Essay: Techniques of Speeding up Cash Flows

Essay: Techniques of Speeding up Cash Flows
12/04/2011 Comments Off on Essay: Techniques of Speeding up Cash Flows Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The techniques of speeding up cash flows are important in improving the cash flows of a firm. The basic concept of efficient cash management is increasing and speeding up the cash inflows and decreasing and delaying the cash outflows of a firm. The techniques of speeding up and improving cash flows are based on this simple concept of speeding up collections and delaying payments. The time duration for collections can be decreased by various techniques which basically motivate the customers and debtors to pay cash on or before stipulated time. These techniques may involve collection points, cash discounts, lockbox systems and providing other easy options to customers to pay their bills such as online transfers, cheques, and credit card payments (Gallagher and Andrew 2007).

Another area to increase and retain cash for a longer period of time is the concept of float. There are two types of float, negative float, and positive float. The positive float is the time duration between the disbursement of the cheque and actual cash outflow and the company can increase this time duration for higher earnings and utilizing the cash. Various types of floats in the total business float can be used to a firm’s advantage. These floats include credit float, mail time float, in-house processing float and bank clearing time float. The various types of floats can be manipulated to manage the economic total business float which would improve the cash flows of a company significantly (Reider and Heyler 2002).

The techniques for speeding up cash flows can be spread out into two areas of cash collection and cash payment. The rapid cash collection and delayed cash payments would have a favorable effect on the cash flows of the company. The cash collection area can be further divided into a rapid collection of cash from customers and effective management of accounts receivables. The cash collection process can also be enhanced by implementing rapid funds transfer facilities such as sweep accounts, wire transfers, and electronic depository transfer cheques.

A company can also speed up its cash flows through accounts receivable factoring. Factoring of accounts receivables entails selling accounts receivable to another entity for immediate cash inflows. It can be seen as collateral for a loan and companies who do not have a very good credit standing can use accounts receivable factoring for immediate cash inflows. The accounts receivable are purchased by another entity which is called a factor. The factor usually purchases these accounts individually after evaluating the standing of each customer and pays the company the invoice amount after deducting a discount of 3 percent to 5 percent. Accounts receivable factoring also referred to as accounts receivable financing also transfers the risks associated with accounts receivable to the factor (Siciliano 2003).

The cash flow cycle is relatively shorter and faster in retailing companies as compared to manufacturing companies due to the fact that retailing companies do not manufacture any products, they just purchase finished goods and sell them to end users. The cash is tied up in the production process of manufacturing companies. This means that if a company can speed up its sales and limit the number of days items remain in inventory it can speed up its cash flows. A study carried out by listed companies of the Istanbul Stock Exchange indicated this variation between the cash collection cycles of manufacturing and retailing companies. The retailing companies need to sell the items in inventory in order to convert the inventory into cash. The number of days inventory remains in the company determines the speed of cash flows. If these items remain in inventory for a longer period of time cash inflows will be slower. Applying these same rule company sell off the older items of the inventory through clearance sales, discount coupons and other promotional campaigns (Uyar 2009).

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