Cash Management Matrix For each principle in the matrix,describe how the principle ensures the reliability of a company's financial statements and provide at least one example of how the principle might work in a real company.
Principles of Internal Control
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical, mechanical, and electronic controls.
Independent Internal verification.
Other controls.
Principles of Cash Management
Invest idle cash.
Plan the timing of major expenditures.
Delay payment of liabilities.
Keep Inventory levels low.
To understand how each principle in the cash management matrix ensures the reliability of a company's financial statements, and to provide an example of how the principle might work in a real company, we can examine each principle individually:
1. Invest idle cash:
This principle ensures that a company's idle cash is not just sitting idle, but instead is invested to generate some return. By investing idle cash, the company can earn interest or other returns on its funds, which can contribute to the accuracy and reliability of financial statements. For example, a real company might invest its idle cash in low-risk Treasury bonds, which provides a steady stream of income and increases the overall cash flow of the company.
2. Plan the timing of major expenditures:
By strategically planning the timing of major expenditures, a company can ensure that it has sufficient cash flow to meet its financial obligations. This principle helps to minimize the risk of cash shortages or excessive cash outflows, which can impact the accuracy of a company's financial statements. For instance, a real company might plan to make a major equipment purchase during a period of high cash flow, ensuring that it does not strain its cash reserves and maintains reliable financial statements.
3. Delay payment of liabilities:
This principle involves strategically delaying the payment of liabilities to optimize cash flow. By delaying payments for as long as possible without incurring penalties or damaging relationships with suppliers, a company can maintain a healthy cash balance and reduce the risk of cash shortages. For example, a real company might negotiate extended payment terms with its suppliers, allowing it to hold onto its cash for a longer period and ensuring accurate financial statements.
4. Keep inventory levels low:
Maintaining low inventory levels is important for cash management as it minimizes the tied-up cash in unsold inventory. By carefully monitoring and managing inventory levels, a company can avoid excessive cash allocation to inventory and free up capital for other purposes. This principle contributes to the accuracy of financial statements by ensuring that the value of inventory is accurately reflected. For instance, a real company might implement just-in-time inventory management techniques, reducing storage costs and improving cash flow.
Overall, these principles of cash management help to ensure the reliability of a company's financial statements by optimizing cash flow, minimizing the risk of cash shortages, and accurately reflecting the company's financial position.