Question

CREATE A CASH MANAGEMENT STRUCTURE AND DEFINE EACH OF THE FUNCTIONS AND CREATE SAMPLE CAPITAL STRUCTURE

Answer 1

Answer ) Cash management is the corporate process of collecting and managing cash, as well as using it for short-term investing. It is a key component for a company's financial stability and solvency. Corporate treasurers or business managers are frequently responsible for overall cash management and the related responsibilities to remain solvent.

Receivables Cash Management

Cash management is the treasury function of a business, responsible for achieving optimal efficiency in two key areas: receivables, which is cash coming in, and payables, which is cash going out.

When a business issues an invoice it is reported as a receivable, which is cash earned, but not yet to be received. Depending on the terms of the invoice, the business may have to wait 30, 60 or 90 days for the cash to be received. It is common for a business to report increasing sales, yet still run into a cash crunch because of slow or poorly managed receivables. There are a number of things a business can do to accelerate its receivables and reduce payment float, including clarifying billing terms with customers, using an automated billing service to bill customers immediately, using electronic payment processing through a bank to collect payments, and staying on top of collections with an receivables aging report.

Payables Cash Management

When a business controls its payables, it can better control its cash flow. By improving the overall efficiency of the payables process, a business can reduce costs and keep more cash working in the business. Payables management solutions, such as electronic payment processing, direct payroll deposit, and controlled disbursement can streamline and automate the payable functions.

Most of the receivables and payables management functions can be automated using business banking solutions. The digital age has opened up opportunities for smaller businesses to access the same large-scale cash management technologies used by bigger companies. The cost savings generated from more efficient cash management techniques easily offsets the costs. More importantly, management will be able to reallocate precious resources to growing the business.

Functions of Cash Management:

So as to achieve the objectives stated above, a finance manager has to ensure that investment in cash is efficiently utilised. For that matter, he has to manage cash collections and disbursements efficaciously, determine the appropriate working cash balances and invest surplus cash.

Efficient cash management function calls for cash planning, evaluation of benefits and costs, evaluation of policies, procedures and practices and synchronization of cash inflows and outflows.

Linkage among different cash management functions has led to the adoption of the following methods for efficient cash management:

1. Use of techniques of cash mobilisation to reduce operating requirements of cash;

2. Major efforts to increase the precision and reliability of cash forecasting;

3. Maximum efforts to define and quantify the liquidity reserve needs of the firm;

4. Development of explicit alternate sources of liquidity;

5. Aggressive search for relatively more productive uses for surplus money assets.

The above approaches involve the following actions which a finance manager has to perform:

1. To forecast cash inflows and outflows;

2. To plan cash requirement;

3. To determine the safety level for cash;

4. To monitor safety level of cash;

5. To locate the needed funds;

6. To regulate cash inflows;

7. To regulate cash outflows;

8. To determine criteria for investment of excess cash;

9. To avail banking facilities and maintain good relations with bankers.

Thus, for achieving the goals of cash management, a finance manager have to, first of all, plan cash needs of the firm. This is followed by the management of cash flows, determination of optimum level of cash and finally, investment of surplus cash.

Importance of Cash Management:

Cash management is one of the critical areas of working capital management and assumes greater significance because it is most liquid asset used to satisfy the firm’s obligations but it is a sterile asset as it does not yield anything. Therefore, finance manager has to so manage cash that the firm maintains its liquidity position without Jeopardizing the profitability.

Problem of prognosticating cash flows accurately and absence of perfect coincidence between the inflows and outflows of cash add to the significance of cash management. In view of the above, at one time a firm may experience dearth of cash because payments of taxes, dividends, seasonal inventory, etc. build up while at other times, it may have surfeit of cash stemming out of large cash sales and quick collections of receivables.

It is interesting to observe that in real life, management spends his considerable time in managing cash which constitutes relatively a small proportion of a firm’s current assets. This is why in recent years a number of new techniques have been evolved to minimize cash holding of the firm.

Capital structure is the composition of long-term liabilities, specific short-term liabilities, like bank notes, common equity, and preferred equity, which make up the funds a business firm uses for its operations and growth. The capital structure of a business firm is essentially the right side of its balance sheet.

Capital structure, broadly, is composed of the firm's debt and equity. There are considerations by management and the stakeholders over what mix of debt and equity to use. Should more debt financing be used to earn a higher return? Should more equity financing be used to avoid the risk of debt and bankruptcy?

For example, the capital structure of XYZ, Inc. is 40% long-term debt (bonds), 10% preferred stock, and 50% common stock.