Cash management is concerned with the management of cash inflows, outflows and cash flows within the company. In addition, it includes the matters relating to financing of deficit and investment of surplus cash so as to maintain optimum cash balance. The functions of cash management start whenever a customer writes cheques to pay the firm on its accounts receivable.
The function ends whenever a supplier, an employee or the government realizes money from the company on a merchant account payable or accruals. The basic issue of cash management is to enable a firm to keep up sufficient liquidity and also at the same time improve its profitability. If cash flows were accurately forecasted, the firm would not have to provide much attention on management of cash. Cash outflows somewhat are certain but cash inflows cannot be predicted accurately. There is absolutely no perfect synchronization between cash inflows and cash outflows.Sometimes, cash outflows exceeds cash inflows due to unusual payment of obligation and non-seasonal build-up in inventories and receivables.
And sometimes cash inflows could be more due to excessive sales than expectation and speedy conversion of receivables into cash. 1. Start inventory as as is possible quickly, staying away from stock-out that may lead to a loss of sales. 2. Pay accounts payable as late as it can be without deteriorating the firm’s reliability, but take advantage of any advantageous cash discount.
3. Collect account receivables as fast as possible without loosing future sales credited to high-pressure collection techniques. Cash discount rates, if any are economically justifiable, enable you to accomplish this goals. 4. Involve in cash planning to determine surplus or deficit profit each period. 5. Surplus cash must be spent into marketable securities.
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Debt service expenditures represent the payment of principal and interest had a need to service personal debt. Such obligations are usually documented as expenses in your debt Service Fund on the due date. The General Fund could also be used if a Debt Service Fund is not needed. The modified accrual basis of accounting provides that accruals for interest are not usually allowed.
In addition, exchanges lead to the reduced amount of a fund’s expendable resources, however they are not categorized as expenditures. A transfer is a lawfully authorized movement of monies between money in which one fund is responsible for the receipt of money and another account is accountable for the actual disbursement. Expenses are thought as the outflows or expiration of assets or the incurrence of liabilities during a period from providing or producing goods, making services, or undertaking other activities that constitute the entity’s primary operations.