Management of the Cash Position Essay Example for Free

Management of the cash in Position Essay none only do these managers often have difficulty in comprehending advanced(a) forecasting techniques, but the cash arises of their companies are usually dependent upon hardly a(prenominal)er customers and a clarifieder fleck of product lines than those of their larger competitors. Thus the cash flow pattern of the small unwavering is typically withal unstable all everywhere time and the available data describing it too limited for reliable forecasting. The small short letter is subject to still different constraints, apart from those applicable to all firms, which tend to restrict the use of til now relatively simple cash management techniques. Small firms, for drill, are usually unable to afford the section of talent available to larger companies in the form of highly educated financial managers.Many small firms, struggling hard just to remain solvent and earn a fair return, suffer nurture from lack of recognition that a cash management problem even exists. Once a problem is discovered the manager may lack knowledge of the methods available for a viable closure. A solution which requires to a greater extent manpower or expenditures than can be covered out of normal cash flow is Dr. Grablowsky is assistant professor and rhairman of the Department of Finance at Oid Dominion University. He has published articles in the JSBM, the ledger of Financial Education, and the Journal of Behavioral Economics. Prior to his entry into education. Dr. Grablowsky was with the Department of Cost, Planning, Systems, and Analysis at the Monsanto Co., World Head, quarters, St. Louis.typically rejected by the small business.This article will present the results of a survey of small-business cashmanagement practices and compare these methods with techniques unremarkably employed by larger corporations. Small businesses are defined in this study as firms with yearbook sales under $5 million. Data for this study were collected by means of a situation questionnaire distributed to two atomic number 6 firms selected randomly, within the various business classifications, from classified advertisements appearing in the telephone directories of the greater Norfolk-Portsmouth SMSA and theHampton-Newport News SMSA. The firms were selected in five different distribution levels, with annual sales varying from under $50,000 up to $5 million.The firms in the survey operated at from one to thirteen locations and employed up to three hundred persons, although more(prenominal) than half(prenominal) had someer than ten employees. Of the two hundred businesses selected for study, 66, or 30 portion, responded. A division of the respondent firms by industry and size is given in Table 1. The Cash BudgetIt was hypothesized that few of the firms with sales under a million dollars would prepare cash budgets in fact, only 30 percent of all firms in the sample did so. Several interesting relationships were none d in this regard. One was that the newer firms 1 For an example of this situation weigh B. J. Grablowsky, Management of Accounts Receivable by Small Businesses, Journal of Small Business Management, Vol. 14, No. 4, October, 1976, pp. 26-27. 5 According to E. Donaldson, J. Pfahl, and P. MuUins, Corporate Finance (New York The Ronald Press Co., 1975), pp. 22-23, this would include, based on average sales per company, over 86 percent of all firms in the U,S. budgets, the larger ones updated their budgets more shoply than the others. One of the reasons for the more frequent update was that none of the largest firms made more than a thirtyday cash forecast while the smaller ones normally made budgets for up to a year.This last finding is in agreement with the results of other studies showing that few firms withsales under $3 million make sales forecasts, whereas virtually all firms with sales over $10 million prepare one or more projections for various planning periods. As the firm gro ws, cash budgeting becomes more essential. Of the firms that prepared cash budgets, an annual planning period was the most common, although some besides used weekly, monthly and quarterly budgets. No company made a cash budget for more than one year. The frequency of updating the budgets was well distributed over weekly, semimonthly, monthly, quarterly, and annual intervals.A nonher question asked whether or not the firms cash balances were being handled in the most effective and efficient manner. Of the 67 firms sampled, forty-eight replied that they felt they were expeditiously utilizing their cash balances, but, of these, only eleven regularly prepared cash budgets. The assumption by the 37 firms that did not prepare cash budgets that they were efficient in the use of their cash balances is certainly made in ignorance. Conversely, of the stay 56 firms that did not preoare cash budgets twenty-three replied, and probably rightly so, that they were not using their cash balances in the most 3 See Orgler. Cash Management, pp. 4-13, for a discusFion of factors affecting the time horizon for cash budgets. Aso see Keith Smith. Management of Working Capital (St. Paul, Minn. West Publishing Co., 1974), pp. 35-49, for a survey of the practices of large businesses. Soldofsky and Olive, Financial Management, p. 559. were more likely to prepare budgets than their longer-established competitors.A possible explanation lies in the higher educational attainments of the owner-managers of the newer firms. This characteristic, together with the attitudes of the owners toward budgeting, is believed to be a major determinant of the efficiency with which financial planning is handled in the small firm. The dta also showed that, somewhat contrary to expectations, in the size categories which included the largest and the smallest firms (i.e., those with less than $50,000 and those with between $1million and $5 million in sales) a smaller percentage prepared cash budgets than in th e other groups.This result was expected for the smallest firms but quite unexpected for large ones. On the other hand, of the firms that prepared casheffective manner. This realization alone should have provided impetus to the managements concerned to investigate the convey and advantages for cash budgeting barely they still failed to prepare the budgets which could have improved their cash flow performance. The managers of these firms recognized that they had a problemthe need for more efficient cash managementyet they failed to take the proper steps to solve it. These alike(p) firms tended to take fewer of their allowed trade discounts than others, suggesting that because they did not forecast cash flows they found it necessary to resort to dear(predicate) sources of financing such as foregoing discounts. Cash Collectionactions that they could take themselves.Although only about half of the respondents had even heard of lock boxes or concentration banking, more than one-third d id use one or both of these methods for reducing float time. Generally, the respondents reasoned that they could not justify expending the time and money demand to reduce float, because such action would not (in their opinion) materially improve the cash position or the mesh of the firm. As with many other decisions confronting small businesses, this one was usually made with inadequate information or investigation. The principal reason, again, was the lack of human resources and expertise available to the small firm. Wholesalers, because of the regional or national personality of their sales, were the most frequent users of these techniques. Businesses with a local sales orientation, such as service establishments and retail stores, were very much less likely to use any method to improve cash collections.