Question

1. In what ways can a company handle temporary shortfalls in cash balances?

Answer 1

Every firm must have a minimum cash. There may be different motives for holding cash. There may be Transactionary motive, Precautionary motive, or Speculative motive for holding cash. The objective of cash management is such that the firm meets its cash needs and chances of cash shortfall decrease.

In case of temporary shortfalls of cash, following measures can be taken by a company -

1) Controlling Inflows:-

The financial manager should take steps for speedy recovery from debtors.

Incentives should be offered to customers for early/ prompt payment.

2) Controlling Outflows:-

An effective control over the cash outflows or payment will also help a firm in better cash management and reducing cash requirements.

Payments should be slow down as much as possible. Creditors/suppliers payments should be deferred.

3) Postponing Purchases:-

Postponing purchase of a new machines/assets will defer the cash outflow for some time and cash shortage will be reduced.

4) Rolling over maturing debts;-

Rolling over maturing debts means converting the debt which is about to mature in the new debt. It will defer the payment to the debt holders and hence will reduce cash outflow for the rolled period.

5) Taking short term debts;-

If the firm can take short term debts on low interest rates that would help the firm to handle temporary shortfalls in cash balances.

6) Raising Prices:-

The firm can raise the price of its goods and services if it doesnot hamper the sales.

7) Issue fresh equity for redemption of Debt-

Issue of fresh equity capital will inject the cash in to the company. Issuing common stock to repay long-term debt will mean that debt will be paid by the cash collected by issuing the stocks. It will also reduce cash shortage.

These are some of the ways a company handle temporary shortfalls in cash balances.

Hope it helps !