Cash: An Essential Commodity of a Business - Research Paper Example

? Cash: An Essential Commodity of a Business Introduction Traditionally cash is considered as the lifeblood of a businessbecause survival of a business is impossible without an adequate flow of cash. From an accounting perspective, cash is just an asset that helps business to properly exist. According to Valentas, Rotstein and Singh, “cash is defined as the net flow of money into the firm after taxes are paid; it is the difference between money received from sales and money paid out for expenses and taxes” (Valentas et al., 539). In simple terms, cash is one of the essential elements needed for a business to grow and to achieve its long term objectives. Cash is particularly important for business because people and organizations will not be normally willing to accept anything other than cash in settlement of their claims against the business. This paper will specifically discuss the importance of cash management and cash planning in a business environment. Importance of Cash Financial experts indicate that cash is the ‘essential commodity’ of a business, that cash lubricates the business and allows operations to run efficiently. It is clear that cash is necessary to meet the day to day needs of a business. Evidently, a business firm cannot run its operations efficiently unless it has enough cash to pay its employees and debtors. In addition, adequate cash reserves are vital for business to invest in infrastructure and other expansion projects and to deal with unexpected contingencies. Experts opine that a firm’s cash flow is a key factor determining the long term success of the business. To illustrate, investors and shareholders give particular focus to the strength of cash reserves while evaluating financial position of a company. Clearly, companies lacking adequate cash reserves cannot offer attractive dividends to stakeholders and this condition in turn would adversely affect their long term sustainability. The intensity of market competition is very high today, and therefore firms need to significantly invest in business promotion in order to successfully confront competitors. If an organization does not have adequate funds to promote its business in the market, it will probably lose its market share to competitors and eventually the business may go out of the market. Importance of Cash Management and Planning As discussed already, cash is an ingredient element for business growth and therefore effective management and planning of cash is vital to ensure long term business success. Assuring sufficient funds as and when required is a potential challenge for financial managers in every organization. When an organization has sufficient funds to implement its business plans to address economic downturns, it can focus on its business operations confidently. On the other hand, when an organization struggling with inadequate cash flow, it is forced to review and modify its business plans. Under such circumstances, a firm cannot run its operations effortlessly. In the view of Williams, effective cash management is particularly important to maintain safe debt levels (n. p.). The financial management has to critically analyze the firm’s ability to repay debts before making a borrowing decision. Excess borrowing beyond the capacity of the organization will certainly affect the feasibility of the business even when the borrowing rates are low. Therefore, cash management is inevitable while dealing with debt financing. In addition, cash management plays a significant role in enabling effective utilization of money. As Nikolai et al. point out, cash management is particularly concerned with the management’s ability to identify cash shortage problems before they arise and to develop potential strategies to resolve those issues recognized (317-318). Proper management of cash is crucial to ensure that the organization has sufficient funds to finance purchases and other expansion activities during the peak season. Thoughtful cash management is helpful for business houses to meet their daily needs without much trouble even under recessionary situations. In addition, this practice greatly assists firms to deal with capital expenditure projects successfully. It is obvious that failures of capital expenditure projects can dreadfully impact the potentiality of the business. In many situations, cash management is vital for the company to arrange for outside financing at cheaper rates and favorable terms. This management process greatly aids firms to take advantages of discounts, special purchases, and emerging market opportunities. A positive cash flow (cash inflow exceeds the cash outflow) directly reflects the efficiency of the cash management whereas a negative cash flow (cash outflow exceeds the cash inflow) indicates that the cash management process is poor. Obsolete inventory and/or poor collection of account receivables can be the major causes of a negative cash flow. The cash management prepares a cash flow statement periodically to obtain a clear view of three components including operating cash flow, investing cash flow, and financial cash flow. According to financial experts like Lienert, good cash management is vital to identify the best sources for meeting the additional cash needs (14). In addition, this branch of management is very crucial to keep good relationship with bankers and other creditors. It is clear that cash is the most important but least productive asset of a firm and hence more attention must be paid to cash management than other current assets. Cash is the most liquid asset available for a firm to meet its obligations and therefore it is very significant in an organizational context. Therefore, the primary function of the cash management is to maintain adequate cash reserves to keep the organization sufficiently liquid and to use the cash surplus in the most productive way. Proper cash management is also important because it is very difficult to anticipate the cash flows accurately, and there is no perfect coincidence between cash inflows and outflows. Although cash represents only the smallest portion of the total current assets, the management devotes its considerable time to manage cash. Hence, cash management is a key strategic process in an organizational environment. For a business, there can be a number of attractive market opportunities at a time. However, the organization may not have adequate cash reserves enough to take advantages of all the opportunities. At this juncture, the management has to make some strategic decisions regarding business investment. In other words, thoughtful cash planning can help the organizational management to identify the most potential and feasible investment projects and to promote most productive utilization of cash. “Cash planning is a process of predicting cash inflows and outflows of the firm over the forthcoming period so as to determine surplus or shortage of cash” (Pramanik 59). If the firm has a positive cash flow, it can invest the cash most profitably, and in contrast if the company struggles with a negative cash flow, it should make adequate provisions for the cash. As Pramanik points out, since effective cash planning is able to predict future cash inflows and outflows, it can minimize the possibility of cash deficits and idle cash balances. The cash planning technique facilitates regulated use of cash and this tool is mainly used to recognize the predictable discrepancies between inflows and outflows of cash in the cash budget (59). Conclusion From the above discussion, it is obvious that cash is the essential commodity of a business and it assists firms to run their operations efficiently. Effective cash management is necessary to enjoy a positive cash flow and to keep the firm sufficiently liquid. In addition, this process is helpful to facilitate the most productive utilization of funds and to promote fast business growth. Cash planning is a technique used to forecast future inflows and outflows of cash and hence to meet the future fund needs effectively. In short, thoughtful cash planning and cash management are essential to run the business efficiently so as to achieve its long term goals. Works Cited Lienert, Lan. Modernizing Cash Management. International Monetary Fund. Print. Nikolai, Loren A., John D. Bazley, Jefferson P. Jones. Intermediate Accounting. Cengage Learning, 2009. Print. Pramanik, Alok Kumar. Accounting and Management : In Theory and Practice. Deep and Deep Publications, 2004. Print. Valentas, Kenneth J., Enrique Rotstein and R. Paul Singh. Handbook of Food Engineering Practice. CRC Press, 2010. Print. Williams, Mike. Government Cash Management: Its Interaction with Other Financial Policies. International Monetary Fund, 2010. Print. Read More