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: soaga_hameed@yahoo.com

H. G. Soaga, 2012. All right is reserved.

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Basics of Cash Management for Financial Management & Reporting

Abstract
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.

Terms: Memorandum Record, Factoring, Lead-time.

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Basics of Cash Management for Financial Management & Reporting

Introduction

The accrual basis of accounting is adjudged appropriate for accounting

for performance and measurement of state of affairs. On the contrary, because
of the precariousness of cash under the accrual method, cash transactions are
reconciled and controlled using the cash basis of accounting. Real
accountability comes up with corporeal cash flow. This underlines the cash
basis of accounting, which is prominent in government accounting.
Ordinarily, unlike other accounts, cash is hardly subjected to accounting
falsification because cash is difficult to manipulate since it must be reconciled
to actual bank balances, which can almost not be overstated. Cash is a volatile
section of financial reporting; it is link to virtually every account in the
financial statements. It cuts across every element of financial statements vis-avis assets, liabilities, equity, income, and expenses. The earth is globular and
moves 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 and
financial strategy, financial stewardship, risk management, value creation,
cost control, management of operating model, budgetary control and
performance management, negotiation, and decision support among others.
Cash management is closely interlocked with other key management
processes. Quality data is the means of support of cash management. Cash
management system with inadequate capacity can leave organisation out in
the open to dawdling, scrappy process, doubtful data and deficient audit trail
for decision-making and stewardship. According to a US bank study, 82
percentages of business failures are due to poor cash management.
Cash is required to meet vital purposes of transaction, precaution, and
speculation. Organisation should be able to pay for required goods/services as
the need arise to meet transactionary purpose, make provision for unforeseen
circumstances that could arise to be precautious, and be able to take advantage
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Basics of Cash Management for Financial Management & Reporting

of unanticipated opportunities and speculations (like investment) as they arise

to increase shareholders wealth. Cash is paramount aver of wealth; deferred
consumption save cash for precaution reasons, or speculated investment to
create assets for future consumption. Missed opportunities because of poor
cash management are always too high that the organisation may not have it
again. Cash to every organisation is like blood to every man; cash is ultimate
and is the liquid asset ever. Effective and efficient management of cash is
essential for the survival and growth of organisation. Good cash management
can reduce the finance cost of the organisation and reduce expenses in general
because of timely allocation base on precedence items. Cash management is
the good and adequate utilisation of liquid funds (cash and cash equivalents)
that are at the exclusive disposal and use of an organisation for optimal
utilisation, survival, and profitability. Survival of enterprise relies heavily on
cash management; cash management in contemporary world is no longer
intuitive, poor cash management can lead to collapse of enterprise. Cash is the
best 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 would
have been averted if serious attention were paid to cash management.
Good cash management allows enterprise to utilise most of cash that
would have been idle or susceptible to theft and as well assist the management
in anticipation of cashless situation. Shareholders primacy is important;
rather than allow payables and receivable keep cash longer, good cash
management system will give the cash back to shareholders. In any case,
strong cash flow is an indication of generating real value for the owners. It
was recently stated by Citigroup that stock price performance of more liquid
companies is 27% higher than their less liquid counterparts. Cash
management 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
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Basics of Cash Management for Financial Management & Reporting

intertwined, such that one is a control or confirmation of another. Good cash

management can be carried out with the use of cash positioning report, cash
flows statement, bank reconciliation, cash reconciliation, and cashbooks.
However, apt cash management utilise cash forecast, credit control and
management, cash flows report and cash budget alongside.
Cash management is a complex and evolving topic. It can be described
as services rendered by banks to customers. History has it that banks did cash
management free of charge as a value added, competitive edge to their
customers before the current empowerment of cash management with
seamless unprecedented automation and control. In the current develop
veracity; banks now make income from providing plethora of sophisticated
cash management services to their customers who are mostly big and
multinational enterprises with the aid of information technology
consolidation, workflow efficiencies and better straight-through processing.
Banks provide treasury and liquidity management services such as account
reconcilement, disbursement control, cash concentration, zero balance
accounting, advance web services, balance reporting, cash collection, cash
transportation (armoured car), cash concentration, wire transfer, automated
clearing house facilities, and other services. This paper describes the basics on
cash management for the purposes of financial management and financial
reporting. This paper covers cash management vis-a-vis financial
management and financial reporting, which are important to every
organisation for management of organisation and compliance. This paper
consists of ten sections. The second section discusses efficient cash
management; the third section explains cash management tools; the fourth
section examines cash flows analysis while the fifth section presents cash
management and fraud. Section six discusses creative cash flows reporting;
section seven examines use of communication and public relations skills for
cash management; section eight examines cash versus profitability; section
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Basics of Cash Management for Financial Management & Reporting

nine discusses foreign currency cash management; and lastly, section ten is
the conclusion and recommendations.

