It Is Said That Cash Is King; Keeping That In Mind, Read The ✓ Solved

It is said that cash is KING; keeping that in mind, read the

It is said that cash is KING; keeping that in mind, read the four in-depth presentations from the textbook Foerster, S. (2015), Financial Management, Chapter 8 - Making Investment Decisions: a) Inventory Management Systems; b) Aging Schedules and Bad Debt; c) The Cost of Foregoing Discounts on Payables; and d) Working Capital Management Ratios Across Industries. Deliverable: In a 3-page paper explain why day-to-day cash flow management has important implications for both the short-term and long-term financial requirements of a company. Use the textbook and at least three outside peer-reviewed sources. Format in APA 6th Edition.

Paper For Above Instructions

Introduction

Cash management is central to corporate survival and value creation. The four topics highlighted—inventory management systems; aging schedules and bad debt; the cost of foregoing discounts on payables; and working capital management ratios across industries—illustrate operational levers that directly affect day-to-day cash flow and, therefore, both short-term liquidity and long-term financial health (Foerster, 2015). This paper explains why daily cash flow management matters, links operational practices to financial outcomes, and provides practical implications for managers.

Day-to-Day Cash Flow: The Short-Term Implications

Short-term cash flow management ensures a firm can meet immediate obligations—payroll, supplier invoices, interest, and unexpected expenses. Effective control of inventory, receivables, and payables determines the cash conversion cycle (CCC), which measures how quickly a company converts resource outlays into cash receipts (Deloof, 2003). For example, slow-moving inventory ties up cash and raises holding costs; aggressive inventory reduction improves liquidity but risks stockouts and lost sales (Filbeck & Krueger, 2005). Therefore, inventory management systems that optimize reorder points and turnover rates directly reduce working capital requirements and improve short-term solvency (Foerster, 2015).

Aging schedules for accounts receivable reveal collection effectiveness and risk of bad debt. Firms that do not monitor aging risk increasing uncollectible accounts and must hold larger cash buffers to absorb credit losses (García-Teruel & Martínez-Solano, 2007). Conversely, tight credit monitoring and effective collections shorten days sales outstanding (DSO), accelerating cash inflows and reducing the need for short-term borrowing (Shin & Soenen, 1998).

Payables management affects short-term cash availability. While delaying payables can conserve cash, forfeiting early-payment discounts often represents an implicit high-cost borrowing (Petersen & Rajan, 1997). The decision to take or forgo a supplier discount should be treated as a short-term financing decision: many discounts imply extremely high annualized interest rates, so prudent cash managers quantify the cost of foregoing discounts when making payment-timing choices (Foerster, 2015).

Linking Daily Cash Management to Long-Term Financial Requirements

Daily cash practices compound over time and shape long-term financing needs and firm value. Persistent inefficiencies—such as chronic overstocking, lax receivables policies, or habitual discount forfeiture—inflate working capital and can necessitate repeated short-term borrowing, which increases financing costs and restricts strategic investment (Hill, Kelly, & Highfield, 2010). Firms that consistently manage working capital efficiently free internal cash for capital expenditures, R&D, and debt reduction, supporting sustainable growth and higher valuation (García-Teruel & Martínez-Solano, 2007).

Working capital ratios across industries highlight that optimal cash management strategies are context-dependent (Filbeck & Krueger, 2005). Capital-intensive industries often have longer production cycles and higher inventory requirements, whereas service sectors may have lower inventories but greater receivable exposure. Long-term financing plans must therefore incorporate industry-specific working capital behavior to align debt maturities and investment horizons with operational cash flow profiles (Hill et al., 2010).

Operational Trade-offs and Financial Policy

Daily cash decisions involve trade-offs between liquidity, profitability, and growth. Shortening the CCC by tightening credit or reducing inventory improves liquidity but may constrain sales growth if customers or distribution partners are disadvantaged (Deloof, 2003). Conversely, generous credit policies can boost revenue but increase bad-debt risk and financing needs. Optimal policies result from balancing marginal benefits and costs; empirical studies indicate a negative relation between CCC and profitability up to industry-specific optima (Shin & Soenen, 1998; Uyar, 2009).

Supplier relationships and trade credit are strategic levers. Using trade credit can be an inexpensive source of short-term financing, but systematic exploitation can harm supplier terms and long-run supply reliability (Petersen & Rajan, 1997). Firms should analyze payables discounts as short-term investment opportunities—calculate the effective annual cost of foregoing discounts and compare it to the firm’s borrowing cost to make rational payment decisions (Foerster, 2015).

Practical Implications and Recommendations

1. Implement integrated inventory systems: Use just-in-time (JIT) or vendor-managed inventory where feasible to reduce holding costs without impairing service levels; measure inventory turnover regularly and benchmark by industry (Filbeck & Krueger, 2005).

2. Monitor aging schedules weekly: Classify receivables by aging buckets, set explicit collection targets, and enforce credit limits. Early identification of delinquent accounts reduces bad-debt expense and improves cash forecasting (García-Teruel & Martínez-Solano, 2007).

3. Evaluate discounts quantitatively: Treat discount opportunities as short-term investments. If the cost of external borrowing exceeds the effective yield from taking discounts, prioritize discounts (Foerster, 2015).

4. Use working-capital metrics for planning: Incorporate CCC, current ratio, and industry-specific benchmarks into monthly management reports and long-term forecasts. Align debt maturity profiles with expected operating cash flows to reduce refinancing risk (Hill et al., 2010).

5. Institutionalize scenario planning: Cash stress tests and rolling forecasts help anticipate liquidity shortfalls, enabling preemptive financing or cost adjustments rather than reactive high-cost borrowing (Padachi, 2006).

Conclusion

Day-to-day cash flow management has decisive implications for both short-term liquidity and long-term financial strategy. Operational practices—inventory control, receivables aging, payables timing, and industry-tailored working capital ratios—influence the cash conversion cycle, financing costs, investment capacity, and ultimately firm value. Firms that treat daily cash decisions as integral to strategic finance, measure outcomes, and adjust policies to industry norms will be better positioned to meet immediate obligations and to fund future growth without excessive external financing (Deloof, 2003; Foerster, 2015).

References

  • Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573–588.
  • Filbeck, G., & Krueger, T. M. (2005). Industry related differences in working capital management. Mid-American Journal of Business, 20(2), 11–18.
  • Foerster, S. (2015). Financial Management. Welwyn Garden City: Pearson Education UK.
  • García-Teruel, P. J., & Martínez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164–177.
  • Hill, N. C., Kelly, G. W., & Highfield, M. J. (2010). Net operating working capital behavior: A first look. Financial Management, 39(2), 783–805.
  • Padachi, K. (2006). Trends in working capital management and its impact on firms' performance: An analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45–58.
  • Petersen, M. A., & Rajan, R. G. (1997). Trade credit: Theories and evidence. Review of Financial Studies, 10(3), 661–691.
  • Shin, H. H., & Soenen, L. (1998). Efficiency of working capital management and corporate profitability. Financial Practice and Education, 8(2), 37–45.
  • Uyar, A. (2009). The relationship of cash conversion cycle with firm size and profitability: An empirical investigation in Turkey. International Research Journal of Finance and Economics, 24, 186–193.
  • Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice. Cengage Learning.

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