Appropriate cash management and resourceful short-term financing prove to be of utmost importance to a company in order to sustain a competitive market share, which will raise profit potential and shareholder value through increasing stock. Proper cash management can find idle cash balances that are not earning any revenue and eliminate them to free up cash as foundations for short-term financing through interest building securities. Short-term financing meets production needs and hopefully maximizes profitability for a company. By comparing and contrasting the different methods and techniques of cash management and short-term financing, a fuller understanding of how a company uses its money will be evident.
Cash Management Techniques
One way a company controls its money is by holding onto it. The reasons a business may hold money will be for transactions, compensating balances for banks, and for precaution (Block & Hirt, 2005). Often times corporate expenses like inventory, employees and taxes are being paid for by cash reserves in the company. In other words, some fixed costs like taxes and variable costs like inventory would be paid for with the cash held back. The other reason a business may hold cash is to pay banks back for services provided by holding balances as opposed to paying the bank directly (Block & Hirt, 2005).
Another cash management technique involves the use of “float.” This 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. Float results from time delays in certain processes within the banking system, such as mailing and clearing checks, and using it to the company’s advantage (Block & Hirt, 2005). By “playing the float,” a company can reduce collection times or lengthen disbursement dates, providing them with more cash on hand to use for interest building securities.
Unlike the... [continues]
Cite This Essay
(2010, 09). Cash Management & Short-Term Financing. StudyMode.com. Retrieved 09, 2010, from http://www.studymode.com/essays/Cash-Management-Short-Term-Financing-409237.html
"Cash Management & Short-Term Financing" StudyMode.com. 09 2010. 09 2010 <http://www.studymode.com/essays/Cash-Management-Short-Term-Financing-409237.html>.
"Cash Management & Short-Term Financing." StudyMode.com. 09, 2010. Accessed 09, 2010. http://www.studymode.com/essays/Cash-Management-Short-Term-Financing-409237.html.