Cash Management

"The world sometimes turns upside down and only those with light liquid assets float to the top again.' – Anthony H Allen.

Whenever any long-term investment is considered the future cash flows from the project, the uncertainty of those cash flows, and the opportunity cost of the funds invested in the project are evaluated. Investment in current assets are also evaluated by all organisations in the same manner but over a short-term period. The time value of money plays an important role in the valuation of long term investments as these investments produce expected cash flows into the future. In the case of current assets (cash, marketable securities, accounts receivables, inventory) provide expected cash flows only in the short term, therefore the time value of money is of lesser importance while evaluating current assets.

Whenever decisions are made for new product development and marketing there is capital investment. Aside from the outlay for assets to produce the product the investment requires:

 More cash to handle the increased volume of transactions.

 More inventory (raw materials, work in progress and finished goods)

 More accounts receivable ( because selling more goods on credit means increasing credit to customers)

Investments made in current assets support the day to day operations of the firm. Therefore investment in long term projects there has to be investment in current assets in order to support the day to day operations that will be required by the project. Current assets are the "Working Capital" put together to work in order to generate benefits monetary or other wise from the investment made.

How much investment should be made in current assets? This is a difficult question as this depends on various factors such as:

 The type of business and product

 The length of the operating cycle

 Customs, traditions, ad the industry practices

 The degree of uncertainty of the business

The type of business, whether extractive, retail, manufacturing or service, affects the way an organisation invests. In some industries, large investments in machinery and equipment are necessary. In other industries, such as retail firms less is invested in plant and equipment and other long-term assets and more is invested in current assets such as inventory and receivables. The firm's operating cycle – the time it takes the firm to turn its investment in inventory into cash – affects how much the firm ties up its assets in current assets. The operating cycle includes the time it takes to manufacture the goods sell,