aicm
Masterclass
Cashflow management Never more in recent history has the monitoring of cashflow been more important and of a critical focus for businesses.
C
ash, as opposed to other current asset management is a subject that has attracted considerable attention of late. In this article we touch on the major factors to be considered in the management of cash within a business. Cash management is an awkward topic to deal with in such a general way because its application is applied across a very broad spectrum – from a sole trader to a large multi-national corporation. It is therefore vital to use a cost-benefit framework when assessing the applicability of some of the mathematical or computer dependent cash management techniques. We also refer to some of the models that have been developed to assist in the cash management process.
1. Importance of Cash Management The necessity for effective cash management can be gauged by the penalties paid by firms that have neglected to do so. In the extreme case, the result can mean insolvency. In the lesser case, the results are reduced returns, either due to lost opportunity for investment of idle funds, or as a result of increased costs (e.g. loss of discounts, use of expensive means of financing) or a combination of factors. Interest rates impact the return on an investment, the required rate of return and the opportunity costs.
l Increasing Opportunity Costs Interest rates and the cost of money reduce the return and therefore have an opportunity cost.
Cash management is an awkward topic to deal with in such a general way because its application is applied across a very broad spectrum... 66
CREDIT MANAGEMENT IN AUSTRALIA • October 2020
l Inflation The effects of inflation on the levels of inventories and receivables and thus on working capital requirements generally, have placed significant pressure on liquidity in most businesses. This problem is not recognised by our taxation system.
2. The need for Cash The reasons for holding cash can still be analysed along the lines suggested by Keynes almost 100 years ago. That is, cash for transaction purposes, and cash for provision of precautionary reserves. Cash balances are required for transactions that is the day to day, month to month operation of the business, primarily because it is highly unlikely that the business will be able to arrange exact synchronisation between cash inflow (from sales) and cash outflows (for purchases of inventories and payment of expenses). Cash balances of a precautionary nature are required because of the uncertainty involved in much of the business’ forward planning. Two major problems of cash management may be summarised as: (a) Ensuring the funds are available to meet those situations where cash outflows exceed cash inflows (e.g. by use of an overdraft, short-term accommodation, extending of payment, etc). As an adjunct to this, if finance would not appear to be available, it would be necessary to ensure that suitable action is taken to avoid the situation, perhaps by re-arranging receipts and payments schedules or moving to a less ambitious scale of operations. To put this another way, firms should subject planned activities to cash flow analysis to gain an idea of potential problem areas before committing themselves to action. (b) Ensuring that surplus cash made available when inflows exceed outflows is placed to the best advantage (e.g. reduction of overdraft, short-term investment, retirement of debt, financing of longterm investments, etc).
