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Synchronization of the inflow and outflow of funds, and economy in their use, can be improved by coordinating the two flows. A company may need to adjust the terms on which it grants credit to its customers or get creditors to extend more favorable terms; or borrowing may be essential if no adjustment is possible. Generally, however, a firm must maintain extra cash for these purposes and it is one of the costs of doing business. When funds are needed for only a part of each year, because production and cash requirements are concentrated at certain seasons and/or inventory must be carried for several months, a borrowing of funds for the period desired is ordinarily cheaper and more effective than maintaining continuous cash balances to handle the peak seasonal needs. This conclusion assumes, of course, that credit for such purposes is available on reasonable terms. Stability of cash operating requirements is an important factor in determining die amount of cash that is needed. A public utility may be able to predict within a narrow range the cash requirements that will ordinarily arise and need not maintain any substantial excess for emergencies. On the other hand, some types of business arc particularly subject to physical hazards connected with drought, floods, or hurricanes, or are subject to strikes and other changes in economic conditions. Additional cash needs or the cessation of cash receipts cannot be predicted accurately and a company cannot afford to be caught with inadequate liquid resources. The smaller the firm and the more dependent it is on a narrow range of activity the greater the danger from unexpected catastrophes. A large company with widely diversified and geographically separated activities has greater collective resources to withstand such a development, and the danger that the same hazard will befall more than one phase of its operations is remote. Furthermore, the cash resources from one division can be diverted temporarily. Thus a large company with diversified activity can coordinate its varied contingent cash needs and maintain fewer excess cash resources than a group of separate and independent companies. Just as die insurance principle of large numbers applies to many other phases of diversified large-scale operations, so it is applicable to the management of cash and allows economical use of that asset. Accelerating the Handling of Cash A company may not only speed up the inflow of its own cash but may delay payments outward. If purchases are made on terms that provide a dis¬count for cash payment, such payment is usually delayed until the last day on which the discount can be taken. Sometimes payments to suppliers are not disbursed until after their due date, although such slow payments arc more often the result of inadequacy of cash than any planned economy in the use of funds. Postponement of the time when funds must be on hand is also made possible by the use of drafts on funds located elsewhere. A time lag of several days occurs between the depositing of a draft and its presentation for collection. This type of practice is effective primarily with wage payments and payments to firms that have not themselves developed accelerated means of collection. In the normal course of business a local bank may require that notice of collection on customers' checks must be received before deposits can be withdrawn. In the meantime the funds cannot be utilized by anyone, and the period of idleness may extend as long as a week. To economize 011 the use of cash and to speed the receipt of usable funds, business firms have evolved methods of speeding collections. Sometimes checks are forwarded by air mail. The time lag can be shortened also if a bank will release the funds as soon as it has received credit from the Federal Reserve Bank of the district—a process that takes about two days. Otherwise, special arrangements may be needed. For example, checks of customers may be directed to a post office lock-box in a central city such as Chicago or New York where they are picked up and deposited by a bank which then immediately forwards the information. The funds are thus available in advance of the clearing procedures. Not only does such a system speed collection but it gives a tighter control over die handling of funds. It is possible to use the lock-box technique in a different manner by having remittances forwarded to banks in areas close to the customers, with balances over a stipulated amount being wired to New York or wherever the principal funds of the firm are located. As a continuous process this permits the reduction of float (funds in transit) and releases cash for other purposes. Classof1.com offers Finance Homework Help
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