Basics of cash management for financial management & reporting


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This paper examines the basics of cash management for financial management and financial reporting purposes. This study makes use of descriptive research method to examine the importance, essence, influence, relationship, and impact of cash management on financial management and financial reporting. It establishes the strong impact of cash management on corporate survival, linkage to practically every account on financial report, maximisation of shareholders’ wealth, fraud prevention and detection, and liquidity enrichment. It also ascertains the need for the use of net cash flows as a measure of performance. Organisations should give cash management serious attention and make it a strategic partner, and should maintain a dedicated cash module for cash management because accrual accounting is not adequate for cash management. Regulatory bodies should enhance disclosure requirements in respect of cash and cash equivalents to enhance transparency and prevent creative cash management.

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Basics of cash management for financial management & reporting

  1. 1. Basics of Cash Management for Financial Management & Reporting Basics of Cash Management For Financial Management and Reporting By Hameed Gbolahan Soaga Tel: +2347033561230, +2348052078611 E-mail:© H. G. Soaga, 2012. All right is reserved. Page | 1
  2. 2. Basics of Cash Management for Financial Management & Reporting Abstract This paper examines the basics of cash management for financialmanagement and financial reporting purposes. This study makes use ofdescriptive research method to examine the importance, essence, influence,relationship, and impact of cash management on financial managementand financial reporting. It establishes the strong impact of cashmanagement on corporate survival, linkage to practically every account onfinancial report, maximisation of shareholders’ wealth, fraud prevention anddetection, and liquidity enrichment. It also ascertains the need for the use ofnet cash flows as a measure of performance. Organisations should give cashmanagement serious attention and make it a strategic partner, and shouldmaintain a dedicated cash module for cash management because accrualaccounting is not adequate for cash management. Regulatory bodies shouldenhance disclosure requirements in respect of cash and cash equivalents toenhance transparency and prevent creative cash management.Terms: Memorandum Record, Factoring, Lead-time. Page | 2
  3. 3. Basics of Cash Management for Financial Management & Reporting1 Introduction The accrual basis of accounting is adjudged appropriate for accountingfor performance and measurement of state of affairs. On the contrary, becauseof the precariousness of cash under the accrual method, cash transactions arereconciled and controlled using the cash basis of accounting. Realaccountability comes up with corporeal cash flow. This underlines the cashbasis of accounting, which is prominent in government accounting.Ordinarily, unlike other accounts, cash is hardly subjected to accountingfalsification because cash is difficult to manipulate since it must be reconciledto actual bank balances, which can almost not be overstated. Cash is a volatilesection of financial reporting; it is link to virtually every account in thefinancial statements. It cuts across every element of financial statements vis-a-vis assets, liabilities, equity, income, and expenses. The earth is globular andmoves in a cycle; life is as well a cycle. Cash is life and a cycle of activities.Cash management is essential to perform finance roles such as business andfinancial strategy, financial stewardship, risk management, value creation,cost control, management of operating model, budgetary control andperformance management, negotiation, and decision support among others.Cash management is closely interlocked with other key managementprocesses. Quality data is the means of support of cash management. Cashmanagement system with inadequate capacity can leave organisation out inthe open to dawdling, scrappy process, doubtful data and deficient audit trailfor decision-making and stewardship. According to a US bank study, 82percentages of business failures are due to poor cash management. Cash is required to meet vital purposes of transaction, precaution, andspeculation. Organisation should be able to pay for required goods/services asthe need arise to meet transactionary purpose, make provision for unforeseencircumstances that could arise to be precautious, and be able to take advantage Page | 3
  4. 4. Basics of Cash Management for Financial Management & Reportingof unanticipated opportunities and speculations (like investment) as they ariseto increase shareholders’ wealth. Cash is paramount aver of wealth; deferredconsumption save cash for precaution reasons, or speculated investment tocreate assets for future consumption. Missed opportunities because of poorcash management are always too high that the organisation may not have itagain. Cash to every organisation is like blood to every man; cash is ultimateand is the liquid asset ever. Effective and efficient management of cash isessential for the survival and growth of organisation. Good cash managementcan reduce the finance cost of the organisation and reduce expenses in generalbecause of timely allocation base on precedence items. Cash management isthe good and adequate utilisation of liquid funds (cash and cash equivalents)that are at the exclusive disposal and use of an organisation for optimalutilisation, survival, and profitability. Survival of enterprise relies heavily oncash management; cash management in contemporary world is no longerintuitive, poor cash management can lead to collapse of enterprise. Cash is thebest survival tool. Liquid funds can be cash in hand, cash at bank (savings,current and domiciliary accounts), deposits (fixed, time, etc), and so forth.The collapse of many great enterprises like W. T. Grant and Chrysler wouldhave been averted if serious attention were paid to cash management. Good cash management allows enterprise to utilise most of cash thatwould have been idle or susceptible to theft and as well assist the managementin anticipation of cashless situation. Shareholders’ primacy is important;rather than allow payables and receivable keep cash longer, good cashmanagement system will give the cash back to shareholders. In any case,strong cash flow is an indication of generating real value for the owners. Itwas recently stated by Citigroup that stock price performance of more liquidcompanies is 27% higher than their less liquid counterparts. Cashmanagement cut across financial management, management accounting,internal control and auditing, financial accounting and financial reporting.Cash management can be done with the aid of several tools that are Page | 4
  5. 5. Basics of Cash Management for Financial Management & Reportingintertwined, such that one is a control or confirmation of another. Good cashmanagement can be carried out with the use of cash positioning report, cashflows statement, bank reconciliation, cash reconciliation, and cashbooks.However, apt cash management utilise cash forecast, credit control andmanagement, cash flows report and cash budget alongside. Cash management is a complex and evolving topic. It can be describedas services rendered by banks to customers. History has it that banks did cashmanagement free of charge as a value added, competitive edge to theircustomers before the current empowerment of cash management withseamless unprecedented automation and control. In the current developveracity; banks now make income from providing plethora of sophisticatedcash management services to their customers who are mostly big andmultinational enterprises with the aid of information technologyconsolidation, workflow efficiencies and better straight-through processing.Banks provide treasury and liquidity management services such as accountreconcilement, disbursement control, cash concentration, zero balanceaccounting, advance web services, balance reporting, cash collection, cashtransportation (armoured car), cash concentration, wire transfer, automatedclearing house facilities, and other services. This paper describes the basics oncash management for the purposes of financial management and financialreporting. This paper covers cash management vis-a-vis financialmanagement and financial reporting, which are important to everyorganisation for management of organisation and compliance. This paperconsists of ten sections. The second section discusses efficient cashmanagement; the third section explains cash management tools; the fourthsection examines cash flows analysis while the fifth section presents cashmanagement and fraud. Section six discusses creative cash flows reporting;section seven examines use of communication and public relations skills forcash management; section eight examines cash versus profitability; section Page | 5
