Cash Management Example

Cash is one of the items that belong to the Asset and that are managed within the companies; call it commercial or service. However, we can add that cash is a very delicate account like the others, but if you have to pay the greatest attention to registering it.

Nature and composition of cash
Cash is the normal resource of the exchange and forms the basis for measuring and accounting for all other items. It is generally classified as a current asset. In order for it to be presented as “cash”, it must be available for the payment of current obligations and free from any contractual restrictions that limit its use to satisfy debts.

Cash is made up of coins, bills, and available funds deposited in the bank. Negotiable resources such as money orders, certified checks, cashier's checks, personal checks, and bank drafts are also considered cash.
Savings accounts usually like cash, although the bank has a legal right to require notice prior to withdrawal. However, banks rarely exercise the advance notice privilege, so savings accounts are treated as cash.

Certificates of Deposit, which can only be withdrawn on certain expiration dates, are more correctly included in the temporary investments section due to the actual restriction imposed on your retirement.

Items with classification problems are post-dated checks, promissory notes, travel advances, postage stamps, and certain special funds. Post-dated checks and promissory notes are handled as accounts receivable. Advances for travel expenses are handled as accounts receivable in case they are to be collected from employees or deducted from their wages. In other cases, the classification as prepaid expense is the most correct.

Petty cash and the provision for change is included in current assets as cash, since generally These funds are used to meet current operating expenses and to settle obligations of the moment. In general, the separation of cash in the current assets section is not carried out, unless it is has specifically established a significant fund to meet an obligation that reaches its expiration.

Restricted or escrow cash is separated from the general cash account. Restricted cash is classified as either current assets or long-term assets, depending on the date of availability or disbursement. Whether the cash is to be used (over the course of a year or the operating cycle, whichever is longer) for pay existing or expiring obligations, the correct thing is to classify it in the section of the circulating. Instead, when it is to be held for a longer period, restricted cash is presented in the long-term section of the statement of financial position. As a general rule, cash that is to be held for long periods is invested rather than held in the form of cash.

Cash management and control
Cash presents a special accounting problem, not only because it enters a large number of transactions but also for the following reasons:

1. Cash is the single asset that is most easily converted into any other class of asset; it is concealed and transported without difficulty and is sought almost universally. Therefore, proper accounting for cash transactions requires that controls be in place to ensure that the cash is owned or related to the business.
2. The amount of cash a business owns must be carefully regulated so that not too much or too little is available at any given time. It is necessary to always have an adequate amount, without significantly paralyzing resources. As exchange resources, cash is essential to pay for all the assets and services that the company acquires and to meet all its obligations as they mature. Therefore, cash disbursement is a daily event, so a sufficient fund must be on hand to meet those needs. On the other hand, cash, as such, is not a productive asset; does not earn returns. Therefore, it is not convenient to have a quantity greater than that necessary to satisfy daily needs, with a reasonable margin for emergencies. Cash in excess of what is necessary must be invested, either in income-generating securities or in other productive assets.

The accounting department faces two problems when it comes to handling cash transactions: (1) it is accurate establish adequate controls to ensure that officers and employees do not carry out operations that have not been authorized; (2) the necessary information must be provided to the corresponding administrators regarding available cash and cash operations. Most of the companies assign to the accounting department the responsibility of achieving the proper control of the record of this kind of operations. Of course, registration control is not possible without proper physical control; so the accounting department has an interest in preventing intentional, unintentional errors in cash transactions. It should be emphasized that errors can and do occur even when the control measures are the most advanced.

The regulation of the amount of money available is fundamentally a matter for the administration: but accountants must be in a position to provide the information necessary for the administration to carry out regulation through special loan operations and investments.

Petty cash systems for advances. In almost all companies it is necessary to pay small amounts for various reasons such as lunches and transportation of employees, purchase of minor office supplies and other expenses minors. Obviously, it would be impractical to expect these disbursements to be made by check; but in any case its control is important. A very common method of achieving reasonable control, simplicity in operation, and general observance of the rule for payment by checks is the so-called advance system for disbursements through the till girl.

The system works like this:
to. A person is appointed as the manager of the petty cash and is given a small amount of which he will take what is necessary to make small payments.
b. As disbursements take place, the petty cash clerk obtains signed receipts from each person to whom a payment was made. If possible, evidence that justifies the disbursement is added to the receipt.
c. When the fund is about to run out, the manager presents to the general teller a request for reimbursement backed by a credit policy. Petty cash that covers all expenses, and receives a check from the company made out to "Cash" or to "Petty Cash" to replace the background.

