Read the article “Why Cash Management Is Key to Business Success.” After reading, answer the following questions:1) What happens when a business is unable to generate enough cash?2) What does the article have to say about accounts receivable, accounts payable, and inventories?3) Is it bad for a company to have too much cash? Justify your answer. ARTICLE ANALYSIS"Why Cash Management Is Key to Business Success."Cash is the lifeblood of a business and a business needs to generate enough cash from itsactivities so that it can meet its expenses and have enough left over to repay investors andgrow the business. While a company can fudge its earnings, its cash flow provides an ideaabout its real health.Cash is KingBy generating enough cash, a business can meet its everyday business needs and avoidtaking on debt. That way, the business has more control over its activities. In a situation inwhich a business has to take on debt to meet its expenses, it is likely that its debtors willhave a say in how the business is run. If they have contrary opinions to the management's,that could be an impediment to the way management executes its vision for the business.Without generating adequate cash to meet its needs, a business will find it difficult to conductroutine activities such as paying suppliers, buying raw materials, and paying its employees,let alone making investments. And it should have sufficient cash to pay dividends and keepits investors happy. Some companies also use their cash to engage in share buybacks toreward investors.Improving Cash ManagementEven if a company is making a profit, by making more revenue than it incurs in expenses, itwill have to manage its cash flow correctly to be successful. A company's cash flow is tiedto its operations or business activities, to its investment activities (such as the purchase orthe sale of capital equipment), and to its financing activities (such as raising debt or equityfunding or repaying such funding). The cash that a company generates from its operationsis tied to its core business activities and provides the best opportunities for cash flowmanagement.Areas that offer possibilities for better cash management include accounts receivable,accounts payable, and inventories. If a company were to grant credit indiscriminately, withoutascertaining the credit worthiness of its customers, and not follow up on tardy payments, thatwould lead to a slower and smaller inflow of cash, as well as unpaid bills. That is why it isimportant to have a credit policy and follow up on tardy payments. On the other hand, whenit comes to accounts payable, it is better cash management to pay suppliers later rather thanearlier. As well, it is important not to have too much cash tied up in inventories, but to haveon hand just enough inventories for the immediate needs of the business.Striking the Right BalanceThere is a right balance between having too much cash on hand, out of precaution, andhaving an inadequate supply. If a business has too much cash, it is missing out onopportunities to invest the cash and generate additional earnings. On the other hand, if itdoesn't have an adequate supply of cash, it will have to borrow the money, and pay interest,or sell off its liquid investments to generate the cash it needs. If the business expects togenerate a better return on its investments than it pays in interest on its borrowings, it mightdecide to invest its surplus cash and borrow any additional money it needs for its activities.In analyzing a company's balance sheet, certain ratios such as a firm's acid-test ratio, or theratio of its most liquid current assets (including cash, accounts receivable, and marketablesecurities) to its current liabilities provide an idea about its cash management. While a ratioof greater than one indicates a healthy current assets situation, a very high ratio couldindicate that the firm holds too much cash or other liquid assets.The Bottom LineA company has to generate an adequate cash flow from its business in order to survive. Inaddition to generating cash from its activities, a business also needs to manage its cashsituation so that it holds the right amount of cash to meet its immediate and long-term needs.Source:http://www.Investopedia.com/articles/investing/041515/why-cash-management-key-business-success.asp

Cash management is crucial for an organization in order to ensure cash availability as and when it…

Answered: Read the article “Why Cash Management…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q