Management of the Cash Position Essay

Not only do these managers often permit difficulty in comprehending sophisticated forecasting techniques, but the immediate payment flows of their companies be usually dependent upon someer customers and a dinkyer number of product lines than those of their bigger competitors. Thus the funds flow pattern of the teentsy starchy is typically too unstable over time and the on tap(predicate) info describing it too limited for reliable forecasting. The small business is subject to hushed other(a) constraints, apart from those applicable to all firms, which tend to restrict the intake of even relatively simple capital management techniques. small-scale firms, for example, are normally unable to afford the division of talent available to volumedr companies in the form of highly educated financial managers.Many small firms, struggling hard just to remain solvent and earn a fair return, suffer further from lack of recognition that a exchange management problem even exists. Once a problem is ascertained the manager may lack knowledge of the methods available for a possible solution. A solution which requires more manpower or expenditures than can be covered out of normal funds flow is Dr. Grablowsky is assistant professor and rhairman of the plane section of Finance at Oid Dominion University. He has published articles in the JSBM, the Journal of Financial Education, and the Journal of Behavioral Economics. Prior to his entry into education. Dr. Grablowsky was with the Department of Cost, Planning, Systems, and Analysis at the Monsanto Co., World Head, quarters, St. Louis.typically rejected by the small business.This article will present the results of a survey of small-business cashmanagement practices and compare these methods with techniques unremarkably employed by larger corporations. Small businesses are defined in this study as firms with annual sales under $5 million. information for this study were collected by means of a mail questionn aire distributed to two light speed firms selected randomly, within the various business classifications, from classified advertisements appearing in the teleph wizard directories of the Greater Norfolk-Portsmouth SMSA and theHampton-Newport News SMSA. The firms were selected in five different diffusion levels, with annual sales varying from under $50,000 up to $5 million.The firms in the survey operated at from one to thirteen locations and employed up to tercet hundred persons, although more than half had few than ten employees. Of the two hundred businesses selected for study, 66, or 30 percentage, responded. A breakdown of the respondent firms by patience and size is given in Table 1. The Cash BudgetIt was hypothesized that few of the firms with sales under a million dollars would prepare cash budgets in fact, only 30 percent of all firms in the sample did so. several(prenominal) interesting relationships were noned in this regard. One was that the newer firms 1 For an e xample of this place see B. J. Grablowsky, steering of Accounts Receivable by Small Businesses, Journal of Small Business Management, Vol. 14, No. 4, October, 1976, pp. 26-27. 5 According to E. Donaldson, J. Pfahl, and P. MuUins, Corporate Finance (New York The Ronald aroexercising Co., 1975), pp. 22-23, this would include, based on average sales per bon ton, over 86 percent of all firms in the U,S. budgets, the larger ones updated their budgets more browsely than the others. One of the reasons for the more frequent update was that none of the largest firms made more than a thirtyday cash forecast while the smaller ones normally made budgets for up to a year.This last finding is in agreement with the results of other studies showing that few firms withsales under $3 million make sales forecasts, whereas about all firms with sales over $10 million prepare one or more projections for various planning periods. As the firm grows, cash budgeting becomes more essential. Of the firms that prepared cash budgets, an annual planning period was the intimately common, although some also used weekly, monthly and quarterly budgets. No company made a cash budget for more than one year. The oftenness of updating the budgets was well distributed over weekly, semimonthly, monthly, quarterly, and annual intervals.A nonher question asked whether or not the firms cash balances were being handled in the more or less effective and efficient manner. Of the 67 firms sampled, forty-eight replied that they felt they were efficiently utilizing their cash balances, but, of these, only eleven regularly prepared cash budgets. The assumption by the 37 firms that did not prepare cash budgets that they were efficient in the use of their cash balances is certainly made in ignorance. Conversely, of the remaining 56 firms that did not preoare cash budgets twenty-three replied, and probably rightly so, that they were not using their cash balances in the most 3 See Orgler. Cash Management, pp. 4-13, for a discusFion of factors bear on the time horizon for cash budgets. Aso see Keith Smith. Management of Working Capital (St. Paul, Minn. West Publishing Co., 1974), pp. 35-49, for a survey of the practices of large businesses. Soldofsky and Olive, Financial Management, p. 559. were more likely to prepare budgets than their longer-established competitors.A possible bill lies in the higher educational attainments of the owner-managers of the newer firms. This characteristic, together with the attitudes of the owners toward budgeting, is believed to be a major(ip) determinant of the efficiency with which financial planning is handled in the small firm. The dta also showed that, somewhat contrary to expectations, in the size categories which include the largest and the smallest firms (i.e., those with less than $50,000 and those with between $1million and $5 million in sales) a smaller percentage prepared cash budgets than in the other groups.This result was expected for the smallest firms but quite unexpected for large ones. On the other hand, of the firms that prepared casheffective manner. This realization alone should generate provided impetus to the managements concerned to investigate the need and advantages for cash budgeting soon enough they electrostatic failed to prepare the budgets which could have purifyd their cash flow performance. The managers of these firms recognized that they had a problemthe need for more efficient cash managementyet they failed to take the proper steps to solve it. These same firms tended to take fewer of their allowed trade discounts than others, suggesting that because they did not forecast cash flows they found it necessary to spa to expensive sources of financing such as foregoing discounts. Cash compendiumactions that they could take themselves.Although only about half of the respondents had even heard of interlace boxes or concentration banking, more than one-third did use one or both of these method s for reducing float time. Generally, the respondents reasoned that they could not justify outlay the time and money required to reduce float, because such action would not (in their opinion) materially improve the cash position or the profits of the firm. As with many other decisions confronting small businesses, this one was usually made with short-handed information or investigation. The principal reason, again, was the lack of human resources and expertise available to the small firm. Wholesalers, because of the regional or national nature of their sales, were the most frequent users of these techniques. Businesses with a local sales orientation, such as service establishments and sell stores, were much less likely to use any method to improve cash collections.