  6. 6. Basics of Cash Management for Financial Management & Reportingnine discusses foreign currency cash management; and lastly, section ten isthe conclusion and recommendations.2 Efficient Cash Management Efficient cash management is the reduction of the cash cycle as short aspossible such that cash can go fast through the cycle of activities. Thisdrastically reduces financing cost such as lost opportunities due to lack offund, interest costs and make cash yield returns by cash sweep to investmentsof cash in opportunities and fixed deposits, which yield far less than theformer and most definitely below cost of capital. Opportunities could beinorganic like investments in (real) estate, merger and acquisition, propertiesand or idle capacities that are gold decoy with filth and looking for insightfulinvestors that can polish and dispose them of within a short period andappetite-wetting premium. Real investment is by far higher returns yielder andgood for national economic development, but it is very risky: long term,unpredictable and ties-up cash. A good knowledge of risk management andinvestment planning and appraisal is a strong mitigating factor, so a specialistcan be assigned full-time to ensure accurate investment decisions. There wasan industry experience of a company with a foresighted finance leader thattook advantage of inorganic investment by tying up cash on estate; thecompany survived long on the huge reserve created while competitors’ headswere deep below the sea when meltdown hit the industry. This example is aguide, there are numerous of such opportunities in hazy forms. Cash efficiency does not come in naturally. It is a result of forecastingand planning, working capital cycle management, good internal controlsystem, best utilisation of cash comparative analysis of competitors models,enterprise approach to cash management (i.e. ensuring payment is made fromreceipt), strategic management of top-line, transformational (rather than Page | 6
  7. 7. Basics of Cash Management for Financial Management & Reportingtransactional) cash management strategy, among others. The primaryresponsibility of treasury is to safeguard and ensure best utilisation of cash.Safeguard comes in strongly because you can only manage what you have.Cash management efficiency shows in sustainable cash flows and perhaps freecash flows, which reflect succinctly at the level of free cash flows. The threedrivers of cash: debtors, creditors, and inventory should be managed toenhance cash efficiency. Efficient cash management prepares organisation forproblems, as well as breaks. Growth such as merger and acquisition, newproduct development and increase sales ingratiate cash. In practice, enterprisemay struggle to pay even essential bills in the period it expands; good cashmanagement is watchful of this paradox by the exploit of cash projection inconjunction with other tools to control the situation. The finance unit shouldmake better and more economical cash management to better theshareholders’ wealth; competitive advantage should be leveraged to createvalue over time. In an experience, a CEO found new revenue for thecompany, that is finding it hard to survive and required new revenue streamthat can not come from its old business, but the green finance chiefmicromanaged and achieved closure of this because of consequential cashflow challenges on the expansion. Cash management should go beyond the traditional approach, whichsees cash management as superfluous in the period of growth but a necessityto survive economic down-turn. Enterprise need to come to terms withutilising cash management for business and competitive analysis. Competitiveanalysis such as the Industry analysis (which certainly utilises Porters FiveForces Model), Strategic group analysis, SWOT analysis, Value chainanalysis, and GE business screen matrix (a derivation of the BCGgrowth/share portfolio matrix). The appropriate technique is determined bythe nature of the pressing problems that are faced. Blind-spot analysis,Competitor analysis, Customer segmentation analysis, Customer valueanalysis, Functional capability and resource analysis, Management profiling, Page | 7
  8. 8. Basics of Cash Management for Financial Management & Reporting Macroenvironmental (STEEP) analysis, Scenario analysis, Stakeholder analysis, Experience curve analysis, Growth vector analysis, Patent analysis, Product life cycle analysis, Miller-Orr Model, S-curve (Technology Life Cycle) analysis, Financial ratio and statement analysis, Strategic funds programming, Sustainable growth rate analysis and several others could be utilised. BCG matrix can assist on likely cash flows from a product/unit, blind-spots analysis identifies areas affecting cash management to minimise cash flow problem, customer segmentation analysis could be utilised to provide the best credit terms to the most valued customers, scenario analysis could estimate cash flows to possible scenarios, as so forth. Figure 1: Cash analysis Receipts/Inflows Disbursement/Outflows Revenue Production expenses Personnel costSundry Revenue(Financing, Investing) Cash Capital expenditure Sales & Distribution Other inflows cost Office/Overhead expenses Statutory expenses (i.e. tax) Other outflows Page | 8
  9. 9. Basics of Cash Management for Financial Management & Reporting3 Cash Management Tools The corporate objectives of an enterprise should resonate in the cashflows structure. Aside traditional feedback, feed forwards system should bebuilt into cash flows management system to properly align corporateobjectives, vision, and mission with the enterprise actual finance, be able toanalyse how far for corrective, and update purpose. Cash planning is astrategic part of strategic planning. Cash flows forecast is management-planning mechanism for decision-making purpose, it is the foundation of cashmanagement. Sources for cash forecast preparation are historical records,corporate aim and objectives, inputs from business units/departments,previous period forecast and errors therein. Judgemental input base oncomprehensive knowledge of business is a salient groundwork for thepreparation of cash-flow forecast. Adjustment of cash flows for the realities oftime value of money is important. Cash flows forecast is an early warningdevice for financial management, it encourages proactive financialmanagement. It sets expectations and challenges management to meet targetprudently, shows problems and how to ameliorate such, make sure theorganisation do not run out of cash. Cash forecast should involve divisionalmanagers, because divisional heads have better understanding on the expectedcash flow in respect of their units. Expected time for cash receipt and paymentshould be considered irrespective of when such is earned or incurred. Theactual balance in the bank accounts should be the opening cash balance, notthe book cash balance; similarly, the closing bank balance should be theclosing balance in the bank accounts at the end of the financial period. It isnoteworthy that cash flows reported in financial statements obliquely reflectsthe internal cash flows report for cash management. Unlike external financialreporting, management cash flows report is detailed (not categorisation intooperating, investing and financing activities, and movement in cash), revealthe actual cash balances as depicted on figure 2 below (rather than ledger Page | 9
  10. 10. Basics of Cash Management for Financial Management & Reportingbalances, which is susceptible to accruals, thus could be exploited for creativeaccounting purposes). In the ancient time, peeping into the future by specialised warlords was alucrative business and imperative for empires and ventures. Soothsayers madefortune from forecasting: Joseph/Yusuf, in holy books, became stupendouslywealthy and a head-of-state because of his interpretation of dreams (data). Intoday’s information age, forecasting is an important tool for planning anddecision-making to attain corporate success. Successful finance chiefs aregreat forecasters. Forecast is an essential financial management tool, itdiscloses Strengths, Weaknesses, Opportunities, and Threats (SWOT) thatforestall solvency, utilises opportunities, engender profitability, among others.Forecast should be prepared regularly to reflect the destination of the entity onforth night basis and monthly, aside the beginning of the year forecast. Cashforecast allows the identification of gaps in finance before liquidity andsolvency disasters struck the going concern foundation. Strength of cashforecast and subsequently cash budget is in the management projectiondexterity. Cash forecast depends heavily on historical information andjudgemental rulings base on business experience. Cash management practicedemands that management should avoid human reaction to historicalexperience that could lead to imprecision. Forecast can be esoteric because itgoes very deep and require insights beyond even Monte Carlo; it can beexceedingly judgemental as nature of business demands. Forecast should beorganisation-based, consider past forecasting errors, and important trends inthe external environment like economy, law, politics inflation. Seasonalvariations that are usual and the ones that are foreseen should be considered incash flows forecast. Sales forecast is the most important item in thepreparation of cash forecast and budget; normally, cash inflow from sales isthe premier and other forecasts are dependent on it. To enhance the accuracyof sales forecast, internal and external environmental factors should beconsidered. Page | 10
