Question

On a typical day, Roosters Restaurant writes $1,000 in checks. Generally those checks take four days to clear. Each day the restaurant typically receives $1,000 checks, which takes three days to clear. What is the restaurants float?

Describe float and why it is a useful cash management concept.

What is the goal of cash management?

What is the revenue cycle?Why is it important to manage the revenue cycle?

Answer 1

Float = disbursement float - collection float

Disbursement Float is when the firm writes a check, decreasing the  firm’s book balance but no change in its available balance.

Collection Float is when a firm receives a check, increasing the firm’s book balance but no change in its available balance.

Float = ($1000 * 4 days) - ($1000 * 3 days) = $4000 - $3000 = $1000

Float is a useful cash management concept because higher float can reduce the working capital requirement, increase the efficiency of working capital, and improve the return on assets.

The goal of cash management is to ensure that there is sufficient cash to meet obligations without interrupting the business, while also ensuring that there is not excessive cash lying idle in the business.

The revenue cycle is the entire process that begins when a sale is initiated, until the full and final payment is received. It is important to manage the revenue cycle because a shorter revenue cycle will reduce the Days sales outstanding (DSO), reduce working capital requirement, improve cash flows and reduce bad debts.