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Cash Management Control

Cash Management Control Assignment / Homework Help
The Finance Manager assumes the responsibility of maintaining effective control on cash and its receipts/disbursements. He has to plan in such a way that the Company maintains short-term liquidity to meet its regular obligations. At the same time he has to plan effectively on investing the surplus cash if any. To attain these short-term goals the following cash management techniques would be of greater help.
  • Speedy Cash collections:

    In managing the cash efficiently, the cash inflow process can be accelerated through systematic planning and refined techniques. The main two approaches would be to encourage customers to pay as quickly as possible and to convert the payment made by customers into cash as early as possible.

  • Encourage prompt payment by customers:

    This can be done by offering them cash discounts and discounts for early payments. Most of the customers may get attracted to this discount offer; as otherwise, the opportunity cost of not taking the discount would work out more than the benefits of holding the funds with them.

  • Early conversion of Payments into cash:

    Once the customer makes the payment by issuing a cheque, the collection can be effected by prompt encashment of the cheque. There is a lag between the time a cheque is prepared and mailed by the customer and the time the funds are included in the cash reservoir of the firm. The early conversion of payment into cash, as a technique to speed up collection of accounts receivable, is done to reduce the time lag between posting of the cheque and realization of money by the firm.

    An important cash management technique is to reduce the deposit float (which is the funds dispatched by a payer that are not yet in a form that can be used by the payee). If the firm adopts decentralized collections, deposit float can be reduced. The principal methods of establishing a decentralized collection network are:

    • Concentration Banking:

      Concentration Banking, as a system of decentralized billing and multiple collection points, is a useful technique to expedite the collection of accounts receivable by reducing the mailing time. The mailing time is saved both in respects of sending the bill to the customer as well as in the receipt of payment.
    • Lock-box System:

      Under this system, firms hire a post office lock-box at important collection centers where the customers remit payments. The local banks are authorized to open the box and pick up the cheques received from the customers. Thus, there is some saving in mailing time compared to concentration banking.

  • Encouraging Wire Transfers:

    The transfer of funds from one bank to another electronically saves a lot of time and effort. But such transfers can be used only for significant dollar amounts because wire transfer fees are assessed by both the originating and receiving banks. But yet, it is used widely do to its advantages.

  • Pre-Authorized Debits:

    Cash from customers may be collected faster if you obtain permission from customers to have pre-authorized debits automatically charged to the customer's bank accounts for repetitive charges. Pre-authorized debits are cost-effective because they avoid the process of billing the customer, receiving and processing the payment and depositing the cheque. Using this method for variable payments is less efficient because the amount of the debit must be changed each period and the customer generally must be advised by mail of the amount of the debit. They are most effective when used for constant, relatively nominal periodic payments.

  • Slowing payments and disbursements:

    This is another effective cash management technique that can be achieved through

    • Avoidance of early payments
    • Centralized disbursements
    • Cheque-kiting (which is a method of consciously anticipating the resulting float associated with the payment process using it to keep funds in an interest earning form for as long as possible).
    • Paying from a distant bank
    • Accruals and
    • Cheque encashment analysis

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