Management of the Cash Position Essay Example for Free

Management of the Cash Position EssayNot only do these managers often have difficulty in comprehending advance(a) fancying techniques, but the cash leans of their companies are usually dependent upon a few(prenominal)er customers and a blueer number of product lines than those of their larger competitors. Thus the cash flow pattern of the small firm is typically too unstable oer time and the operable data describing it too limited for reliable forecasting. The small credit line is subject to still opposite constraints, apart from those applicable to all firms, which tend to restrict the employ of even relatively simple cash wariness techniques. mild firms, for example, are normally unable to afford the division 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 further from lack of recognition that a cash management problem even exists. Once a problem is discoered the manager may lack knowledge of the methods available for a viable declaration. A solution which requires more 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 Journal 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 commonly employed by larger corporations. Small businesses are defined in this study as firms with annual sales under $5 million. Data for this study were collected by means of a institutionalize questionnaire distribut ed to two c 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 statistical 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 than fractional had fewer than ten employees. Of the two hundred businesses selected for study, 66, or 30 pct, responded. A breakdown of the respondent firms by industry and surface is attached 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 noned in this regard. One was that the newer firms 1 For an example of this situati on see 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 frequently 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 grows, cash budgeting becomes more essential. Of the firms that prepared cash budg ets, an annual planning period was the most common, although some alike 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.Another 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 remaining 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 issue 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 the other groups.This result was expected for the smallest firms but quite unexpect ed for large ones. On the other hand, of the firms that prepared casheffective manner. This realization alone should have provided nerve impulse to the managements concerned to investigate the deprivation and advantages for cash budgetingyet 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 same 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 expensive 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 did use one or both of these methods for reducing float time. Generally, the responden ts reasoned that they could not justify expending the time and money required to reduce float, because such action would not (in their opinion) materially improve the cash position or the moolah 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 nature 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 oftentimes less likely to use any method to improve cash collections.