Cash Management Strategies

Applying the financial axiom of time value of money, a firm must speed up cash inflows by
properly managing collections and must delay cash outflows by properly controlling
disbursements to the extent possible.
A. Synchronize inflows and outflows by arranging things so that cash inflows will
coincide with cash outflows.
B. Reduce the need for precautionary balance (Safety stock) by
 Increasing forecast accuracy
 Negotiating a line of credit
 Holding marketable securities
C. Managing (Accelerating) Collections involves reducing the period between the time
customers pay their bills and the time the cash is reflected in the firm’s balances, ready
for disbursements.

Time period- determined by the mode of payment by customers allowed by the

company and the related remittance procedures.
 Cash Basis
 Credit Cards- relatively longer time for cash availability than cash basis.
 Check payments- provide cash availability after the “float” period. Mainly used in
whole sale and high value consumer goods.
Remittance period- covers the time before the customer’s payment reach the firm (mail
float), the firm deposits the check to its depository bank (processing float), and the
depository bank make payments available to the firm (clearing float)

D. Controlling Disbursements- concerned with delaying cash payments, which depends

on the ability to:
1. Defer cash payments to the maximum feasible time by paying at the last days of the
credit term or even beyond the credit term if possible
2. Use a remote disbursement account by issuing a check that is in a distant or small
city, not in the clearing site, in order to increase the clearing float