Efficient Cash Management

Efficient cash management is the reduction of the cash cycle as short as

possible such that cash can go fast through the cycle of activities. This
drastically reduces financing cost such as lost opportunities due to lack of
fund, interest costs and make cash yield returns by cash sweep to investments
of cash in opportunities and fixed deposits, which yield far less than the
former and most definitely below cost of capital. Opportunities could be
inorganic like investments in (real) estate, merger and acquisition, properties
and or idle capacities that are gold decoy with filth and looking for insightful
investors that can polish and dispose them of within a short period and
appetite-wetting premium. Real investment is by far higher returns yielder and
good for national economic development, but it is very risky: long term,
unpredictable and ties-up cash. A good knowledge of risk management and
investment planning and appraisal is a strong mitigating factor, so a specialist
can be assigned full-time to ensure accurate investment decisions. There was
an industry experience of a company with a foresighted finance leader that
took advantage of inorganic investment by tying up cash on estate; the
company survived long on the huge reserve created while competitors heads
were deep below the sea when meltdown hit the industry. This example is a
guide, there are numerous of such opportunities in hazy forms.
Cash efficiency does not come in naturally. It is a result of forecasting
and planning, working capital cycle management, good internal control
system, best utilisation of cash comparative analysis of competitors models,
enterprise approach to cash management (i.e. ensuring payment is made from
receipt), strategic management of top-line, transformational (rather than
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Basics of Cash Management for Financial Management & Reporting

transactional) cash management strategy, among others. The primary

responsibility 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 free
cash flows, which reflect succinctly at the level of free cash flows. The three
drivers of cash: debtors, creditors, and inventory should be managed to
enhance cash efficiency. Efficient cash management prepares organisation for
problems, as well as breaks. Growth such as merger and acquisition, new
product development and increase sales ingratiate cash. In practice, enterprise
may struggle to pay even essential bills in the period it expands; good cash
management is watchful of this paradox by the exploit of cash projection in
conjunction with other tools to control the situation. The finance unit should
make better and more economical cash management to better the
shareholders wealth; competitive advantage should be leveraged to create
value over time. In an experience, a CEO found new revenue for the
company, that is finding it hard to survive and required new revenue stream
that can not come from its old business, but the green finance chief
micromanaged and achieved closure of this because of consequential cash
flow challenges on the expansion.
Cash management should go beyond the traditional approach, which
sees cash management as superfluous in the period of growth but a necessity
to survive economic down-turn. Enterprise need to come to terms with
utilising cash management for business and competitive analysis. Competitive
analysis such as the Industry analysis (which certainly utilises Porter's Five
Forces Model), Strategic group analysis, SWOT analysis, Value chain
analysis, and GE business screen matrix (a derivation of the BCG
growth/share portfolio matrix). The appropriate technique is determined by
the nature of the pressing problems that are faced. Blind-spot analysis,
Competitor analysis, Customer segmentation analysis, Customer value
analysis, Functional capability and resource analysis, Management profiling,
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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
Production expenses

Revenue

Personnel cost

(Financing, Investing)

Other inflows

Cash

Sundry Revenue

Capital expenditure

Sales
cost

&

Distribution

Office/Overhead
expenses
Statutory expenses
(i.e. tax)
Other outflows

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Basics of Cash Management for Financial Management & Reporting

Cash Management Tools

The corporate objectives of an enterprise should resonate in the cash

flows structure. Aside traditional feedback, feed forwards system should be
built into cash flows management system to properly align corporate
objectives, vision, and mission with the enterprise actual finance, be able to
analyse how far for corrective, and update purpose. Cash planning is a
strategic part of strategic planning. Cash flows forecast is managementplanning mechanism for decision-making purpose, it is the foundation of cash
management. 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 on
comprehensive knowledge of business is a salient groundwork for the
preparation of cash-flow forecast. Adjustment of cash flows for the realities of
time value of money is important. Cash flows forecast is an early warning
device for financial management, it encourages proactive financial
management. It sets expectations and challenges management to meet target
prudently, shows problems and how to ameliorate such, make sure the
organisation do not run out of cash. Cash forecast should involve divisional
managers, because divisional heads have better understanding on the expected
cash flow in respect of their units. Expected time for cash receipt and payment
should be considered irrespective of when such is earned or incurred. The
actual balance in the bank accounts should be the opening cash balance, not
the book cash balance; similarly, the closing bank balance should be the
closing balance in the bank accounts at the end of the financial period. It is
noteworthy that cash flows reported in financial statements obliquely reflects
the internal cash flows report for cash management. Unlike external financial
reporting, management cash flows report is detailed (not categorisation into
operating, investing and financing activities, and movement in cash), reveal
the actual cash balances as depicted on figure 2 below (rather than ledger
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balances, which is susceptible to accruals, thus could be exploited for creative