  11. 11. Basics of Cash Management for Financial Management & Reporting There is a thin line between cash forecast and cash budgets that many cannot distinguish one from the other. This is because the procedures for preparing the two are the same. Cash budget like every other forms of budget relates to short-term financial expression of an organisation’s corporate objectives for the entity’s fiscal period, usually one year. In terms of periodicity, cash budget like every other type of budget can be enhanced if flexed to reflect business realities from time to time. Thirteen-week budget is a regular form of cash budget. Due to the volatility of cash, there is need for regular review of cash budget; fortnight or monthly budget is proactive for effective cash management. On the other hand, Cash forecast is projection tool of business reality. Figure 2: Cash Management Mechanism Cash Management Financial Management Financial Reporting Cash-flow Projection Cash Book Cash Budget Cash/Bank Reconciliation Cash Position Cash-flows Statement Credit Control & Management Statement Figure 3: Inter-Relationship between Cash Management Mechanism Balances = Cash Position Balance = = Cash-Flow Statement Cash Book BalanceCash Budget (After adding back provisions and adjusting (After adjusting for (After adjusting forActual Balance for timing differences & timing differences & timing differences & Page | 11 amendments) amendments) amendments)
  12. 12. Basics of Cash Management for Financial Management & Reporting Realistic and effective rolling forecast is a cutting-edge performancemanagement system. It assists management to make nimble measurement andwell-informed decisions faster; more time is spent managing the future. Thepurpose of forecast has been grossly misinterpreted, organisations concludescash forecast report during the year under consideration. Forecast is a mean toan end; inform decision. Forecasting seeks to assist management oninformation decision-making that would influence outcomes. For forecast toshape outcomes, it process should be as short as possible (remembertimeliness as an essential characteristics of information), it should centreattention on only few drivers, it should be pragmatically drawn up on businessrealities, it should not be presented as commitment to guide against distortion,bias and overambitious. Distorting forecast for target affects integrity offorecasts and action plans Cash position is a critical report that the finance chief should spend thefirst part of the day on before any payment. It is the nucleus of cashmanagement system. Besides, it is a control mechanism that ensuresarithmetical and accounting accuracy (of postings), it assists in the detectionand correction of errors such as casting, commission, omission. Cash positionis for internal reporting purpose; it is a good memorandum record andexplains daily cash movement. Arithmetically, the report is opening balance(previous period closing balance) plus cash inflows (from customers/clients,reversal/cancellation of previous payments like stale cheques, cash/chequeexchange, investments, fixed/time deposits, transfers) minus cash outflows (topayables such as creditors, governments (taxes, levies), payroll, shareholders,intergroup) minus provisions for contingencies. For the purpose of brevity,cash position report should be a page and should be categorised. Cash positioncan be categorised base on the nature of payments, as well as receipts, of anorganisation. A model daily cash position report is easy and time saving toprepare. To ensure good practice, it is advisable that previous day report be Page | 12
  13. 13. Basics of Cash Management for Financial Management & Reportingready before any disbursement. Quality financial reporting system will havethe cash position reconcilable to ledger balances. Once an enterprise does not operate cash only policy there are bound tobe account receivables. Therefore, customers/clients should be appropriatelyprequalified to weed out ones with high default risk and reliable invoiceshould be sent timely. Late payment of outstanding and bad debt is bigproblem on cash management; they can result in cash flow problems that cancripple organization of any size. Credit control can be a simple task wherethere is stringent and keenly monitored credit management policy.Conversely, delinquent debtors are ingenious with the truth when payment isdemanded. They come up with any of the various excuses such as the chequeis in the post, the document to process payment is just being signed now, orrequest for invoice to be resent? When credit control is getting to this level,outsourcing could be the solution to improve cash flows, reduce debtor daysand potential bad debt, or management needs a very tactful creditmanagement. Weekly credit control report is a vital cash management tool thatsignificantly assists management decision making. The report shows newinvoices, outstanding invoices, expected payments, payments received andother details base on the nature of business and level of details required.Collectability of debt and creditworthiness of the customer are effectivecontingent consideration that affects cash inflows. Prompt collection fromcustomers/clients, minimum collection cost, aggressive follow up on overdueinvoices, and possibly, requires up-front deposits at the time of sale are greatformulae that aid business growth. There should be dynamic model forcustomers/clients that have potentiality for risk. Day Sales Outstanding (DSO)is a key performance indicator for measurement by outstanding enterprises.Valuable cash management strategy is bared in a shorter Day SalesOutstanding (DSO). Sales sell to anyone irrespective of the customer/client Page | 13
  14. 14. Basics of Cash Management for Financial Management & Reportingpayment capacity that would often result to bad debt, to achieve theirperformance. Sales commission plan should be drawn to give the enterprisethe best compensation; it should be at the best interest of the company andshould be aligned to corporate objectives. For instance, sales commissioncould be structured such that commission would only be paid when customerpays, to motivate collections, but should avoid sales taking up credit controltasks rather than sales. Judicious use of Bad Debt Reserves to Receivablesratio assists in improving cash flows and earning through strategic creditmanagement. Finally, the ultimate tool for credit control and management isrelationship. In a business experience, a credit control officer achieved whatother approaches, including restlessness and litigation, could not throughrelationship. The best credit control officer is a relationship professional. Cash/Bank reconciliation is a methodological procedure of comparingtwo sets of related cash/bank accounts or records from different systems andany other sources, categorizing and analyzing differences, and making neededamendments. Bank reconciliation is a powerful accounting and controlprocess by which an entitys cashbook balances is compared with the bankscash balance as of a given period to note any differences. Bank reconciliationto a business is like a compass, map, and sextant to a traveller to navigate. It isthe heart of every organization’s book keeping system. Bank reconciliationunveils reconciling items, which result from timing difference, and adjustingmatters for necessary corrections. Life is not perfect, mistakes are made; bankreconciliation exposes errors that are inadvertent and the deliberate ones,timing differences and bank charges/interests to light. Effective and timelymanagement of bank reconciliation activities significantly increasesmanagement ability to proactively identify and resolve issues that can result inmisstatements in financial reporting records. Simplicity of preparing bankreconciliation statement is a function of the complexity of operations. Thedaunting veracity of bank reconciliation statement is that it must balance,nothing like limbo. Weird experience on reconciliation can be caused by Page | 14
  15. 15. Basics of Cash Management for Financial Management & Reportingmany hushed reasons like incorrect beginning balance (i.e. item(s) notconsidered in earlier reconciliation on cashbook, system error), errors (i.e.transposition, addition, subtraction, commission, error on cheque register etc),incorrect bank beginning balance (i.e. bank charges that hit statement afterdispatch of statement), and many others. These problems are preventable bysetting-up appropriate reconciliation and information management processes,improving organization, training, and automation. Reconciliation must be prepared on a timely basis at the end of a period,reconciling items must be investigated and necessary adjustments should bemade in the accounting system, segregation of duties must be instituted, andreconciliations should be appropriately filed and available for futurereference. Reconciliation is best done periodically in a continuum i.e. weekly,monthly, or quarterly depending on the size, the level of activity, associatedrisk of error and complexity of operation. Where the system is poor andreconciliation has piled up for many periods, it is highly cumbersome anddifficult to reconcile. In such situation, there is a need for high technical skillsand experience, particularly on the comprehensive understanding of businessof the organization. To solve such problem there are two approaches:periodic/graduating reconciliations and lump sum/single reconciliation. Theperiodic/graduating reconciliation is easier, methodological, recommended,but time-consuming, while experts use lump sum/single reconciliation that isfacilitated by the design and adoption of special reconciliation model.Organizations can forestall the burden associated with reconciliation by usingautomated bank reconciliation. Many accounting software come with bankreconciliation automation, which reduces the time it takes to complete thereconciliation considerably and simplify reconciliation unto a straightforwardtask. The external reporting counterpart of cash budget and management cashflows analysis report is statement of cash flows. The comprehensive Page | 15
