Mba 503 - Cash Management

Cash Management

Businesses must understand cash management for it to be effective. Financial goals will be harder to achieve without a proven structure. It is possible that goals are not achieved, and it can be seen that cash management may have taken part in it one way or another. It's the fundamental building block of financial planning. There are various methods of short term financing can also be essential to a successful businesses. This paper will describe cash management and short term financing. Some of the points that will be brought up are managing your working capital, managing business risks, and monitoring costs.

Working capital is an essential part of cash management. The level of working capital of a business is directly related to the flow of cash into and out of a business. Working capital is needed to setup a business, pay operating costs, and continue to operate until the receivables arrive. Depending on the amount of working capital the business uses, things can be effected like paying suppliers, buying materials and even salaries. I can be seen that maintaining and managing a particular level of working capital allows the business to flex during hard times. Not understanding and forecasting the need for the correct amount of working capital can be devastating to a business.

Short-term financing can be used to make business purchases that can allow the company to purchase fixed assets, or help a company with less than expected working capital. A line of credit can be created with the company’s financial institution, and is normally done before the need should arise to be effective. There are many risks involved in running a business, and serious challenges should be expected at some time in the future. It is possible to reduce the risk of possible capital issues by planning ahead and having a more diversified client base. Having the business depend on the heath of another business is not good practice. Finding new clients will increase revenue, improve cash flow, and enable the business to not be as susceptible to financial meltdown.

Costs and inventory is very important in business and cash management. Trying to make sure the business gets the best possible deal from the suppliers is important. A business can do this by shopping around and getting quotes from other suppliers. They may not be able to give a better price, but may be able to offer better payment terms making it easier on your cash flow situation. Analyze inventory turnover to determine which items are selling, and which items just waste much needed working capital. Keeping inventory levels low can also help reduce the strain on the company’s working capital. Managing inventory and workflow will help with the working capital issues, but can be outsourced if the company cannot handle the burden. Financing for a period of 1 year or less is considered short term financing. These funds are usually for businesses to run daily operations which include payment of wages to employees, inventory ordering and supplies. A simple example of short term financing is when a firm places an order for raw materials; it pays with a finance plan and anticipates paying this loan by selling these goods over the period of a year (Encyclopedia Britannica, 2005). There are many methods for which businesses can seek short term financing. Some include overdrafts, bills of exchange, promissory notes, and inventory loans.

An overdraft is the amount by which a check exceeds the available balance in a checking account. It is also described as the negative account balance that results when a depositor writes checks exceeding the account balance. Bank customers who have an overdraft line of credit, called Overdraft Protection can write checks for more than the account balance if needed, without fear that their checks will be returned or they will have to pay overdraft check fees for bounced checks. Overdraft is much like a security blanket for your loan or financial institution for the business and personal expense accounts.

Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable