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Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Cash Management for Financial Management and Policy MCOM Sem 2 Delhi University : IMPROVING CASH MANAGEMENT practices is one of the most important issues of the financial world. Technological advances and the broadening availability of the Internet provide exciting, cost-saving cash management tools. The Financial Management Service (FMS), a bureau of the Department of the Treasury, is making full use of emerging technologies to improve the management of the Federal Government’s finances. FMS’ vision is to move toward an all-electronic Treasury, maximizing the use of technology and providing Federal agencies with comprehensive electronic commerce solutions.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

The integration of e-commerce technologies in the payment and collection infrastructure will result in:

■ timely and accurate disbursement of Federal payments within the optimal payment processing environment, and

■ timely collection of Federal Government receipts at the lowest cost.

The cost savings realized by the integration of technology into the Federal Government’s cash management tools lessen the Government’s borrowing requirements and the interest paid on that debt, thus saving taxpayers’ money. As the Internet becomes the standard for how business is transacted, taxpayers (individuals and businesses) will want the convenience and the choice of interacting with the Federal Government in a similar fashion as they would conduct business transactions with the private sector. 

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Purpose of Cash Management

Cash management is the stewardship or proper use of an entity’s cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization.

The function of cash management at the U.S. Treasury is threefold:

1. To eliminate idle cash balances. Every dollar held as cash rather than used to augment revenues or decrease expenditures represents a lost opportunity. Funds that are not needed to cover expected transactions can be used to buy back outstanding debt (and cease a flow of funds out of the Treasury for interest payments) or can be invested to generate a flow of funds into the Treasury’s account. Minimizing idle cash balances requires accurate information about expected receipts and likely disbursements.

2. To deposit collections timely. Having funds in-hand is better than having accounts receivable. The cash is easier to convert immediately into value or goods. A receivable, an item to be converted in the future, often is subject to a transaction delay or a depreciation of value. Once funds are due to the Government, they should be converted to cash-in-hand immediately and deposited in the Treasury’s account as soon as possible.

3. To properly time disbursements. Some payments must be made on a specified or legal date, such as Social Security payments. For such payments, there is no cash management decision. For other payments, such as vendor payments, discretion in timing is possible. Government vendors face the same cash management needs as the Government. They want to accelerate collections. One way vendors can do this is to offer discount terms for timely payment for goods sold.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Agency Benefits of Cash Management Improvements

The Chief Financial Officers (CFO) Act of 1990 (Public Law 101-576) marked a new era not only in Federal management and accountability, but also in efforts to gain financial control of Government operations. The Act provided a foundation for comprehensive reform of Federal financial management, established a leadership structure, provided for long-range planning, required audited financial statements, and strengthened accountability reporting.

According to the Act, Federal agencies have the responsibility to use timely, reliable, and comprehensive financial information and systems. To that end, FMS encourages all agencies to improve their cash management practices by using electronic funds transfer (EFT) whenever cost effective, practicable, and consistent with statutory authority.

In addition to those benefits noted above, Federal agencies may also realize the following benefits when EFT mechanisms are implemented:

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Cost Savings

■ Eliminates printing of bills and payment coupons.

■ Reduces postage expenses.

■ Reduces personnel time for processing remittances manually.

■ Eliminates the need for physical security measures for handling cash and checks.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Paper Elimination

■ Reduces paper needed for billing.

■ Precludes reminder notices.

■ Eliminates paper-check handling.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Cash Management Improvement

■ Accelerates availability of funds.

■ Improves internal controls.

■ Provides better cash management forecasting.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Efficient Management of cash.

Cash is absolutely necessary for maintaining enough liquidity. The Company requires cash to—

(a) pay off creditors;

(b) buy stock of materials;

(c) make payments to labourers; and

(d) meet routine expenses.

It is the responsibility of the Financial Manager to make the necessary arrangements to ensure that all the departments of the Enterprise get the required amount of cash in time for promoting a smooth flow of all operations. Short-age of cash on any particular occasion is sure to damage the credit- worthiness of the enterprise. At the same time, it is not advisable to keep idle cash also. Idle cash should be invested in near-cash assets that are capable of being converted into cash quickly without any loss during emergencies. The exact requirements of cash during various periods can be assessed by the Financial Manager by preparing a cash-flow statement in advance.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and it is productive when not used. Cash management deals with the following:

(i) Cash inflows and outflows

(ii) Cash balances held by the firm at a point of time

(iii) Cash balances held y the fire at a point of time Cash management need strategies to deal with various facets of cash.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Following are some of its facets:

(a)Cash Planning: Cash Planning is technique to plan and control the use of cash. A projected cash flow statement may be prepared, based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash;

(b)Cash Forecasts and Budgeting: A cash budget is the most important device for the control of receipts and payments of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Both Short-term and long-term cash forecasts may be made with the help of following methods:

(i) Receipts and disbursements method

(ii) Adjusted net income method

(i)Receipts and Disbursements Method: In this method the receipts and payments of cash are estimated. The receipts and disbursements are to be equaled over a short as well as long periods. Any shortfall in receipts will have to be met from banks or other sources. Similarly, surplus cash may be invested in risk free marketable securities. It may be easy to make estimates for payments but cash receipts may not be accurately made. The payments are to be made by outsiders, so there may be some problem in finding out the exact receipts at a particular period. Because of uncertainty, the reliability of this method may be reduced.

(ii)Adjusted Net Income Method: This method may also be known as sources and uses approach. It generally has three sections: sources of cash, uses of cash and adjusted cash balance. The adjusted net income method helps in projecting the company’s need for cash at some future date and to see whether the shares, etc. In preparing its statement the items like net income, depreciation, dividends, taxes, etc.

This chapter examines the requirements, responsibilities, standards, and objectives for internal controls. Implementing internal controls is important in the area of cash management because of the diverse nature of the processes involved, i.e., billings, collections, deposits, and disbursement processes, as well as the fragmented oversight responsibilities generally associated with these processes.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Some of the other major factors, which impose a need for a consistent application of sound internal controls, are:

a. The prevalence of a high turnover rate of operating personnel and supervisors in cash management functions;

b. The assignment of cash handling responsibilities to personnel with limited fiscal experience or understanding;

c. The fragmentation of billing and cash handling functions which makes monitoring the whole process difficult; and

d. The inherent risk of loss, or opportunity for personal gain, created by the nature of cash transactions.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

Section 2.0 Policy

It is the policy of the Department of Commerce to implement internal controls in the area of cash management to minimize the cost of the use of money to the U.S. Government. Organization unit’s accounting and administrative controls must also provide reasonable assurance that all Federal assets, including funds, are safeguarded against waste, loss, unauthorized use, or misappropriation.

While the need for internal controls may seem burdensome or restrictive, their value should be obvious. It is the responsibility of financial managers to interpret the value of internal controls for other managers and employees. They should also assist in establishing internal controls that may need to be tailored to specific situations. However, the costs and benefits of proposed controls for unusual situations should be carefully evaluated and the costs should not normally exceed the benefits likely to be derived. On the other hand, such evaluations should not be mistakenly used as a justification for relaxing controls, or accepting an increased risk of loss to the Federal Government, based strictly on cost.

Cash Management for Financial Management and Policy Mcom Sem 2 Delhi University

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