Question

1) How do we determine the appropriate level of cash that should be present to effectively run a business?

2) Explain the concept of trapped cash. How do we determine how much cash is trapped on the balance sheet of a firm?

3) When considering AP, AR and Inventory, which is the most challenging? Why?

Answer 1

1. Company should always be having appropriate level of cash that should be able to to keep itself enough liquid in the short run, in order to fund its short term debt repayment schedule, because short term debt repayment schedule like interest payments are to be regularly paid to the creditors.

A company should always be having an adequate amount of cash in its books, so that it should not be missing out on the opportunities which are available to it in terms of investing in the short run because there are so much of opportunity cost involved, with missing of all those investment lying in its books of accounts.

So a company must be having an appropriate level of cash in order to fund its short term liability, in order to have a high liquidity ratio and have cash in hands in order to fund for its short term project. so, a company must be having a high current ratio,high quick ratio, and it should be having a high times interest earned ratio, in order to fund its short term payables so that it will have enough cash in its hands.