The main objective of managing cash flows is to accelerate collection of cash and delay disbursement of cash without damaging credit worthiness. After preparing cash budget, management should try that there should not be any significant difference in actual & budgeted cash flows.
Accelerating Cash Collections:-
The customers should be encouraged to make early payment by giving cash discount to fill time gap between sale of goods and its payment by cheque. There are 2 methods of reducing these time gaps:-
(1) Concentration Banking:-
It is a system of collecting cash from customers of large sized firms which have large number of branches. Some of these branches are selected for collection of cash from debtors which are called collection centres. Firm opens its account in local banks of these collection centre. On receiving cheque, centre sends them to local branch of bank and then they are transferred to Head office daily for disbursements.
Thus, this method is profitable technique of realising debts at the earliest because it reduces time gap between sending of cheque by customer and their receipts by firm.
(2) Lock box System:-
Under concentration banking, cheques or drafts received by collection centres are deposited in local banks & therefore, sometime is wasted before cheques or drafts are sent for collection. Under the lock box system, this time gap can be reduced.
Under this system, firm takes on rent a lock box from post office at important collection centres.
Customers are instructed to send their cheques/drafts in lock-box. Firm authorises local banks to withdraw these cheques/drafts from lock box and credit the same to firm’s account. Bank operates this lock-box several times a day. Local banks are also instructed to transfer funds exceeding a particular level to Head office. This system is considered better to concentration banking because in this system, time involving in receiving cheque, their accounting & deposit of these cheque in banks is saved.
But under this system, firm has to bear additional expenses of post office & bank.
The main objective of disbursement management is to slow down the payments without farming goodwill & credit worthiness of firm. Following methods can be used for slowing disbursements.:-
1) Avoidance of Early Payments:-
Under this management, firm should make payment on due date only, neither early nor afterwards. Firm is allowed some time to make payment. But firm should not bear loss of cash discount.
2) Centralised Disbursements:-
Under this system, all payments should be made from the central account by Head Office. This system will help in delaying payments and it will increase time gap in payment before they reach creditors. If payment is made by local branch, it will not take much time to reach to creditors by post.
In this system, firm will have to maintain lesser total cash as against deentralised disbursement.
Where each branch will have to maintain some cash. In this method, greater time will be involved in the presentation & collection of cheques. Control over payments will also become easier.
Float is the amount which is trapped in cheques but which are yet to be collected. It means that although cheque has been issued but actual cash will be required later when it will be actually presented for payment.
For Example:- if the payment of wages and salaries is made by cheque on Ist of every month. It is not necessary that all cheques would be presented on Ist day. In actual practice, some cheques will be presented on Ist day, some on 2nd & some on 3rd. Thus firm need not deposit extra amount in bank on very Ist day.
Wages & other expenses can be paid after the date of actual services rendered to them.
Determining Optimum cash Balance:-
If available cash is more than operating requirements of firm, additional cash should be invested in short-terms securities. Optimum cash balance is that level of cash at which transaction cost & opportunity cost are minimum. If firm maintains more cash than optimum level, opportunity cost increases and transaction decreases and vice versa.
Investing Surplus Cash:-
If nature of surplus cash is permanent, it can be invested in long term assets. While investing cash in securities, their safety, maturity and marketability should be considered.
a) Safety:– Cash should be invested in those securities, the prices of which do not change substantially and there is no risk in repayment of its principal & interest.
b) Maturity:– more changes take place in long term securities.
c) Marketability:– of securities means easiness in converting them into cash. Therefore, the surplus cash should be invested in such securities which can be converted into cash with out much loss.