Question

What are some management strategies for using credit, receivables, and cash as short-term financial tools? What are the risks and benefits of each short-term financing option?

Answer 1

strategies for short term financial tools

Credit : if your credit worthiness is good enough then you can buy raw material or different kind of inventory on credit, you can also ask for extended credit period in this way you will get leverage of decreasing your working capital requirment in short term & increase your profitability.

Risk : If you will ask again & again raw matrial on credit or if you always ask for credit period extension , it will hamper your organization image in market because every one want immediate payment to increase their profitability.

Benifit: it is reducing your working capiatal requirment & reducing operating expenses. it is also increasing your profitability.

Receivables : if you are collecting your recievables as early as possible it is increasing your liquidity & reducing working capital requirment. it will also increase operating efficiency & net income. in this way it use to increase profitability of organization because now they have more money to run opration & for further investment.

Risk: if you will stop selling things on credit it will reduce recivables but you will loose some of your clients which will reduce sale & ultimately reduces profitability. if any organization has very strict receivable managment policy then it will loose his business.

Benifit: it will reduces expenses of collection , increases operational efficiency & reduces working capital requirment .

Cash: if any organization has enough liquid cash it can easily fullfill its operational needs & working capital requirment but excess ideal cash reduces organizational profitability. so organization should have only adequate amount of cash to run its operations only.

Risk: excess cash will reduces organiztion profitability & in long term it will hamper organization growth.

Benifit: It is easy to meet day to day working capiatl needs.