Cash and cash equivalents management, Operational, production...

Managing cash and cash equivalents

Managing cash and cash equivalents is one of the most important activities of a financial manager. It includes:

- calculation of the time of circulation of funds (operational, production and financial cycles);

- analysis of cash flow;

- forecasting of cash flows;

- determination of the optimal level of cash;

- drawing up of budgets of money resources, etc.

Operating, production and financial cycles

In the process of production, the company's funds are reincorporated in various forms, starting from the moment of acquisition (receipt) of raw materials, materials or purchased semi-finished products and completing receipt of payment from the buyer of the finished product. At the same time, it is extremely important for the company that the cycle of money circulation be as short as possible so that it can quickly return capital. Let's imagine this process unfolded in time, allocating only the moments of time that are significant from the point of view of the company's financial management (Figure 7.6).

The operational cycle is the conditional name of the period - a typical repetitive element of the production and commercial process (from the receipt of raw materials until the return of funds in the form of revenue) funds are dead in calculations.

The production cycle is the period from the time the goods arrive to the point of sale (shipment) of the finished product.

The production cycle is equal to the period of turnover of working capital embodied in the production form.

Interrelation of the operating, production and financial cycles of the company

Fig. 7.6. The relationship between the operating, production and financial cycles of the company:

A - receipt of raw materials and accompanying documents; B - payment of raw materials (outflow of funds); With - selling of finished products with a deferred payment; D - Receiving payment from the buyer

Financial cycle is a conditional name for a period as a typical repetitive element of the technological process, at the beginning of which cash is actually spent in payment for suppliers for raw materials purchased from them and at the end of which they return in the form of revenue.

The calculation and analysis of the company's cash flow is as follows. The effectiveness of the company's financial activities in terms of settlements with counterparties is characterized not only by the timely receipt of accounts receivable, but also by a rational policy towards creditors. Accounts payable to the company can be managed, moving or approximating the maturity of the company. Due to this, the problem of regulating the amount of money on the company's settlement account is solved, as well as the task of reducing the duration of the cash cycle, which is regarded as a very positive trend in the company's operations.

Analysis and forecasting of cash flows

Cash flows are one of the most important objects of financial management. The solution of the problem of effective cash flow management is relevant for any phase of the company's life cycle, whether it is the rise or fall of economic activity. Quite often, financial managers are faced with the situation of active growth in sales of the company's products, when cash is becoming increasingly scarce, due to the imbalance in cash flow. Even more difficult is the situation with the preservation of solvency for companies in recession, when payment obligations remain, and incoming cash flows are unstable.

The basis of cash flow management is an analysis of the process of their movement, which can be performed by direct and indirect methods.


Direct method assumes that the cumulative cash flow is divided into three components that characterize the cash flow associated with operating, investment and financial activities. For each of them, the amounts of incoming and outgoing funds are determined, which makes it possible to calculate net cash flows for each type of activity. In the event that a negative CPR is created in the course of operating activities, it is necessary to identify sources of covering the cash deficit.

Indirect method assumes the calculation of the DDP based on net profit. To this end, it is necessary to add to the net profit expenses that did not cause an outflow of money in the period under review (for example, depreciation charges) and subtract the amount of outflow of money that is not related to costs, in particular, the increase in inventories. In addition, from the net profit is deducted revenue, which became an inflow of funds in the period under review, for example, the growth of accounts receivable, the increase in interest accrued to receiv- ing, etc. The application of the indirect method allows the financial manager to understand the economic content of the company's balance sheet items from the position of cash flow dynamics, which is not available to every manager.

The results of a comprehensive assessment of cash flows are of fundamental importance for the construction of a strategic financial management system. They should be taken into account when developing, first of all, the investment strategy of the company as an opportunity for effective investment of free cash, as well as a strategy for the formation of sources of financing as a factor influencing the decision on the need for borrowing.

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