Cash management 2.1.4

Cash management - involves the construction of a cash budget

Always necessary to hold some cash for transactions, precautionary reasons and for speculative purposes (awaiting a business opportunity)

Cash flows should be monitored

Excess cash should be profitably invested

Provision of overdraft facilities should be negotiated in case of cash shortage.

IMPROVING THE CASH POSITION

1) Short term

▪Reduce current assets (stock and debtors)
▪Increase current liabilities (delaying payments)
▪Sell surplus fixed assets

2) Long term

▪ Increase equity finance
▪ Increase long term liabilities
▪ Reduce net outflow on fixed assets

SHOULD SELLING PRICES BE DISCOUNTED?

Price discounting is designed to improve the cash flow into the business. It generates cash through increased sales. Also reduces stock levels.

BUT...

▪It may undermine the firm's pricing structure

▪ It may leave the firm with low stocks

▪ It's success does depend on price elasticity of demand