Cash management is necessary for financial availability. Organizations and firms use certain basic strategies to achieve cash management.
Stretching Accounts Payable
The payment of accounts payable can be delayed as late as possible without damaging the credit worthiness of the firm or violating ethical considerations. Firms offer cash discounts like (2/10 net 35) to encourage debtors to pay early. Thus, delaying payment from say 35 to 45 days will reduce cash cycle to 110 days (85+70-45) and so cash turnover increases to 3.27 (ie 360/110). This will reduce the firm's minimum operating cash requirement.
This involves turning over the firm's inventory as quickly as possible while avoiding stocks out that may occur, shutting down the production process or loss of sales. Firms may use better inventory control methods, effective production and scheduling techniques to reduce the length of production cycle. Thus, improvement in the overall inventory turnover will result in the reduction of operating cash required.
Speedy Collection of Accounts Receivable
Firms should try to collect their receivables as quickly as possible without losing future sales, avoiding high pressure collection methods, and offering cash discount when they are economically justifiable. Accounts receivable allows firm to increase sales than on cash basis, as well as to maintain competitive advantage.
The firm should ensure that customers payments (cheques) are converted into cash as quickly as possible. For geographically dispersed customers, firm may establish cash centres with local bank arrangements and for easy transfers to regional or headquarter accounts. This reduces mailing time as well as cheque clearing time.
Under this arrangement, customers are requested to forward their cheques to a post office box in their geographic area and a local bank picks up the cheques. The bank can then process the local cheques through the local clearing house for rapid collection and perhaps have the funds available for use within a short period of time.
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