  16. 16. Basics of Cash Management for Financial Management & Reportingexplanation for statement of cash flows is International Accounting Standard7 (IAS 7), which requires the presentation of information about the historicalchanges in cash and cash equivalents of an enterprise. It is categorisation ofcash flows into operating, investing, financing, and change in cash and cashequivalent activities. It is less detail when compared to management cashflows report, which is not restricted to just four categorisation, and it can befiddled because it is accrual base (although reconciled using cash basis) andnot the actual cash expended and received. In practice, cash flows statementcan be easily prepared because it is principle (in fact, it is rule) base,spreadsheet models abound, and it is automated in many accounting software.The need for reporting compliance gave cash flows sacred position; however,the cash flows analysis reveals so much that creative accounting can be nip inthe bud easily. However, it is noteworthy that every cash management toolmust be relevant, reliable, consistence, understandable, timely, andcomparable.4 Cash Flows Analysis Cash flows analysis can be used to reveal relationship of values, groupof values between cash and other accounts. It reveals trends of events overaccounting periods and evaluates the strengths and weaknesses in the internalenvironment, as well as opportunities and threats in the external environment.Cash flows analysis contributes to an understanding of the past operations,and useful in forecasting and planning. It shows where cash are generatedfrom and where cash go to and reveals the relationship therein. For instance,cash conversion cycle (CCC) also called cash flows cycle (CFC), analysis thelength of time between payables and receivables. This aid the enterprise tominimize the length of time cash are tied-up, thereby reduce the workingcapital needed for operations. Cash flows analysis can be presentationalanalysis in form of analytical review, cash flows analysis or cash ratio Page | 16
  17. 17. Basics of Cash Management for Financial Management & Reportinganalysis. Prediction of business future is crucial from all perspectives. Earlywarning signal aids preventive actions; cash flows analysis can be used, usingfinancial accounting ratios to predict business failure. The common and known form of cash flows analysis is on cash flowsratios, with nominators and denominators from audited, and assured financialstatements – cash flows statements, balance sheet and profit and lossaccounts. For financial management purposes, management cash flowsanalysis is more detailed and customised to the nature of an organisationoperation. Unlike cash flows statement, that is uniform irrespective oforganisation under direct and indirect methods, cash flows analysis of atrading company is clearly dissimilar from that of a manufacturing. In fact,within trading enterprises, as an example, management cash flows analysisreport could be very distinct because of financial management strategy, whichis drawn from corporate objectives, dictates the drivers. Management cashflows analysis reveals the actual situation in details and tremendously assistsmanagement in forecasting, planning, and control. Management cash flowsanalysis is different from cash budget and cash forecast, it is a stewardshipreport in details for both inflows and outflows Preparation of management cash flows analysis report can be tediouswhere there is no automated cash module. In most organisation, it is tediousand as a result it is either not done or it is carried out once in a blue moonwhen there is strong management request for one, example is for annualfiscal estimation purpose. Automation of this function rarely comes withfinancial accounting software because of the above-discussed issue ofcustomisation. Software designers can build a special cash module for thepurpose of cash flows analysis as standalone or integrated module in theaccounting system. However, for expert modeller, this is no problem; excelaffords the opportunity to put-up creativity in generating this important reporttimely, accurately and with ease. Page | 17
  18. 18. Basics of Cash Management for Financial Management & Reporting While finance primarily look ahead, understanding past financialperformance in order to predict accurately financial future is very important.Aside the preparation of management cash flows analysis, finance shouldevaluate, and explain the causes behind the figures to see the root cause andcorrective action needed. Cash ratios are powerful tools that assistmanagement decipher fact out of figures, know where to concentrate efforts,ascertain quality of report, evaluate efficiency of cash utilisation and futurepotentials, assess credit worthiness for loans/credits, and inter firmcomparison to bring into light management competitiveness. This analyticaltool depicts relative importance of items. Apple can best compared to apple;ratios show relationship and proportion rather than absolute monetary values Cash financial ratios are evolving. The current phenomenon, financialmeltdown, has made cash ratios appreciated and a popular metrics asperformance indicators and control tools. Besides the famous ratios such ascurrent, acid test ratios, the following are samples of recently popularised cashratio.4.1 Operating cash flows ratio (OCF) The operating cash flows ratio is one of the most important cash flowsratios. Cash flows are an indication of how cash move into and out of anenterprise. Operating cash flows connotes cash flows that an entity accruesfrom operations to its current debt. Operating cash flows measures how liquidan entity is in the short run by relating cash flows from operations to currentliabilities. The operating cash flows ratio (OCF) measures a companys abilityto generate the resources required to meet its current liabilities. The equationis: Operating cash flows ratio (OCF) = Cash flows from operations /Current liabilities Page | 18
  19. 19. Basics of Cash Management for Financial Management & Reporting Cash flows from operations, which is the numerator, is on cash flowsstatement, while the current liabilities, which is the denominator, is on thebalance sheet. The ratio reveals how much the enterprise is generating cashfrom its operations to take care of its current liabilities. Ratio 1.00 and aboveconnotes the enterprise is making sufficient cash to meet its immediateobligations. The higher the ratio, the better the firm’s liquidity position,conversely, a ratio lower than 1.00 is an indication that cash has to be sourcedelsewhere to keep the firm afloat. And, the fact that going concern is at risk ifthe abnormality is not corrected quickly.4.2 Cash current debt coverage (CCD) Cash current debt coverage (CCD) is a ratio that can be used to measurea companys ability to pay back its current debt. Cash Current Debt coverageis calculated as follows:Cash current debt coverage (CCD) = (Cash flow from operations – cashdividends) /Current interest-bearing debt The cash flows from operations less cash dividend represents acompanys retained operating cash flow is on the cash flows statement, whilethe current interest bearing debt is on the balance sheet. Where the firm’sCCD is 1.00 or higher, the firm is generating enough cash to fulfill its currentdebt obligations. The higher the ratio, the more the firm is at ease on the debton its balance sheet. The firm’s industry also determines the comfort zone.However, when the CCD is less than 1.00, the firm is not making enough cashto pay back its current debt commitments. Cash current debt ratio is a variantof acid-test ratio to measure liquidity. It reveals the relationship between thecash available for debt servicing to the debt (principal, interest, lease) payable.It shows ability to generate cash to cover debt.4.3 Cash Conversion Cycle Page | 19
  20. 20. Basics of Cash Management for Financial Management & Reporting The cash conversion cycle measures liquidity risk by showing thesensitivity of cash to investment in resources for operations. It measures timespan in days between cash disbursement and cash collection. Cash conversioncycle assist on credit purchase and credit sales policies to enhance cashmanagement. Basically, the cash cycle calculation can be performed with: Inventory toproduct conversion time + receivables collection time - Payables paymenttime When measured in years the cash cycle equation is: Average inventory /(cost of goods sold / 365) + Average AR / (Sales / 365) + Average AP /(COGS / 365). Thus, it can be calculated as follows:Cash Conversion Cycle = Average inventory / (cost of goods sold / 365) +Average AR / (Sales / 365) + Average AP / (COGS / 365)Cash Conversion Rate is the rate of cash conversion Cycle. It is computed asbelow: Cash Conversion Rate = Free Cash Flows / Net Income4.4 Cash ROCE % This measures cash return on cash invested by comparing cash earned(net cash flows from operation on cash flows statement) to cash invested(return on capital employed- a ratio of profit and loss accounts to balancesheet). There is no best way of evaluating financial performance and there areadvantages and disadvantages in using earnings per share or cash flows as thebasis of measurement. Earnings before interest, tax, depreciation and Page | 20
