Question

Which one of the following will you consider first in managing your business: Cash Management or Account Receivable Management or Inventory Management? EXPLAIN your answer

Answer 1

I would consider cash management at first. The reasons are:

Cash is the life blood of business. It is required for carrying out the operations of the business smoothly. If cash is not available when required, the business will run into liquidity problems. Poor liquidity will lead to loss of production, sales, profits and ultimately it will lead to bankruptcy. Hence, cash management is very important.

It is pertinent to note that cash is at the beginning and ending of the cash operating cycle and inventory management, receivable management and payables management are the intermediary steps. Hence, measures to manage cash will automatically lead to bettering accounts receivable management and inventory management.

Further, cash is the least productive asset and at the same time the most essential. It is also the most volatile in terms of the amounts held. Managing it requires attention on a minute to minute basis. Forecasts and actuals are to be made on an ongoing basis to know surplus and shortfall points. Surplus cash can be invested but shortage situation requires advance planning for sources of short term finance.

Thus, I would consider cash management most important and it will trigger the management of other current assets.