Companies may maintain large cash balances because some Companies with good growth prospects plan to use these resources to support the growth, either financing property and plant expansion, research and development or acquiring other companies. But very high cash may give a bad indication that Company follow conservative capital working management which loss a good opportunity for new investments and may lead to reduce the Company’s equity by returning some of cash equity to shareholders. The below subtopic can discuss more details in cash management

Financial ratios are relative figures reflecting the relationship between variables, they enable analyst to draw conclusions regarding financial operations. For cash and cash equivalents, the most appropriate ratios are as follow:

Liquidity ratios, the adequate liquidity is important to help Company to meet current/short-term obligations. The short-term creditors are interested in the short-term solvency or liquidity of the Company.

Acid-test/quick ratio is one of the liquidity ratio that refers to current asset which can be converted into cash in short term without diminution of value such as cash and cash equivalents.

Cash ratio = cash and cash equivalents/ current liabilities

Acid-test/Quick ratio = (cash and cash equivalents + short-term investment + accounts receivables)/ current liabilities

If satisfactory ratio which is equal 1 or more which gives an indication that Company can settle its current obligations by cash, and unsatisfactory ratio which is less than one that may lead the company to covert some unsalable inventory or give more prompt payment discount for receivables to collect the money and pay its current obligations. But too high ratio is not necessary good indicators, as long as there is no an indication in the management plan or Corporate Governance in the financial statements for plant expansion or acquiring new investments, high ratio will indicates that cash have been unnecessary accumulated and are not being profitably utilized, and the management follow conservative policy for managing cash which reflects the poor skills of the management. This ratio should be considered in relation to the industry average to infer whether the firms short-term financial position is satisfactory or not.

Defensive-Interval Ratio, the liquidity position of a firm should be examined in relation to its ability to meet projected daily expenditure from operations as the below formula

Defensive-Interval Ratio = Cash and Cash equivalents / Projected daily cash requirements

                Where: Projected daily cash requirement = Projected cash operating expenditures/365 days

The defensive interval ratio measures the timespan the Company can operate on present cash without resorting to next year’s income or revenue.

Many companies collect cash from many sources and make payments from number of different cities or even countries. If the Companies do not manage their cash, they may loss opportunity or face insolvency in short-term. Therefore, many companies try to decrease the cash flow-in or cash collection period and increase the cash flow-out period or payment period. To speed up collecting cash or slow down paying cash, checks is went through various processes are 1) mail float 2) processing float; 3) clearing float.

Using float 

Float is the difference between the balance shown in Company’s book and Bank’s records. Delays that cause float arise because it takes time for checks to travel through mail (mail Float) and to be processed by bank (processing float) and to be cleared through banking system (clearing float).

Speeding up receipts or slowing down payments 

For speeding up receipts, Company reduce the all the above floats by doing the following:

  • Establishing lockboxes (Lockbox is old tool)
  • Opening accounts in the branches or near the location of its sales/collection centers and to be specified for sales and receivable collections only and those receipts transferred to headquarter’s specific bank account frequently
  • Getting cash receipts via wire transfer
  • Opening other accounts for disbursements which is funded by headquarters but keeping the balance in its branchs’ account not exceeding specific limit.
  • Paying branches’ disbursements centrally via headquarter’s bank account, but this may increase the working papers and working time by headquarter staff. Therefore, automatic wire transfer is more appropriate than issuing checks.
  • Saving for maximizing payment float

For slowing down payments, Company increase all the above floats by doing the following:

Savings = Interest rate x payments x number of days extended ÷ 365 

Slowing down the payment period is not always good recommendation, Company o make the Cost-And-Benefit Analysis for slowing down the payments, the cost of slowing down payments to supplier is cash discount loss, loss reputation and loss supplier who can provide Company with materials or render services, the benefit of slowing down payments is meeting its urgent and important obligations or to obtain high cash discount from other supplier, or obtain interest income from its short-term investments. In any case, delay in payments should not exceed 45 days.

Cash management is not only via increasing or decreasing floats. Also, cash can be managed by maintained economic cash balance in the disbursement bank account. Economic Cash Balance is determined by the below formula 

 ECB = √ (2 * total payments during a year * processing cost per payment /Interest rate)