Essay: Advantages of Slowing Down Cash Outflows

Essay: Advantages of Slowing Down Cash Outflows
11/04/2011 Comments Off on Essay: Advantages of Slowing Down Cash Outflows Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The advantages of slowing down cash outflows are quite similar to speeding up cash inflows in an organization. The basic motive of both speeding up cash inflows and delaying cash outflows is to retain cash in the organization for a longer period of time. When a company retains cash for a longer period of time it increases its ability to generate profits by investing the excess cash in short-term investments and meet any unexpected cash shortfalls. As with speeding up cash inflows, delaying cash outflows increases the time lag between receipts and payments and the company can invest the freed up cash in various options available like short term deposits, short-term securities or treasury bills (Gallagher and Andrew 2007).

Slowing down cash outflows helps the company in fulfilling the motives of holding cash which include the transaction motive, precautionary motive, and the speculative motive and were described in the previous section. The company can delay payments on obligations of lower urgency to meet obligations which have a higher level of urgency and which would affect the overall operations and profit o the company if they are not paid. Similar to speeding up cash inflows the company can slow down cash payments to take advantage of a sudden fall in merchandise, a rise in interest rates and rate of return on short-term securities.

Holding a large amount of cash does not only have its advantages it also has some disadvantages. If the cash remains idle for a longer period of time and is not invested in any securities it may have adverse effects on the company’s future cash flows. The company would incur an opportunity cost for this large amount of cash as it could earn profits and increase the level of future cash flows if it is invested in short-term securities or other short-term investments. This entails that the company should not only speed up cash receipts and delay cash payments for holding surplus cash but should also take measures to invest this cash on the basis of risk, return and liquidity  (Khan and Jain 2005).

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