Nowadays, reliability and efficiency is one of the necessary premises for all companies that aspire to perfect their economic activity in order to achieve better results.
The success of this purpose will depend on the degree of certainty that the decisions made regarding the adequate administration and management of the available material and financial resources possess, the future performance obtained depends largely on the good performance of this task..
Make better use of resources, increase labor productivity and reduce costs, can only be achieved with effective capital management.
Cash management, aspect to consider for the administration of working capital.
The administration of this item is one of the fundamental fields in the administration of working capital, since cash represents the most liquid asset that companies possess, through which unforeseen expenses can be covered and thus reduce the risk of a liquidity crisis.
The term cash or cash refers to all the money, either in cash or in a bank account that the organization owns, that generates or receives during a certain period, which is distinguished by not producing any return and makes it possible to use it immediately of money in the operations of the company.
The primary objective of cash management is to minimize idle cash balances and strike a balance between liquidity benefits and costs.
Cash can also be considered as the common denominator to which the rest of liquid assets such as accounts receivable and inventories are reduced, companies have different reasons for maintaining cash stocks such as:
- Transactional: It enables the company to carry out its ordinary operations. Precautionary: It foresees the inflows and outflows that will take place in the company. Speculative: It enables the company to accept profit opportunities that may arise in certain business situations. Requirement of a Compensatory Balance: Refers to the minimum levels that a company should keep in its bank account.
To achieve efficient cash management, the following basic strategies or policies should be considered:
- Cancel accounts payable as late as possible, without losing credit credibility but taking advantage of any discounts for prompt payment. Rotate inventories as soon as possible, avoiding the depletion of stocks that may affect operations. Collect accounts receivable as fast as possible without losing future sales.
The impact of the application of these policies in the fulfillment of the exposed objectives requires the use of formulas and models that allow the availability of cash in operations, through the use of:
- Cash cycle management Mathematical economic models.
Cash cycle management
The administration of the cash cycle is an important element in the administration of working capital. When analyzing it, two fundamental aspects must be taken into account:
- Cash cycle or Cash flow cycle: It is one of the mechanisms used to control cash, it establishes the relationship that exists between payments and collections; that is, it expresses the amount of time that elapses from the moment the company buys the raw material until payment is made for the sale of the finished product or the service provided (see Annex 3).
When analyzing the cash cycle, it is convenient to take into account two fundamental factors:
- Operating cycle. Payment cycle.
1 - The operating cycle is nothing more than a measure of time that elapses between the purchase of raw materials to produce the items and the collection of cash as payment for the sale made; It is made up of two elements that determine liquidity:
- Inventory conversion cycle or Average inventory term. Accounts receivable conversion cycle or Average accounts receivable term.
2 - The payment cycle takes into account the cash outflows that are generated in companies for the payment of the purchase of raw materials, labor and others, this is determined by:
- Conversion cycle of accounts payable or Average term of accounts payable:
The combination of both cycles results in the cash cycle:
- Cash rotation: It expresses the number of times the company's cash actually rotates, its main objective is to maximize profit through cash and it is determined:
- Operating cycle. Cash cycle. Uncertainty in cash inflows. The coverage or credit position. Taking advantage of new business opportunities.
Mathematical economic models to determine the optimal cash balance.
In order to know the optimal cash balance required, it can be determined by calculating the minimum cash for operations or the minimum cash cycle for operations.
This model provides the minimum level of cash that companies need to carry out their operations and it is obtained:
There are mathematical economic models that allow determining the optimal amount of cash that needs to be kept for operations, among the most used are:
- William Baumol's model: it is based on the determination of the economic quantity of the inventory order, it allows to know the optimal size of the transfers made in the purchase and sale of negotiable securities. Model of MH Miller and D. Orr better known as the Miller and Orr model: in essence it proposes the determination of the optimal point of return, that is, it shows how entities can manage their cash balances and minimize their costs by not being able to predict their inflows and outflows; The graphic representation of this model (see Annex 4) represents how the cash balance winds unpredictably until it reaches an upper limit, at which point the company buys necessary securities to return the cash balance to a more normal level;Again the balance is allowed to meander until it reaches a lower limit, when it does the company sells the necessary securities to return the balance to a desirable level.
To establish the limits of this model Miller and Orr showed that they depend on three factors:
If the daily variability of the cash flows is large or if the cost of buying and selling securities is high, then the company must establish very separate control limits, on the contrary, if the interest rate is high, the limits must be established closer.
Cash management according to this model plays with the limit depending on how much risk of lack of cash the company can tolerate, this can be zero or a minimum margin of security necessary to maintain operations with the Bank.
The desirable level of cash will depend on the transaction costs of buying or selling negotiable securities and the opportunity cost of holding cash, the transaction costs per period are dependent on the number of transactions in negotiable securities during the period, the opportunity cost of holding cash is a function of the expected cash per period and will be given by:
- The distance between the upper and lower limit:
The upper and lower limits are considered as model control limits and the desirable level minimizes the sum of the transfer costs and the expected opportunity cost.
