Question

In studying the handling of cash in operations, one of the objectives we have is to ensure that we have enough cash to meet short term obligations and keep a minimal level of cash in reserve to ensure that operations would be able to continue for a specific period, even if sales and operations were adversely affected by conditions outside of the control of the company. There are specific strategies that have developed as a result of these objectives, to maximize cash flow. Among these are the strategies of encouraging collection of cash as quickly as possible from customers while at the same time delaying payment to vendors for as long as possible without incurring financial penalties. However, some sections of the business world view these practices as unethical, in that following those practices require others to act in a way that we ourselves are not acting.  If you were the financial manager of a small business, would you advocate for the policy stated above and how would you address the ethical perspective articulated by those who criticize the approach?

Answer 1

Issue: Strategies to Maximum Cash Flow. To maintain the flow of cash to provide the availability of the readily available of cash over a period to particular project inlined.

Strategy: Under this collect the customers due as early as possible but stop the flow to outside liability to suppliers or creditors to the extent it will not cause any kind of financial liability arise from such contracts.

Recommendation: Being Financial Manager, This is the general practice followed by the industrialist. Secondly as if operating at lower market share i.e. small business owner, then the above practice is justified. As the credit provided to smaller business it means, the industrialist or medium sized owner will not regard much more towards the payment received from such entrepreneur. AS the payment made by small business will not make any big difference in their cash flows. It is just like a “ A Drop in Ocean”.

Thus from above discussion, the action is tenable provided this will not incur any kind of financial liability that arise from contractual obligation. That is the risk pertaining to particular contracts and it not stops till only financial liability but also can be enforced as legal case suit.

Hence, Restricting till financial Penalty is one of the benchmark sets out by the management as safeguard.