  21. 21. Basics of Cash Management for Financial Management & Reportingamortisation, EBITDA, is now commonly used as a close approximation of acash flows performance measure. Calculation of Cash ROCE % is as below:Cash ROCE % = net cash flow from operations/average capital employed The method of performance measurement is not a clear-cut cash orprofit choice. It is generally useful to use both. However, rely heavily onprofit performance measures with a strong emphasis on EPS (Earnings PerShare) and the price/earnings ratio (P/E).4.5 Price/Cash Flow Ratio This ratio compares company’s market value to its operating cash flow.The company market capitalization is divided by operating cash flow. Thiscould be carried out on unit basis by using market price per share asnominator, while operating cash per share (Operating cash flow/Number ofshares) as denominator. Some analyst use free cash flows in the denominatorin place of operating cash flow. The closing price of the stock on a particularday is usually share price. A lower price/cash flow ratio connotes a bettervalue stock, everything being equal. Calculation of price/cash flow ratio is asfollows: Price/cash flow ratio = Share price/Operating cash flow per share It compares the companys share price to the cash flow the companygenerates on a per share basis. It is a valuable ratio for a company that ispublicly traded. Because of the realism of cash, the price to cash flow ratio isoften considered a better measure of a companys value than the price toearnings ratio, most analysts use price/earnings ratio in valuation analysis. Page | 21
  22. 22. Basics of Cash Management for Financial Management & Reporting4.6 Cash Flows Margin Ratio This is popular with the name burn rate or runaway rate. It shows how afirm can efficiently transform sales to cash. The Cash Flows Margin ratio isan important ratio as it expresses the relationship between cash generatedfrom operations and sales. Every enterprise needs cash to dischargeobligations to owners, creditors, government, and invest on capital assets andexpansion. The calculation is:Cash Flows Margin Ratio = Cash flows from operating cash flows / Netsales The numerator of the equation comes from the firms Statement of CashFlows. The denominator comes from the Income Statement. Largerpercentage indicates better ability of the firm to translate sales into cash. Apattern of receivables that rise significantly faster than sales may be indicativeof aggressive revenue recognition. It might also reveal the implementation oflower credit standards as a ploy to capture less creditworthy customers tocreatively boast earnings.4.7 Cash Flows from Operations to Average Total Liabilities Ratio Cash flows from Operations to Average total liabilities is a variant of thefrequently used total debt/total assets ratio. Like debt to assets ratio, cashflows from operations to average total assets ratio measures the solvency,ability to pay debts and ensure going concern. The cash flows from operationsto average total liabilities ratio is better, it measures ability over a period oftime rather than at a point in time. The calculation of the ratio is as follows: Cash Flows from Operations to Average Total Liabilities = Cash flows from Operations/Average Total Liabilities Page | 22
  23. 23. Basics of Cash Management for Financial Management & Reporting Cash flows from operations is taken from the Statement of Cash Flowsand average total liabilities is an average of total liabilities from several timeperiods of liabilities taken from balance sheets. The higher the ratio, the betterthe firm is financially flexible and able to discharge its obligation to creditors.4.8 Net Income to Operating Cash flows Ratio The net income to operating cash flows ratio is a very important cashratio; it reveals how much an enterprise is able to generate cash from earningsand the long run sustainability of the firm. This ratio allows for comparingearnings to cash flows, increasing earnings and decreasing cash flows is anindication of decrease in earnings in the future. The occurrence of increasingearnings combined with decreasing cash flows imply accounting shenanigans,or cash management problems such as cash conversion cycle problem, poorcredit control and management; accounts receivables could increase becausecustomers do not have the cash to pay. An unforeseen sales slowdown couldpush inventory levels up. However, these events can also foretell an earningsslowdown. The calculation of the ratio is as below: Net Income to Operating Cash flows Ratio = % Change in EPS / %Change in Operating Cash flows The numerator of this fraction is change in the earnings per Share (EPS),represents a enterprise’s after tax profit divided by the number of shares. Thedenominator is the change in operating cash flows, which is found right on thecash flows statement, represents in a companys accounting earnings adjustedfor non-cash items and changes in working capital. Earnings management canbe detected with the use of net income to operating cash flows ratio If the ratio falls below 1.00, then the company is not generating enoughcash to justify its performance. In this case, the company is either creative inreporting or the cash management needs overhauling. The ratio is not Page | 23
  24. 24. Basics of Cash Management for Financial Management & Reportingexclusive; it can be compared with other firms and the trend analysis is a finetool. It is critical that cash flow from operations not lag behind net income foran extended period of time. Whenever a company is not collecting the cashrelated to its reported earnings, then it calls into question the quality of thoseearnings. If net income to operating cash flows ratio was employed; bigcorporate failures like W. T. Grant, Chrysler would have been averted.4.9 Bad Debt Reserves to Receivables Bad Debt Reserves to Receivables ratio measures the relationshipbetween bad debt reserves and days sales outstanding to discern how muchthe enterprise is taking caution by making adequate prudence against baddebts. This ratio is necessary on the premise that there is a problem ofpossibility of understatement of uncollectable debts when bad debt reservesare out pacing receivables. The most often adjusted account by externalauditors is receivables accounts and the associated reserves. To calculate thisfigure, a companys accounts receivable balance for the end of a certain periodis divided by average sales per day during the same period. Bad Debt Reserves to Receivables = Bad Debt reserves / Days SalesOutstanding (DSO) Days sales outstanding (DSO) is a ratio used to measure the averagelength of time that a firms receivables are outstanding. When DSOs areincreasing, then in most cases the company should book a similar increase inbad debt reserves. If it does not, then that could serve as an important warningsign. Bad debt reserve account is on balance sheet. Any receivable written offduring a period depletes bad debt reserve balance, while additional provisionincreases the balance. Normally, like in the golden rule of double entry,increase in reserve leads to corresponding increase in bad debt expensesduring reporting period. Page | 24
  25. 25. Basics of Cash Management for Financial Management & Reporting4.10 Operating Cash Flows to Total Assets Operating cash flows to total asset ratio is useful for internal assessmentand to compare the company to other firms in the industry. The numerator isright on cash flows statement, while the denominator is on the face of balancesheet. It shows the destination of the company. The formular for this ratio isas below: Operating Cash Flows to Total Assets = Operating Cash Flows /Total Assets The higher the ratio, the more cash that is available for retaining forgrowth. Enterprises should strive to improve operating cash flows to totalassets ratio for the sustainability of the organisation. . Analysis of cash ratios over a period of years allows trailing historicaltrends and variability in the ratios over time. Ratios can be used to identifyaspects of an enterprise that require profound investigation5 Cash Management and Fraud According to International Standard on Auditing 315 (ISA 315), animportant management responsibility is to establish and maintain internalcontrol on an ongoing basis. Management’s monitoring of controls includesconsidering whether they are operating as intended and that they are modifiedas appropriate for changes in conditions. Hence, the accuracy andcompleteness of the accounting records are the responsibility of theCompanys management. Even though internal control over financialreporting may appear to be well designed and effective, controls that areotherwise effective can be overridden by management in every entity. Many Page | 25
