Cash Management Assignment - Finance Module, University 2017, Analysis

This cash management assignment explores the critical role of cash in business operations, emphasizing its significance as a key component of working capital. The assignment delves into the cash conversion cycle and its impact on liquidity. It discusses four major components of cash management: inventory management, including techniques like Just-in-Time and vendor management; receivables management, focusing on aging analysis and bad debt prevention; the cost of foregoing discounts on payables, highlighting the importance of leveraging vendor discounts to optimize cash flow; and working capital management ratios and cycles. The assignment underscores the importance of internal controls, efficient inventory management, timely receivables collection, and strong supplier relationships to enhance cash flow and overall financial health. References from academic journals and books support the analysis.

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By student name
Professor
University
Date: 18 August 2017.
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Contents
Introduction...…………………………………………………………………………………………….......3
Concepts of Cash Flow Management..........……………………………..……………………...4
Conclusion.....…………………………………………………………….....…………………………………6
Refrences.....……………………………………………………………….......................................7
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Introduction – Cash Manegement
Cash is one of the most important and critical resource in managing a business. It has
been rightly said that cash is the KING as without it no business requirements can be sustained.
This is one of the major component of the working capital and gives liquidity to the company.
However, there should be a planning as to maintain only the required minimum amount of cash
in hand such that the resource is not wasted and its alternative use or opportunity cost can be
utilised. (Raiborn, Butler, & Martin, 2016) Another important factor is the cycle within within
which the cash is rolled back to the company when the company invests it in the form of raw
material such that raw material comes, it is converted into finished goods, it is kept in the stock
and then sold to the customer then the customer is given some credit terms and he/she pays back
within such timelines, similarly the vendor or the supplier is also paid in some time based on the
credit terms availed from him/her. Based on all this, there is a timeline post which the cash once
invested is returned or rolled back in the form of cash again. This is called cash operating or cash
conversion cycle. The lower it is, the better it is for the business as it reflects liquidity and
mobility of the cash.
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Concepts on the cash flow management
Here we will be discussing on 4 major components of cash management mentioned
belew:
1. Inventory management system: It forms part of the working capital and optimum
inventory needs to be maintained in order to avoid the storage and pilferage costs. It may
depends upon company to company and industry to industry as per the customer needs.
For example, the food retailers and restaurants would have less inventory as compared to
the apparels or construction industry (Knechel & Salterio, 2016). The inventory
management techniques include Just in time approach, the Kaizen approach, the vendor
management approach where either the ordering is done based on the needs or the orders
from the customer such that there is least time lag and least storage costs or the vendor
himself looks into the stocks maintained by the company and replenishes them once the
stock is low. Earlier the companies used to follow the approach called “EOQ” or
economic order quantity where minimum possible quantity of stock was ordered based on
the demand. This entails huge costs so the business managers should look to economise it
through effective and efficient planning.
2. Ageing Analysis of the receivables and Bad debt: A continuous tarcking of the
receivables ageing should be in focus in order to avaoid the bad debts and providing the
management with the early warning signals in case there is any challenge in collection of
the receivables. This helps to understand which of the debtors are faultering the credit
timelines and where the discount could be given to the debtors based on the quick cash
collection. It also helps to plan well if any of the debtors is experiencing a financial
distress and may be bankruptcy by taking a provision for doubtful debts in the books.
This also helps to analyse what are the customers who need to be continuously tracked
and who are the healthy customers with which the business can be increased. (Fay &
Negangard, 2017) It also gives the fair idea of the DSO and what is the amount of
working capital requirement in terms of the debtors standing in the balance sheet. Bad
debts needs to be avoided on priority and the ageing schedule is the key to it as debtors
can also be discounted or factoring can be done in case of immediate requirement of the
cash to the company.
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3. The cost of foregoing the discount on the payables: This is one of the essential
component and remains being unutilized by most of the companies because of the lack of
analytical thinking. A lot of vendors offer discount in case the payment is made
immediately or within the fixed timeline. Example vendor offering 1% discount in case
the payment is made within 10 days, credit period being 30 days in total. In case the
purchases are made for $1000000, the payment to be made comes to $ 990000 after
availing discount and paying in advance by 20 days (30-10 days). On this basis, the
annualised interest rate on loan comes out to (10000/990000)*(365/20) = 18.43%, i.e.,
the company is charging 18.43% p.a. in case the payment is made in regular 30 days.
Now suppose, there is a aloan available in the market at 5-10%. The business should
always avail the loan and try to make the payment to the vendor within 10 days to make
use of the opportunity cost. This not only enhances the cash cycle of the company but
increases the turnover over the cash. (Jones, 2017)
4. Working capital management ratios and cycle: The gap between the period when the
cash is invested to buy inventory to the period when it is converted to cash again is
termed as working capital cycle. It entails conversion of cash to inventory to finished
goods to sales to debtors to cash again with payment to creditors. The shorter the cycle,
the better it is. Different industries have different working capital gap such that
companies which receive amount in advance of quick upon delivery like Pizza hut or
Indigo airways have shorter cash conversion cycle whereas those like construction and
transportation industry where the payment is on achievement of the milestone have
longer cash cycles. It also depends on the credit terms offered by the vendors and how
the relationship is being maintained with them. (Sonu, Ahn, & Choi, 2017).
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Conclusion
We can clearly see that the cash being a liquid asset is the most important resource of the
company and there can be various measures and ways in which it can be managed well. Instead
of outside funding sources, if the internal controls are well managed the cash requirement can be
met within the business itself by churning it in the best possible manner. Also, care has to be
taken such that extra inventory is not piled up and funds are not blocked in inventory, further the
receivables are collected on time and good business relationships should be built with the
suppliers in order to get the elongated credit period. (Grenier, 2017).
Refrences
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Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), 241-256.
Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Knechel, W., & Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge.
Raiborn, C., Butler, J., & Martin, K. (2016). The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21.
Sonu, C., Ahn, H., & Choi, A. (2017). Audit fee pressure and audit risk: evidence from the financial crisis
of 2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), 127-144.
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