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.

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Cesarnew: carrying vs shortage