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Cash Management Essay

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The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.
Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.
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In the business world companies are always trying to maximize their earning potential by strategically investing in short-term financing. In terms of finance short-term may mean months or even a couple of years. The type of finance method that is used is contingent on the specific needs of the corporation. These methods include trade credit, bank credit, financing through commercial paper, foreign borrowing, and the use of collateral, accounts receivable financing, inventory financing and hedging to reduce borrowing risk. Trade credit is the practice of purchasing goods now and paying for them later. Trade credit is widely used and “is the least expensive and most convenient form of short-term financing” (McHugh, McHugh & Nickels, 1999, p. 573). When a company purchases goods on credit an invoice is received outlining the terms of repayment. An invoice contains terms such as 2/10, net 30. The total bill is due in 30 days, but the supplier has extended a discount if the amount is paid in full within 10 days. Finance managers use the information on the invoice to perform an analysis to find out if the discount is worth paying the invoice in advance or if there is opportunity for more earning potential if invested elsewhere.
Banks issue credits to organizations seeking funds for there ventures. The bank usually “prefers a self-liquidating loan in which the use of funds will ensure a built-in or automatic repayment scheme” (Block & Hirt, 2005, Chapter 8, p.
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