- CFA Exams
- 2021 Level I > Study Session 11. Corporate Finance (2) > Reading 35. 35. Working Capital Management
- 2. Managing the Cash Position
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Subject 2. Managing the Cash Position
Managing short-term cash flows involves minimizing costs. The two major costs are carrying costs, the return forgone by keeping too much invested in short-term assets such as cash, and shortage costs, the cost of running out of short-term assets. The objective of managing short-term finances and doing short-term financial planning is to find the optimal trade-off between these two costs.
The starting point for good cash flow management is developing a cash flow projection. To forecast short-term cash flows, a financial manager needs to:
- Determine minimum cash balances.
- Identify the typical cash inflows and outflows of the company.
- Develop a cash forecasting system.
Monitoring cash uses and levels means keeping a running score on daily cash flows.
- The most important task is to collect cash flow information on a timely basis.
- Establish a target cash balance for each bank.
- Use short-term investments and borrowing to help with cash position management.
- Consider other factors, such as seasonal factors, upcoming mergers and acquisition, etc.
Practice Question 1Which of the following is the most appropriate technique for forecasting cash flow for the short term?
A. Statistical models
B. Simple projections
C. Projection models and averagesCorrect Answer: B
Simple projections are used to forecast short-term needs. Projection models and averages are normally used to forecast medium-term cash flow needs. Statistical models are normally used to forecast long-term needs, not short-term cash flow needs.
Study notes from a previous year's CFA exam:
2. Managing the Cash Position