Question

Discuss a management strategy used to retain or increase cash. Share an example of a time when you’ve used a similar strategy in your personal finances. How are the applications of these strategies similar or different for businesses and individuals?

Answer 1

A management strategy that is used to retain cash is the strategy of “matching funding to the cash flow obligations”. We know that all businesses have short term and long term cash flow obligations. The short term cash flow obligations are with regards to day to day business operational expenses while the long term cash flow obligations are with regards to investments, capital expenditures, debt maturities etc. This strategy of matching funding to the cash flow obligations helps business to retain cash as various sources of funding is matched to capital flows and hence cash is available to meet obligations. Thus cash is retained in a systematic manner.

An example of a time when I have used a similar strategy in my personal finances is when I had to pay for buying a new car. I had just graduated from college and had joined an investment bank as a research analyst. I needed to buy a car for my daily commute and to ensure that my cash balance was retained and not depleted I matched my need for a new car purchase with an equivalent loan. This loan entailed paying monthly installments and hence my cash balance was retained and the monthly loan installments were paid through my salary.

The application of these strategies is similar for businesses and individuals in the sense that the eventual goal and objective was same in both cases. In terms of differences the implementation of the strategy required a higher degree of planning at the business level because of several stakeholders were involved. In case of my individual self implementation of this strategy was very simple.