Question

Explan and describe in detail the McKinney model for cash management.

Answer 1

Author Jerome B. McKinney in his book 'Effective Financial Management in Public and Not For Profit Agencies' describes a particular system for Cash Management. Cash Management is essentially ensuring that adequate and optimal cash balance is held to make payments and aims to maximize the returns earned on idle cash. Effective cash management can be ensured by timely conversion of trade receivables to cash and effective payment of payables. This model involves 4 steps - the first one being identifying and clearly arriving at the long term needs of the business followed by having clear understanding of the policies in place for execution of daily activities involving cash, then arriving at the best suited investment strategy and finally the last step involves bank and institutional relationships. These steps are facilitated by forecasting cash flows and preparing cash budgets after deciding the cash management objectives and priorities. They involve active monitoring, evaluation and control of cash and investment decisions relating to it. One must track the investment decisions made and make changes as necessary. There are certain constraints that need to be considered while following this model - for example, the creditors might require that cash is paid to them within 90 days of trade, in such a scenario cash management model has to acknowledge this constraint. Cash management model involves classifying the cash flows into 3 categories namely operating cash flows, investing cash flows and financing cash flows. This bifurcation helps to manage cash in a more effective manner. Thus this model focuses on cash management considering all the areas of a business and predeterming the objectives and constraints of cash held.