Cash Management Techniques After reading Chapter 16 in our text, I decided to do my write up on something I knew very little about; Cash Management Techniques. This is something that we did not cover in any of my undergraduate level finance classes. This section of the textbook describes how large firms maintain a cash balance in banks and how they are aligned with the sales patterns and trends. “By timing their cash receipts to coincide with their cash outlays, firms can hold their transaction balances to a minimum” (Ehrhardt & Brigham 2011). Firms attempt to time up their accounts receivables around the timeframe for the due date of their expenses. This is the best way to get a handle on the company’s cash is to synchronize cash flows accordingly. Doing so will keep average cash balances low. “You can use the time such as the time from the writing of the check until it clears the bank, accelerate collections with low credit terms and high interest rates on unpaid balances, and control disbursements by making use of discounts and good purchasing practices”(Blondin, N. 2011). The check clearing process can be somewhat time consuming however. In the past checks were to be sent via snail mail, international transfers may run into longer turnover times especially when the validity of the check must be verified. Since then, times have changed with the innovation of technology and the process is much smoother. “The Check 21 Act of 2004, which made it okay to create digital versions of paper checks for processing, spells out the rules required of check imaging, regardless of which channel the payment comes through”( WISNIEWSKI, M. 2013). This does have risks but it eliminates long lead times as well as the potential for human error.

“Float is defined as the difference between the balance shown in a firm’s (or individual’s) checkbook and the balance on the bank’s records.”(Ehrhardt & Brigham 2011) This is the balance that is shown and is the delay from when the payer wrote the check and when the amount is deducted in the account. Some of the road blocks that occur with and result in float are checks by snail mail, checks going through the receiving firm, and the time it takes for an actual check to clear. Depending on the firms float, collections may be extremely up to speed whereas writing checks may be done at a slower pace. In past times, companies used lockboxes in order to collect money quicker. These were utilized at one time however, wire transfers are becoming more popular. Nowadays, companies have expressed the need for bigger money denominations and amounts at a faster rate. They almost expect it to happen in real-time. With the use of electronic debit structure, money is subtracted accordingly and transferred to various accounts. By using this system, the lag time is mitigated as much as possible.

The use of cash management is an essential vehicle to maintain and track cash that is not being used. In order to be successful, all managers must be in tune with the processes in monitoring idle cash. The excess cash that is not used to bring about revenue can be used elsewhere or another project such as short-term financing. The obvious example would be securities or instruments where interest can be established and add value to the firm. A firm can utilize the money to increase production, capacity, or innovate products. Another thing that must taken into consideration is the time horizon for their idle cash. I can recall my accounting professor during undergrad in my intro class explained that having too much cash sitting may be attractive for a few days. It is then up to the managers to utilize the cash and manage it accordingly for the betterment of the company.

Ehrhardt & Brigham (2011) Corporate Finance A focuses approach : Working Capital Management(Cash Management Techniques) page 659. Retrieved on August 9, 2013

Blondin, N. (2011) Cash Flow in and Out, retrieved August 9, 2013 http://www.tscpa.com/Content/publicinfo/sbarticles/cash_flow_in_out.aspx

WISNIEWSKI, M. (2013) Mobile Check Deposit Boom Brings Risks http://www.americanbanker.com/issues/178_133/the-lesser-known-risks-of-mobile-check-deposit-1060543-1.html Retrieved on August 9, 2013 http://www.americanbanker.com/issues/178_133/the-lesser-known-risks-of-mobile-check-deposit-1060543-1.html