new term,what would the average receivable balance be? use the full sales of $144000 for your calculation

    Current, Quick, Cash Ratios and Short Term Liquidity

    I'm writing a pretty lengthy paper but I'm stuck on these two points. Please help. - Describe the circumstances under which the current, quick and cash ratios, respectively, are more appropriate measures of short term liquidity than other ratios. - Describe the effect of a cash versus a stock dividend on stockholder's equit

    Working Capital Strategies For Apple Inc.

    Financial Outcomes Review your organization's most recent financial reports, such as balance sheets, statements of cash flow, management comments, and footnotes to financial statements, to explain how each current asset and liability account has affected cash management strategies. Complete the following in your paper: -As

    The Records of Rahman Company

    1. The records of Rahman Company include the following information about its activities for the year just ended. Beginning cash balance $ 40,000 Increase in accounts receivable 60,000 Cash collections from customers 50,000 Purchase of property, plant and equipment 15,000 Decrease in accounts payable 28,000 Cash pai

    Custody is transferred from the warehouse to the shipping department upon authorization of the A. invoice. B. customer order. C. purchase order. D. shipping order. 14) The most reliable evidence comes from A. examining a sales invoice. B. a negative confirmation. C. a blank confirmation. D. a positive confirmation. 15) Approval of credit sales by the credit department supports the assertion of A. valuation or allocation. B. existence or occurrence. C. rights and obligations. D. completeness. 16) A proof of cash is normally used A. when control risk for cash is low. B. for all engagements. C. when lapping is suspected. D. to test the transactions process when controls over cash are weak. 17) An enlightened management may decrease the probability of fraud in the company best by A. stressing negative observations on their work to increase performance. B. restricting authority for profit objective determination to top management. C. establishing work teams that share responsibilities, performance, and bonuses based on collective efforts. D. measuring performance and awarding bonuses on the basis of short-term operating results. 18) When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent A. substitution of stolen funds. B. theft. C. kiting. D. lapping. 19) Inventory must be recorded when A. the related revenue is recognized. B. the company has title to it. C. it is shipped from the vendor. D. it is received. 20) Responsibility for the physical inventory count lies with the A. client. B. vendor. C. inventory specialist. D. auditor. 21) The source of authorization for preparation of materials requisitions is the A. production plan. B. bill of materials. C. sales forecast. D. purchase order.

    13) Custody is transferred from the warehouse to the shipping department upon authorization of the A. invoice. B. customer order. C. purchase order. D. shipping order. 14) The most reliable evidence comes from A. examining a sales invoice. B. a negative confirmation. C. a blank confirmati

    Financial Statements - Investor and Management Views

    Compare and contrast the differing views an investor and management may have on financial statements. How should investors and management view EVA and FCF? Pick a publically traded company. Go to the company Web site. Try one that you are familiar with?you shop at their store, eat at their restaurants, or wear their clothes. On

    Medco Hospital Buyers Group (MHBG) processes a significant number of intercompany transactions each month, mainly transferring cash between business units to meet the needs of operating cash flows.None of MHBG's intercompany transactions are material on an individual basis. The intercompany transactions only affect balance sheet accounts. Company policy calls for intercompany accounts to be reconciled each month and for the balances between business units to be confirmed; however, the policy is not followed. The reconciliations are not performed regularly, and when they are performed, not in a timely manner. Management reviews the financial reports of the various business units and follows up on any large amounts in the intercompany accounts. Management also reviews the operating expenses of each of the business units each month, using variances as an indicator of reasonableness. Management consistently investigates any large intercompany account balances and unusual or large variances that are identified in this monthly review. (Adapted from AS 2, D1, Scenario A) Do you believe the lack of monthly intercompany account reconciliation and confirmation at MHBG is an ICFR deficiency? If you think it is, is it a significant deficiency or a material weakness, and why?

    Medco Hospital Buyers Group (MHBG) processes a significant number of intercompany transactions each month, mainly transferring cash between business units to meet the needs of operating cash flows.None of MHBG's intercompany transactions are material on an individual basis. The intercompany transactions only affect balance s