Question

4. The board wants to adopt a restrictive short-term financial policy to improve on its cash management. Identify three aspects of restrictive short-term financial policy the company should consider.

Answer 1

Cash management reduces financial risks. The aim of cash management is to shorten the working capital cycle. While maintaining the desired level of profitability it aims to improve collection processes and accelerate cash flows.

A firm should

• Ensure adequate control
• Ensure liquidity
• Able to borrow funds when needed
• Maximize return on idle cash/Cash optimization
• Minimize business and financial risk.

Restrictive or Aggressive cash management policy:

Under this policy the current asset estimation is done very aggressively without any consideration for provision. The policy is implemented without any tolerance for deviation. This policy saves cost due to lower working capital requirements. This is a high risk policy.

Other policies:

The relaxed policy estimates current assets after careful consideration of various factors and there is little or no risk involved. The moderate policy is a balance between restrictive and relaxed. The risk is less than restrictive and more than relaxed policy.