Introduction
One of the most critical functions of a firm’s accounting manager is that of cash management. Unlike long-term forecasting or choosing to expand a company’s fixed assets, cash management requires constant, immediate, and responsive decision-making. There is no opportunity to carefully consider each possibility and wait to further observe trends within the market. Inventory and demand for cash change daily, therefore, the accounting manager must be well-versed in the most effective ways to manage the cash a firm has, along with the most efficient ways to obtain cash as needed. This paper will compare and contrast various cash management techniques, as well as compare and contrast the various methods of short-term financing.
Cash Management Techniques
Most people are often taught conservative cash management practices, but most companies do not want to keep any more cash on hand than absolutely necessary. Most companies must keep some cash for transactions, bank payments, and potential emergencies; the opportunity cost of holding an excess of cash rather than reinvesting it into current assets or growing the firm’s fixed assets is often significant. There are multiple techniques that a firm can employ to manage its cash. Some of these techniques include float, short-term investments, and international cash management.
Float
Due to the opportunity cost of holding excess cash, most companies try to leverage the minimal amount of cash that they carry to cover as many payables as possible. One way that firms achieve this goal is by employing the use of float. Float refers to the difference between the balance carried on the corporate books and the amount credited to the corporation by its bank (Block & Hirt, 2005). Payable ...