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.
Increase the speed of collection on receivables.
(APPENDIX B)
To explain how each principle of cash management ensures the reliability of a company's financial statements and provide examples of how they might work in a real company, let's go through each principle:
1. Invest idle cash: This principle ensures that unused cash is invested to earn interest or gain returns, thereby maximizing the company's financial resources. For example, a real company might invest their idle cash in short-term government bonds or money market funds to generate additional income.
2. Plan the timing of major expenditures: By carefully timing major expenses, a company can manage its cash flow effectively and prevent unnecessary strain on its financial position. For instance, a real company might plan the purchase of new machinery or equipment during a period of higher cash inflow, such as after receiving a large payment from a customer or through a strategic loan arrangement.
3. Delay payment of liabilities: This principle involves strategically postponing the payment of company liabilities, such as vendor invoices or loan repayments, to maintain a healthy cash balance. For example, a real company might negotiate extended payment terms with suppliers or lenders, allowing them to hold onto their cash for a longer period before making required payments.
4. Keep inventory levels low: By minimizing inventory levels, a company can reduce storage costs and the risk of obsolescence, thereby freeing up cash for other essential business needs. For instance, a real company might implement an efficient inventory management system to ensure that they hold just enough inventory to meet customer demand without tying up excessive financial resources.
5. Increase the speed of collection on receivables: This principle focuses on accelerating the collection of outstanding customer payments, which helps improve cash flow and reduces the risk of bad debts. A real company might implement more streamlined payment processes, offer discounts for early payment, or utilize debt collection agencies to expedite the receipt of overdue balances.
These principles of cash management, when executed effectively, enhance a company's ability to maintain reliable financial statements by optimizing the utilization of cash resources, managing cash flow, and reducing financial risks.