  26. 26. Basics of Cash Management for Financial Management & Reportingfinancial statements frauds have been perpetrated by intentionally overridingthe substance by senior management of what might otherwise appear to beeffective internal controls. Because management is primarily responsible forthe design, implementation, and maintenance of internal controls, the entity isalways exposed to the danger of management override of controls, whetherthe entity is publicly held, private, not-for-profit, or governmental. When theopportunity to override internal controls is combined with powerful incentivesto meet accounting objectives, senior management may engage in fraudulentfinancial reporting. Thus, otherwise effective internal controls cannot berelied upon to prevent, detect, or deter fraudulent financial reportingperpetrated by senior management (AICPA; 2005). The auditors’responsibility is to report to the members of the company whether thefinancial statements give a true and fair view of the state of the Companysaffairs and of the profit or loss for the year, and whether they are properlyprepared in accordance with law. Organisation should use as little number of banks as possible that suitsnature of business, and requirements to achieve enhanced manageable cash.The more banks an organisation maintains, the more the cost of servicing theaccounts and the more the control system is weakened. Management of manybank accounts can be cumbersome; reconciliation of accounts,correspondences like cheques confirmation, ledger accounting, andpreparation of cash position, among many others. Dormant bank accounts, ifnot closed or regularly monitored, can constitute serious internal control threatfor the reason that such accounts can be exploited for nefarious purposes. Totrim down or select banks, management should consider qualitative factors,such as competitive advantages of bank, proximity to business, client-ship, aswell as quantitative factors like bank charges, interest charges, withdrawalcharges etc. Fortified/Bullet-proofed cash management requires managementto institute serious control policies like monthly reconciliation, approvallimits, segregation of duties, arithmetical and accounting accuracy, Page | 26
  27. 27. Basics of Cash Management for Financial Management & Reportingauthorisation, approval, physical control, among others. Bank could bedisproportionate in charging charges and interest; the organisation can recoverthe overcharge through (bank interest and charges) audit with the assistance ofexperts. There are many ways to a true; quality accounting requires preparingschedules, statements, summaries, registers, analysis, reports to corroborateaccounts. Enterprise need to maintain at least two kinds of cashbook record –ledger cashbook and treasury cashbook, for the purposes of arithmetical andaccounting control, fraud prevention, availability of comparable record toreconcile and adjust intentional and unintentional errors. Ledger record is forfinancial reporting while treasurer cashbook is a memorandum record. Asidethe aforementioned collaboration, cash position report is another level ofcashbook accounting that serves as a decision support tool. As employee,particularly one that handles cash gets used to a system, such employee attainsexclusive understanding of the system and the loopholes therein. Thetendency to commit irregularities is heighted, such that professional onnormal course of duty is very likely not to detect consequential irregularities.It takes high professional competence, qualitative skills, eagle eye, andcomprehensive understanding of the organisation’s operations to seize suchfraud. Good internal control arrangement reduces premeditated andinadvertent errors to the minimum. Enterprise should maintain optimal level of office cash to reduce cost,and risks associated with going to bank too often for reimbursement. Cashmanagement requires working out cash requirement for a week base on thecash budget, cash position reports, creditors awaiting payments and otherrealities of business. There should be a threshold, payments outside petty cashthreshold items should be made with negotiable instrument or transfer toenhance control, reduce volume of cash in hand transactions, and avertcumbersome record keeping. Payments to employees, aside impress Page | 27
  28. 28. Basics of Cash Management for Financial Management & Reportingtransactions, are better done through bank. Good finance practice is to releaseconfirmed cheque so that cheques get cleared on time to allow beneficiariesaccess to fund. Not releasing cheques timely can cost the organisationtremendously in the end; organisation can be deprived of the imperativeservice/good thereby telling drastically on operations, loss of reputation,which can lead to payments in cash or draft. Additional costs such ascommission, lead-time, interest on bank draft, transport cost, security hazardof carrying cash. Some organisations by nature of operation maintain high sum of cash inhand. Such organisation should make additional security arrangement; asideprivate office security, additional arrangement of keeping one or two policefrom nearest police station on payroll will drastically avert burglary androbbery. It is noteworthy to mention that petty cash is the most susceptibleaccounts of all cash accounts to fraud; therefore, there should be strong, strict,consistent control. Personnel in charge should not be allowed to be in chargefor too long, because exclusive understanding and awareness of loopholes canbe too costly for organisation. Cash theft has variety, such as understatedsales, sales register manipulation, skimming, collection procedures, falseentries to sales account, theft of cheques received, cheques for currencysubstitution, lapping accounts, inventory padding, theft of cash from register,and deposit lapping. Similarly, fraudulent disbursements can be personalpurchases with company funds, returning merchandise for cash, false refunds,deposits in transit, small disbursements, check tampering, billing schemes,and false voids. Teaming and lading, pilfering, and other forms of fraud canbe perpetrated over period of time that can exceed the shareholders’ fund.Incidents of imprudent management of cash that resulted to erosion ofshareholders’ fund abound: Parmalat, the biggest dairy company in Europebased in Italy that collapsed in 2003, went under because of non-existent cashin bank, Satyam Computer Services overstated cash by $1.5 billion but thecompany was saved by Indians, Bernard L. Madoff Investment utilised ponzi Page | 28
  29. 29. Basics of Cash Management for Financial Management & Reportingscheme to strip people about $17 billion to satisfy his veracious craving forcash, Tyco International used creative accounting to divert company’s fund toits CEO and CFO Company laws require that the management of an enterprise isresponsible for ensuring internal control system. It is appalling how oftenorganizations rely utterly on external auditors to improve internal controlsystem. Management should ensure that internal controls system guarantee thecash. In addition, the cash balances are properly described and classified andadequate disclosures are made of restricted or committed funds and of cashnot subject to immediate withdrawal.6 Creative Cash Flows Reporting Cash flows statement, the third major component of financialstatements, is categorisation of cash flow activities into operating, investing,financing and change in cash and cash equivalent over a financial period.Operating cash flows mirror the sustainable cash generating ability more thanthe others categories; hence, financial analysts consider operating cash flowsas a leading signal of liquidity sustainability. Accounting standards areflexible on certain issues. Accountants can work within the standards, bytaking advantage of the flexibility in accounting standards, or work out of thestandards to prepare cash flows statement. Manipulation by taking opportunityof accounting standards only increase reported cash flow but factuallyoverstate sustainable cash flow position. Cash equivalents such as investmentscan be debt/equity security held either for trading purposes or as available forsale. Creativity comes in when instruments with fixed maturity date, not heldto take advantage of short-term price swings are classified as operating ratherthan investing activities. This is common with non-financial enterprisesbecause such cash equivalents are not part of their normal operation. Another Page | 29
  30. 30. Basics of Cash Management for Financial Management & Reportinginstance is capitalisation of costs, which hitherto expenses, thereby movingcash outflows from operating activities to investing activities, hence, inflatefree cash flow. Besides the above weaknesses that can be utilised, enterprisescan boost operating cash flow through acquisitions because operating results,as well as weaknesses therein, are included in the acquirer’s results. Obliquely, financing cash flows can be coined as part of operating cashflows by manipulating reported operating activities, thereby overstatingsustainable cash flows reported. Financing cash inflow can be moved tooperating activities by increasing trade and non-trade creditors, overdrafts.The qualities of cash flows is in operating and free cash flows, which is cashflows after deducting investing cash flows from operating cash flows andshow the cash available to pay the financier of the enterprise. Imagineenterprise with no cash available to pay shareholders and creditors but claimto be highly profitable. Therefore, cash is a better measure of performance inthe end than profitability. However, there is a need to avoid the agency cost offree cash flows by financing projects earning low returns. Such decision istantamount to minimising, rather than maximising, shareholders’ wealth andis inimical to the company and the economy because of inefficiency in theutilisation of resources. One major challenge about cash flows statement is that auditors do notcarry out detail examination as done for revenue and balance sheet accounts.There are many intricacies behind every amount on the face of cash flowsstatement. This gives the preparers of financial statements opportunity to takeadvantage of this lapse. An enterprise could utilise factoring to drive up cashbalance on the financial statements. It is noteworthy that poor cash flowswhile the two other financial statements composites are good is a signal thatthere is a smoke. Page | 30
