Cash forecasting and management

Upon preparation of cash budgets after forecasting the receipts and payments, the management will have knowledge about the cash position of the firm. After knowing the cash position, the management should work out the basic strategies to be employed to manage its cash. The strategies of cash management are essentially related to the cash turnover process, that is, the cash cycle together with the cash turnover. The cash cycle is the amount of time cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product.

Cash cycle = Average age of Inventory + Average collection period – Average Accounts Payable period

Cash turnover = Number of times cash is used during the year = Number of days in a year/Cash cycle

Minimum operating cash – It is the level of opening cash balance at which a firm would meet all obligations and is computed by dividing total annual outlays by the cash turnover.

Efficient Cash Management Strategies

Cash management strategies are intended to minimize the operating cash balance requirement. The basic strategies that can be employed to effectively manage cash are:

• Delaying and stretching Accounts Payables
• Speeding up collection of Accounts Receivables
• Efficient Inventory-Production Management and
• Combined cash management strategies.

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