Cash flow statement.
To assess solvency and assess the ability to generate positive cash flows in future periods to pay dividends and finance the growth of companies, it is necessary to prepare the Cash Flow Statement: which relates the income and cash payments that are made in an accounting period, it also provides information about investment and financing activities.
The state allows the company to make diagnoses related to the entity's ability to attract external financing; it reveals the destination of the cash received in the period, provides information about the growth of the company, that is, if it is growing, if it is stagnant or in recession, and highlights whether funds are earmarked for the short term to place them in slow recovery investments.
This status should help the company in the evaluation of aspects such as:
- Assess the ability of the business to generate positive cash flows in future periods. You must explain the reasons or causes for the differences between the value of net income and the cash flow related to operations. Assess the ability of the business to meet your obligations and pay dividends. You must explain both cash and investment and financing transactions that do not use cash during the period under review.
The main objective of the statement of cash flows is to provide information about the income and cash payments, as well as the financing and investment activities of the entity.
- Classification of cash flows:
1- By operating activities: This includes income and cash payments made by operations.
| Income | Payments |
| I collect or charge clients for sales of merchandise and services rendered. | Payments for merchandise and services rendered to suppliers, including payments to employees. |
| Interest and dividends received. | Interest and tax payments. |
2- For investment activities: Includes those income and payments that are related to this activity.
| Income | Payments |
| Cash from sales of investments or fixed assets. | Purchase of investments or fixed assets. |
| Cash for collection of securities on loans. | Advance securities to borrowers. |
3- By financing activities: It relates the income and cash payments made for this concept.
| Income | Payments |
| Cash product of loans obtained in the short and long term. | Payments of borrowed securities (excludes interest) |
| Cash received by owners. | Payments to owners as cash dividends. |
Income and interest payments are classified as operating activities to reflect the effect that those transactions included in the determination of net income would have on cash; while dividend payments by not intervening in this calculation are considered financing activities.
Cash equivalents that are highly liquid short-term investments, made up of monetary investment funds, commercial papers and treasury bonds, as well as money that is deposited in a bank account are not considered as income and cash payments.
The difference between the income and cash payments of each of these flows will give a negative or positive result.
- If it is positive, the result will be expressed as: Cash flow from operations, investment or financing activities. If the result is negative, it will be expressed: Cash flow used in operations, investment or financing activities.
The sum of the results of these cash flows shows the change in cash in the period under review; This is known as Net Cash Flow.
For the preparation of a cash flow statement it is necessary:
- Balance Sheet of the current period and the previous period. Income Statement for the current period.
• Basic approaches to preparing the cash flow statement:
1- Cash basis: this approach summarizes the results of operation in terms of income and cash payments (direct method); allows calculating cash flows from operations by converting the income statement values for income, cost of goods sold and expenses from the accrual basis to the cash basis, adjusting the items in the income statement for the changes they have undergone related balance sheet accounts.
2- Causation basis: summarizes the results of operations in terms of income earned or expenses incurred.
There is an alternative method which is the Indirect Method, it is used to prepare the cash flow from operations, this part of the net profit for the period and all necessary adjustments are made to convert this figure to the net cash flow from the operations. operations.
Importance of cash flow from operations.
Companies need to be able to generate positive cash flows from operations that guarantee that the company survives, because if the flows generated are negative, they will not be able to obtain cash indefinitely from other sources, since the ability to obtain cash from Through financing activities they depend to a great extent on the ability of the company to generate cash flows from operations activities, in addition this situation discourages investors when they are going to invest.
For the preparation of the statement of cash flows from operations, it is necessary to take into account the effects on cash of the income and payments previously related, as well as the variations in the accounts and the conversion of the income and expenses of causation to the box base, using the following equations:
1- Cash received from clients:
Net Sales + decrease in accounts receivable - increases in accounts receivable
2- Interest and dividends received:
Interest income + decrease in interest receivable - increase in interest receivable
3- Payments to merchandise providers:
Cost of sales + inventory increase - inventory decrease
4- Expense payments:
Operating expenses - depreciation and others + increase in advance payments expenses that do not - decrease in advance payments use of cash
5- Interest payments:
Interest expense + decrease in interest payable - increase in interest payable
6- Tax payments:
Tax expenses + decrease in taxes payable - increase in taxes payable
There are certain differences between net profit and net flow from operations such as:
- Expenses that do not make use of cash, such as depreciation and amortization of intangible assets, do not affect net cash flow, but affect net income. The time differences that exist between the recognition of income and expenses and the occurrence of cash flow. Non-operating gains and losses are involved in determining net income, but the related cash flow is classified as a financing activity, not an operating activity.
Preparation of cash flow from financing and investment activities.
To calculate the flows from these activities, the entries of the related assets and liabilities accounts can be examined, along with any profit or loss that is related and shows the income statement; In addition, if operations that do not use cash take place within these activities, they must be listed in a supplementary report, which will accompany the cash flow statement.
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