  31. 31. Basics of Cash Management for Financial Management & Reporting7 Use of Communication and Public Relations Skillfor Cash Management Enterprise should avoid the practice of getting in touch withclient/customer on credit control, solitary when the need arise for client tomake payments. Courteous e-mails, telephone calls, Short Message Service(SMSs), visits to express appreciation are treasured gift of gratitude andkindness. Additionally, yearend gift of souvenir, which at the same timeserves as publicity and promotional tool, and presence at the ceremonialevents of client/customer and their key officers are qualitative mechanismsthat can assist cash inflow, reduce bad debts and cost of collecting debts.Contemporary business is built on relationship; good rapport withclient/customer and every source of inflow is crucial. A dedicated well-polished professional(s) can handle credit control function adequately, andbring into play timely follow up that closes the gap in a professional mannerthat does not present an outlook of pestering. Close working relationship with bankers is pertinent for cashmanagement. Ability of a treasury person to work into the bank and come outwith result is a measure of efficiency. In organisation, staff and managementare less concern about how finance is managed; their important concern istimely provision of cash for remuneration, operations, projects, officemaintenance, and others as need arise. The survival of every firm dependsgreatly on cash inflow. A good finance management understands workinghabit of the customer/client and her payment policies The fact that cash is king should not intoxicate treasury. It is a smartdecision to intimate creditors of the organisation’s liquidity condition andreach a favourable date for payment to preserve creditors’ confidence in theenterprise. Getting creditors acquainted on time enhances their willingness to Page | 31
  32. 32. Basics of Cash Management for Financial Management & Reportingflex payment terms particularly during unusual circumstances perhaps tojustify business relationship. The person that experienced it best tells Story.The company’s liquidity problem could become a wild bush fire, especially insmall size industry. This will give opportunity of deferring payments, workingcapital option, without adverse consequences. A business can create a good reputation or otherwise throughmanagement of creditors. By one mean or another, every organisation is anagent to its customer/client. Equally as in normal principal-agent relationship,no principal will be happy on the news of bad treatment of her contractors byher agent. Building and maintaining good reputation is paramount forsustainability of business. Good cash management takes care of everystakeholder’s interest. Generally, finance chiefs bother about salary andshareholders’ interest, but treat creditors’ payment with levity. Who knows,your creditors can be your brand ambassadors and can have enormousinfluence on your business. Furthermore, creditors are the next source offinancing enterprise after shareholders; future negotiation with the creditorscould be impaired. It is wise to organise payment logically. Entities owe smallest debts areoften the most restless; they spread default news, aggravate situation and cande-market quick and fast. They should be paid-off as soon as possible.Listening skill is imperative, cash management practice demand carefullistening to external and internal clarifications and utilising the information inprioritisation. A listening finance is a great finance.8 Cash versus Profitability One major problem with the current global capitalism is the wrongimpression that earnings are the acme of organization success. This Page | 32
  33. 33. Basics of Cash Management for Financial Management & Reportingoverreliance and pressure has considerably dwindled the quality of earnings.Besides, profit is short term and therefore imposes myopic insight intobusiness vision. While cash is like blood, profit is like water to everyenterprise. Organization could utilize the duo as performance metrics.However, better decision would be made using cash when liquidity is the keylimiting factor. Profit, alongside other variables such as cash management, isthe determinant of cash flows. Enterprise can operate where profitability isdying, but cannot continue as a going concern with no cash because billscannot be paid with profit, but profitability will catch up eventually whenmargin loss stifles out cash. The ravaging global meltdown is a result of everyindividual selling without recourse to corporate governance, credit risks,profitability, until the liquidity disappeared completely from the market. Netcash flows is a more appropriate measure of profitability in the end because inthe long term it is accurately done; for a good enterprise, in the end, cashflows must be positive. The two basic underlying assumptions of financial reporting are accrualsand going concern. The real measure of organisation performance is cash.Organisational performance is evaluated by ability and certainty to generatecash. No matter the immensity of profit/reserve or asset, convertibility to cashor cash equivalent is critical. Enterprise must be cautious about cash flow;quest for profitability should not be allowed to kill cash flow requirementbecause it is vital for organisation’s solvency and survival. Profitability is notall that matters; cash-generating capability is germane, a profitable venturethat generates less cash than the cash consume is a bubble. That is, Cash flowis a major determinant of going concern status of enterprise. While cash isessential for organisation survival and short-term nature, profitability is abasic requirement for growth and development in the long term. A good cashmanagement function is analogous to the three Rs (Risk, Return, andRelationship); Risk – risk of cash management, Return – Profitability,Relationship - Cash and Profitability relationship. Page | 33
  34. 34. Basics of Cash Management for Financial Management & Reporting High-quality cash management is apparent in positive cash flow, excessof cash receipt over cash payout with smart deployment of excess. Poor cashmanagement can lead to increase expenses like finance charges, extrainventory cost. External and internal business environments influence cashrequirements and inflow of organisation; so, enterprise should revise cash-management strategy as realities demands on regular basis. During the periodof pressure on cash, profit is adversely affected. This is common at theinception of new business, restructuring exercise, business usual season oflow cash inflow, period of business expansion, and others. Every organisationrequires strong cash management. To keep company afloat in hard times, cashmanagement is vital, not accounting profit. The most important work of Finance Chief in a more difficult macro-economic environment is to ensure that the company has good cashmanagement to be financially healthy, and meet obligations at any time. Theopportunity of capital market for funds may not be available every time in thefuture, as we are presently experiencing, cash management functions will bethe redeeming feature and would be more important and appreciated. Forstrategic control purpose, cash report forms actual to be compared with cashforecast to enhance system as compared to result-oriented style. To perk upnet cash flow, disbursement procedures should be enhanced by continuouslykeeping an eye on account payable on a regular weekly or monthly schedule,constant evaluation and taking advantage of discounts for early payment, payas close to the due date as possible. Cash flows differ from profit by timingdifferences, which impinge on capital assets generating income in the futureand working capital utilisation. In the end, there is a positive correlationbetween profitability and net operating cash flow. Thus, analysis of therelationship between profitability and net operating cash flow can revealcreative accounting. Page | 34