Entries are only made in the Petty Cash account in order to increase or decrease the fund or to adjust the balance and the relevant expenses if they were not reimbursed at the end of the year. The refund entry does not affect the Petty Cash account, but the amount of cash it contains does.

The Cash Overflow and Shortfall account is affected when the fund does not balance. If cash shows a shortage (e.g. when the sum of policies and cash on hand is less than the amount of the petty cash fund), the difference is charged to the account of Surpluses and Shortages of Cash. If you throw a surplus, it is credited to that account. The account is left open until the end of the year, which is when it is closed and is generally presented in the income statement as an expense or miscellaneous product.

Typically, there are expense items in the fund, except immediately after reimbursement; Thus, if the financial statements are to be accurate, the funds must be repaid at the end of each accounting period and also when they are near exhaustion.

According to the advance system, the petty cash manager is responsible at all times for the amount, whether in the form of cash or represented by signed vouchers. These vouchers are the evidence required by the disbursement officer to write a refund check. Two additional procedures are followed to achieve more complete petty cash control.

1. Someone in charge of the petty cash manager occasionally makes surprise counts, in order to determine if the fund is being managed satisfactorily.
2. Petty cash vouchers are canceled or mutilated once presented for reimbursement so that they cannot be used to obtain a second improper payment.

The advance system is often applied to the payment of salaries through a special account. Separate advance accounts are also used, operated through the bank by the system described for the payment of dividends, salaries of officials, travel expenses, commissions, bonuses and expenses confidential.

The reason that forces to maintain control over the cash flow is that generally the inflows do not coincide with the outflows of money. There are four models to determine the balance to be maintained:

· Keep a certain number of days of out-of-pocket expenses that could occur depending on the security you have on the expected cash inflows.
Carry out a regression analysis, taking as sales variables and cash where this is the variable dependent and sales the independent variable that will affect the amount that will be maintained according to the sales.
· Determine an adequate ratio of cash to sales.
· Build a mathematical model that integrates the cost-benefit binomial; that is to say, take into consideration what it costs to maintain the cash and what it costs to lack it to cover the commitments, that is, the shortfall cost and the surplus cost.

Importance of cash management.
Managing cash and marketable securities is one of the most important areas of managing working capital. As both are the most liquid assets of the company, they may in the long run constitute the ability to pay bills when they are due. In collateral form, these liquid assets can also function as a reserve of funds to cover unexpected disbursements, thus reducing the risk of a "solvency crisis". Since the other current assets (accounts receivable and inventories) will eventually become assets through collections and sales, cash is the common denominator to which all assets can be reduced liquids.

"Marketable securities" are short-term investment instruments that the company uses to obtain returns on temporarily idle funds. When a company experiences an excessive accumulation of cash, it will use a part of it as an interest-bearing instrument. Although commercial banks may pay interest on demand deposits, clients generally receive such interest. compensation for your account balances, in the form of reduced service fees or lower interest rates on loans, or both. Certain highly liquid interest earning systems allow the company to earn profits on idle cash, without sacrificing part of its liquidity. The basic strategies that companies should follow in relation to cash management are the following:

1.- Cover the accounts payable as late as possible without gaining the credit position of the company, but taking advantage of any favorable cash discounts.
2.- Use the inventory as quickly as possible, in order to avoid stocks that could result in the closure of the production line or in a loss of sales.
3.- Collect outstanding accounts as quickly as possible without losing future sales due to overly pressing collection procedures. Prompt payment discounts can be used, if economically justifiable, to achieve this goal

Cash Management Techniques
· Synchronization of cash flows. a situation in which inflows coincide with outflows, thereby allowing the company to maintain low balances for transactions.
· Clearing a check. a process followed to convert cash and deposit a check that has been written to the payee's account.
· Float of the disbursement, the value of the checks, which we have issued but are still being processed and which therefore have not been deducted by the bank from the balance of our account.

Cycle and turnover, determine the minimum balance and apply models.
The "cash cycle" of a company is defined as the period that covers from the moment the company makes a disbursement to buy raw material, until the moment in which the cash is collected from the sale of the finished article and produced with said material. The "cash turnover" is the annual number of times in which the numeraire undergoes a turnover.
Determining the minimum balance can be defined since the company must take advantage of the opportunities that arise to invest or pay your debts in order to maintain an effective balance, the goal should then be to operate in a way that requires a minimum of money cash. The amount of money that allows the company to cover with the scheduled payments of its accounts at the time of its due date, as well as provide a margin of safety for making unanticipated payments, or scheduled payments, when cash inflows are available expected. The minimum level of operating cash a business needs can be calculated by dividing the business's total annual outlays by its cash turnover rate.