Question

Discuss various strategies of effective cash management of the firm

Answer 1

1. Open a money market fund. At first, you can do what many families do to build up a small nest egg of working money. Set aside small sums each month in a money market fund. You won't get rich quick, but you will earn a greater return on your excess cash than if you put it in an interest-bearing checking or bank savings accounts, and the money remains readily available should you need it.

2. Invest in CDs. If your business' cash flow becomes so predictable that you have several months' worth of expenses in cash, you can invest in CDs. You will earn a higher yield but there will be penalties for early withdrawals should you unexpectedly need the money. This downside can be minimized by purchasing CDs in smaller denominations (which yield less interest) and staggering their maturity dates so cash is freed up at regular intervals.

3. Open a sweep account. Sweep accounts are trouble-free ways to squeeze the most interest out of small amounts of spare money. However, they make sense only if your bank's fees are less than the interest you will earn. There are two types of sweep account:

Controlled-investment account: Every day, your bank will leave in your checking account only enough cash to cover the checks that were presented the night before for payment that day. The rest is swept, very early in the day, into overnight investments. Do not make electronic payments or wire transfers from controlled-investment accounts! They may be submitted for payment later in the day when your account has no money in it.
End-of-day sweep account: Usually a safer bet for small business owners, this type of account waits until late in the day to determine how much to sweep into overnight investments. Typically, an end-of-day sweep account pays 0.1% to 0.2% less than a controlled-investment account.


4. Set up a lockbox account. Speed up posting of customers' payments to your bank account. Payments are mailed to a P.O. Box directly accessible by the bank, which processes receipts daily. You don't have to go to the bank (or send a subordinate) and stand in line to make deposits. Deposited checks don't sit in a teller's drawer all day, they are taken directly to the processing department. If your bank is regional or national you can set up lock-box accounts near your biggest customers, eliminating days of postal travel time for checks they mail to you.

Answer 2

1. need of working capital
2. need of assests
3. need and payments of current liab.
4.effective management by reducing cost
5.efficiency in cost