Essay: Advantages of Speeding up Cash Inflows

Essay: Advantages of Speeding up Cash Inflows
11/04/2011 Comments Off on Essay: Advantages of Speeding up Cash Inflows Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The level of cash in a company should be kept at a stable level to provide for usual operations and any urgent requirements. Cash inflows to an organisation come from various sources such as sales of goods and collection of accounts receivables. Every company needs to collect cash as fast as possible and avail the whole time period provided by suppliers to manage cash flows effectively.

The companies can create surplus cash by speeding up collections and delaying payments. The time period during the collection and payment can be utilised to invest cash into profitable sources. The time lag between collections and payments creates surplus cash for the company which can be invested in short term securities after evaluating the risk, profitability and liquidity of these securities (Pandey 2006).

A company has various motives for holding cash which include the transaction motive, precautionary motive and the speculative motive. A company needs cash to meet obligations arising out of normal course of business such as paying for purchases, bills, salaries and rent and thus cash would be retained under the transaction motive. Some companies also hold cash as a backup plan for any urgent requirements of cash that may arise during the course of business but if the cash flow streams of a company are even and stable the amount retained for precautionary purpose would be quite low. The cash retained for taking advantage of any seasonal and unseasonal opportunities is held with the motive of speculation. The company can take advantage of various opportunities that the company may have in future operations such as a sudden fall in prices of raw material, rising interest rates and if the prices of short term securities fall. Any surplus cash generated through early collection of receivables and delayed payment of payables can be held or invested under the speculation motive (Nieuwenhuisen, Rossouw and Badenhorst 2008).

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