  35. 35. Basics of Cash Management for Financial Management & Reporting9 Foreign Currency Cash Management Foreign exchange rate fluctuation can push a bottom line from profitunto loss. Contrary to the believe by some finance folks that exchangedifference is an ordinary paper profit/loss, the risk of foreign exchange isbasically on profit and it is real. The main issue on foreign currencymanagement is hedging of exposure to adverse foreign exchange differenceand encouragement of currency speculation for profit. Generally, foreignexchange risk hedging is either forward contract or option rate. To reduceinherent foreign exchange risk conversion, enterprise can hedge the risk byforward contracts, fixed forward or floating/option contracts; invoicingforeign clients/customers in local currency; and matching income againstexpense/expenditure in the domiciliary bank account. Other strategies areprotection clause on sale price in foreign currency or adjusted exchange ratemoves outside a defined range; invoicing in a strong currency; and pricingpolicy, by building extra profit margin into selling price to act as a cushion inthe event that exchange rates move adversely. Superior foreign exchange management utilises innovation tostrategically manage cash to achieve organisation’s objectives by adoptingintegrated liquidity and investment to optimise cash and enhance efficientallocation of resources. The basic manual to unleash the immense opportunityis the central/reserve bank’s foreign exchange manual as updated from time totime. For instance, proceeds of export in the domiciliary account affordexporters (of goods/services) unfettered access to funds like ability to makeoffshore fund transfer above the statutory limit. Another example is theopportunity to transfer cash above the statutory limit as invisible transaction.To hedge losses that can result from foreign exchange transactions,multinational organisation should settle intercompany indebtedness throughintercompany accounts and settle the net payable through foreign exchange. Page | 35
  36. 36. Basics of Cash Management for Financial Management & ReportingThis will drastically reduce bank charges and interests on domiciliaryaccounts. Corporations should take advantage of Society for WorldwideInterbank Financial Telecommunication (SWIFT) and others such as NIFT,NEFT, CIFTS, RTGS through their bankers to achieve effective and efficientforeign currency exchange management. In a trade incident, a company madea remarkable saving by transferring fund, even above statutory limit, asinvisible transaction, and avoided hassles of buying foreign currency andrestriction of maximum fund transfer limitation. Generally, cash management measurement basis is historical cost, butforeign exchange accounting is not. Reporting of foreign currencytransactions should be at the current (spot) rate, rates of exchange at the dateof the transaction (or a reasonable approximated average). While non-monetary (assets and liabilities) items should be reported at the historical cost(exchange rate at the date of the transaction), monetary (assets and liabilitiesand cash flows) items should be reported using the closing foreign exchangerate. The use of official rate, particularly to value monetary item, is laudablenow that national central/reserve banks and monetary authorities areconverging interbank rate with official rate. Today’s current rate is historicaltomorrow, thus the consequential exchange difference. Foreign exchangereporting impacts three items, namely; foreign currency transaction, foreignoperations and exchange rate translation difference. In summary, the manualfor foreign exchange cash management reporting is the InternationalAccounting Standard (IAS) 21 and other associated International FinancialReporting Standard (IFRS) interpretations Generating revenue and incurring expense in foreign currency lead tofluctuations and associated risks which could impact an enterprise. Besides,the nature and operations of foreign currency transactions give way forcomplex situations that could harbour irregularity. For that reason,Management should put up adequate controls to check hoax while auditors Page | 36
  37. 37. Basics of Cash Management for Financial Management & Reportingshould tread the path of prudency and disclosures of foreign currency impacts(particularly on earnings) to minimise creativity.10 Conclusion and Recommendations Cash management is a technical and sensitive function that requireswell-trained professional to be in charge. It is a complex and evolving aspectof finance that is on reducing cash conversion cycle to achieve efficiency andeffectiveness in the management of the most liquid asset of every entitythrough forecasting and planning, internal control, cash management tools,and other models. Cash flows ratios, that are recently popularised, assistmanagement and financial analysts to decipher the facts behind the figures onthe financial statements. This ratios are so powerful that they can revealSWOT (strengths, weaknesses, opportunities and threats), errors, creativityand avert corporate failures. Management should institute sturdy internal control. Safeguard of cashcomes in strongly because an entity can only manage what it has. The fivecomponents of control namely; control environment, risk assessment,information system, control activities, and monitoring control should be inplace to ensure cash is safeguarded. Management should be wary about anemployee, particularly the one in charge of cash, getting exclusiveunderstanding and capacity on the system as this can heighten the tendency tocommit irregularities. Countless number of corporate failures were a result ofimprudent management of cash. Accountant could be skimpy, they couldwork within the accounting standard or work out of accounting standards toincrease reported cash flows. Hence, the sustainability cash flows positionwould be distorted not enhanced. Page | 37
  38. 38. Basics of Cash Management for Financial Management & Reporting Good working relationship with clients/customers and other medium ofcash inflows is vital for cash management; moreover, a good sales day is thegood day in finance. The fundamental secret of a successful creditcontrol/management is relationship. Similarly, close working relationshipwith bankers is pertinent for cash management. Though treasury is powerful,it should rather be used to build an adoring brand for the entity beforestakeholders. Furthermore, Profitability as the acme of organisational successhas imposed myopic insight into business vision. Net cash flows, incollaboration with profitability, are a more appropriate measure ofperformance, particularly in this period when global melt down is ravaging. This paper recommends that business survival rest heavily on liquidity;therefore, organisations should give cash management serious attention andconsider cash management a strategic partner within the business. New start-ups must give cash management serious attention; possibly, it should beplaced ahead of profitability. Secondly, organisations should have a dedicatedmodule for the purpose of cash management because accrual accounting is notapt for cash management. Beside the usual accrual basis of accounting, asecondary accounting subsystem base on cash basis to aid forecasting andplanning, enterprise approach, strategic business decision, cash flows analysis,and maximise returns on cash, should be operated as standalone or intergradedinto the system like Enterprise Resource Planning (ERP) system.Inventiveness stem from order and routine, simplicity is the ultimatesophistication; finance with cash management built on a dedicated cash basisis flexible, speedy, and shows where cash is coming from and where it isgoing. Small enterprises can take advantage of the robust in databasemanagement software by deploying the likes of Microsoft Access and utiliseanalytical powers of Microsoft Excel to manage cash. Thirdly, regulatory bodies should mandate disclosure of actual corporealcash and cash equivalent balance and reconciliation of same to book balance Page | 38
  39. 39. Basics of Cash Management for Financial Management & Reporting(as per audited financial statements), as well as disclosures of foreigncurrency impacts (particularly on earnings), to enhance quality of financialreporting. Furthermore, because cash is a better indicator of performancereality, there should be an increase disclosure of operating cash flows i.e.operating cash flows should be analysed and form part of financial statements.This will afford the users of financial statements the opportunity to see therealities behind the figures on cash flows statements. Page | 39
  40. 40. Basics of Cash Management for Financial Management & ReportingBIBLIOGRAPHY Akinsulire, O., 2002, Financial Management, El-Today VenturesLimited, Lagos. American Institute of Certified Public Accountants (AICPA), 2005,Management Override Of Internal Controls: The Achilles’ Heel of FraudPrevention, the Audit Committee and Oversight of Financial Reporting,American Institute of Certified Public Accountants, Inc., New York, NY10036-8775, Baharom, K., 2009, Article Source: BDO Seidman, 2008, Dealing with Economic Turbulence, BDOConsulting, a Division of BDO Seidman, Connellan, M., 2011, Show Me The Kwan, Jerry! Cash Is King,Seeking Alpha,, December 8, 2011 Dechow, P., 1994, Accounting earnings and cash flows as measures offirm performance: The role of accounting accruals, Journal of Accounting andEconomics 18(1): 3-42. Gallanis, M., 2008, Stay Strategic in Times of Crisis by BulletproofingTreasury, gtnews - Handbook Of International Auditing, Assurance, And EthicsPronouncements, 2007, Edition International Standard on Auditing (ISA) Page | 40
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  42. 42. Basics of Cash Management for Financial Management & Reporting Putra, 2009, Creative Cash Flow Reporting,,, Saturday, April 4,2009 Soaga, H. G., 2011, Client’s Staff Management for Audit PracticeDevelopment,, November 4, 2011 Winning Investing, 2002, Spot Accounting Red Flags the Easy Way Usecash flow to detect creative accounting, Winning Investing • 411 PalmerAvenue • Aptos, CA 95003, published 12/15/02,, Weiss, P., 2000, Calculating Cash Flow Ratios, The Motley Fool,, July 07, 2000. Page | 42