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Subject 2. Managing the Cash Position PDF Download
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.
Learning Outcome Statementsd. describe how different types of cash flows affect a company's net daily cash position;
CFA® Level I Curriculum, 2020, Volume 4, Reading 35
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