Controlling Aspects Cash Management

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After the preparation of cash budget, the financial manager should ensure that there are no significant differences between the expected/budgeted cash flows and actual cash flows. This requires controlling & reviewing of the whole exercise on a regular basis. The financial manager should take appropriate steps for preventing any unexpected deviation in both the inflows as well as the outflows.

The efficiency of the firm’s cash management program can be enhanced by the knowledge and use of various procedures aimed at

a)    Accelerating cash inflows
b)    Controlling cash outflows

Controlling Inflows:

 The financial manager should take steps for speedy recovery from debtors and for this purpose proper internal control system should be installed in the firm. Once the credit sales have been affected, there should be a built-in mechanism for timely recovery  from the debtors. Periodic statements should be prepared to show the outstanding bills. Incentives offered to the customers for early payments should be communicated to them. Once the cheques/drafts are received from  the customers, no delay should be there in depositing these receipt with the banks. The time lag in the collection of receivables can be considerably reduced by managing the time taken by the postal intermediaries and banks. Concentration banking and lock box system help reducing this time lag .

A firm may open collection centers ( banks) in different parts of the country to save the postal delays. This is known as concentration banking.  Under this system, the collection centers are opened as near as to the debtors as possible, hence reducing the time in dispatch ,collection etc. The firm may instruct their customers to mail their payments to a regional collection centers/bank rather to the central office. The concentration banking results in saving of time of collection and hence in better cash management .

Under Lock box system,  customer mail their payments to a post office near their work place. The firm arranges with a local bank or some other agency to collect the payments and credit to the firm’s account as quickly as possible. The lock box system is economical only if there is a relatively large number of  payments being received in particular area.

The concentration banking & the lock box system attempt to
i)    reduce the mailing time of the customer payments
ii)    reduce the time during which payments received remained uncollected
iii)    speed the movement of cash to the main office for disbursement.

Controlling Outflows:

An effective control over cash outflows or payments also help a firm in better cash management and reducing cash requirement. A financial manager should try to slow down the payments as much as possible. However, care must be taken that the goodwill and credit rating of the firm is not affected. Payments to the creditors need not to be delayed otherwise it may be difficult to secure trade credits at a later stage. There is no need to make early payment unless there is discount offered. The credit facility allowed by creditors should be fully utilized. The discount offered by creditors for prompt payments must be evaluated properly in terms of costs and benefits of the discounts.

Balance lying in the bank account should also be managed as to take maximum advantage out of it. There may not be a balance in the bank account when a cheques is issued but there must be sufficient balance when the cheques is expected to be presented for payments. Thus effective control of disbursement /outflows can result in larger cash balances.  

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