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How does a company can run to its predicted cash needs depends not only upon the ordinary requirements but also upon the contingencies against which it must maintain protection. Ability to obtain cash when desired can be an effective substitute. If a company has a sufficient credit rating and channels of financing with a bank or finance company, a cash deficiency can be alleviated immediately. In this regard a medium-sized or large company has an advantage because its credit rating is customarily higher than that of a small company and it is more likely to have a pre¬arranged line of credit. This source of credit may apply to unsecured loans or may necessitate the pledge of accounts receivable, inventory, or other assets. Maintaining adequate cash balances is also related to credit relation-ships in another way. Deposits with individual banks must be large enough for a firm to be a paying customer and one with which the bank will be willing to do business. If the bank's services are used only sparingly the cost of providing those services may be greater than its receipts from the service charges. Although centralization of cash is advisable for a large company and a considerable saving may be possible, it must be done within die framework of maintaining goodwill in the areas in which it does business. In recent years, die management of bank deposits by large companies has taken the form of keeping balances in the various local banks of operation at minimum acceptable levels and transferring excess funds to one or a small number of locations where they can be invested temporarily if an excess accumulates. Moreover, with a central reservoir of cash, the extra needs of one division or subsidiary can be supplied by surpluses from another. It is unlikely that the peak requirements of all will be simultaneous. Treatment of Excess Cash It is not customary for a company to allow large amounts of cash to re-main idle even for relatively short periods of time. If the excess accumulation is expected to be permanent, the company will either plan for its projected use in the business, when expansion of some sort is warranted, or disburse the funds as dividends to stockholders. Sometimes the acquisition of another firm is considered an appropriate use of otherwise idle cash. If future use of the cash is contemplated but has no immediate function, the purchase of short-term government or business obligations may be suitable. Investment in stocks or bonds of long maturity is not wise because of the risk of loss of principal due to variations in earnings or interest rates. Idle cash can also be invested in commercial paper offered either through commercial paper houses or directly by large finance companies. Maturities on this paper are sufficiently diverse to coincide with any requirement for liquidity. Commercial banks are currently encouraging investment by business firms in negotiable certificates of deposit which avoid the restrictions on their paying interest on demand deposits but permit interest to be earned on short-term funds. Preventing Losses Adequate control of the movement of cash is essential to avoid losses through theft by employees. A firm must be assured its receipts are secured and properly recorded. Methods of diversion, both temporary and permanent, are numerous; and trusted employees have been known to divert liquid assets over long periods of time. Payments have also been made in ways that have removed cash illegally. Fictitious suppliers have been reimbursed and money has been paid for imaginary services. Cash that has been stolen is ordinarily expended and can seldom be recovered. The most satisfactory technique is to hire honest employees but selection is never perfect and temptation influences conduct. In addition to wise selection of personnel a company needs to set up institutional arrangements that tend to discourage theft. If incoming and outgoing movements of cash are arranged so that control over them is handled and checked by more than one individual, and the records are analyzed carefully, the danger of loss is reduced. It may also be desirable occasion¬ally to introduce new personnel into some of the stages of record-keeping. The more persons who would need to enter into any collusion in the stealing of funds the more difficult the process and the less likely that a loss will occur; any unusual activities will undoubtedly be uncovered be¬fore they become established practices. If sizable amounts of cash are being handled, some of the risk may be shifted by requiring employees to be bonded. A large company, having extensive division of labor in its accounting procedures, has an advantage in employing such diversification of functions. For a small firm, dependence on die integrity of individual trusted employees is still essential; it does not have the personnel to permit an allocation of the various steps in financial operations among different persons. Classof1.com offers Finance Assignment Help
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