accounting purposes).
In the ancient time, peeping into the future by specialised warlords was a
lucrative business and imperative for empires and ventures. Soothsayers made
fortune from forecasting: Joseph/Yusuf, in holy books, became stupendously
wealthy and a head-of-state because of his interpretation of dreams (data). In
todays information age, forecasting is an important tool for planning and
decision-making to attain corporate success. Successful finance chiefs are
great forecasters. Forecast is an essential financial management tool, it
discloses Strengths, Weaknesses, Opportunities, and Threats (SWOT) that
forestall solvency, utilises opportunities, engender profitability, among others.
Forecast should be prepared regularly to reflect the destination of the entity on
forth night basis and monthly, aside the beginning of the year forecast. Cash
forecast allows the identification of gaps in finance before liquidity and
solvency disasters struck the going concern foundation. Strength of cash
forecast and subsequently cash budget is in the management projection
dexterity. Cash forecast depends heavily on historical information and
judgemental rulings base on business experience. Cash management practice
demands that management should avoid human reaction to historical
experience that could lead to imprecision. Forecast can be esoteric because it
goes very deep and require insights beyond even Monte Carlo; it can be
exceedingly judgemental as nature of business demands. Forecast should be
organisation-based, consider past forecasting errors, and important trends in
the external environment like economy, law, politics inflation. Seasonal
variations that are usual and the ones that are foreseen should be considered in
cash flows forecast. Sales forecast is the most important item in the
preparation of cash forecast and budget; normally, cash inflow from sales is
the premier and other forecasts are dependent on it. To enhance the accuracy
of sales forecast, internal and external environmental factors should be
considered.
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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 organisations corporate
objectives for the entitys 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 Budget
Actual Balance
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Cash Position Balance

(After
adding
back
provisions and adjusting
for timing differences &
amendments)

Cash Book Balance

(After adjusting for
timing differences &
amendments)

Cash-Flow Statement
(After adjusting for
timing differences &
amendments)

Basics of Cash Management for Financial Management & Reporting

Realistic and effective rolling forecast is a cutting-edge performance

management system. It assists management to make nimble measurement and
well-informed decisions faster; more time is spent managing the future. The
purpose of forecast has been grossly misinterpreted, organisations concludes
cash forecast report during the year under consideration. Forecast is a mean to
an end; inform decision. Forecasting seeks to assist management on
information decision-making that would influence outcomes. For forecast to
shape outcomes, it process should be as short as possible (remember
timeliness as an essential characteristics of information), it should centre
attention on only few drivers, it should be pragmatically drawn up on business
realities, it should not be presented as commitment to guide against distortion,
bias and overambitious. Distorting forecast for target affects integrity of
forecasts and action plans
Cash position is a critical report that the finance chief should spend the
first part of the day on before any payment. It is the nucleus of cash
management system. Besides, it is a control mechanism that ensures
arithmetical and accounting accuracy (of postings), it assists in the detection
and correction of errors such as casting, commission, omission. Cash position
is for internal reporting purpose; it is a good memorandum record and
explains 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/cheque
exchange, investments, fixed/time deposits, transfers) minus cash outflows (to
payables 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 position
can be categorised base on the nature of payments, as well as receipts, of an
organisation. A model daily cash position report is easy and time saving to
prepare. To ensure good practice, it is advisable that previous day report be
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ready before any disbursement. Quality financial reporting system will have
the cash position reconcilable to ledger balances.
Once an enterprise does not operate cash only policy there are bound to
be account receivables. Therefore, customers/clients should be appropriately
prequalified to weed out ones with high default risk and reliable invoice
should be sent timely. Late payment of outstanding and bad debt is big
problem on cash management; they can result in cash flow problems that can
cripple organization of any size. Credit control can be a simple task where
there is stringent and keenly monitored credit management policy.
Conversely, delinquent debtors are ingenious with the truth when payment is
demanded. They come up with any of the various excuses such as the cheque
is in the post, the document to process payment is just being signed now, or
request for invoice to be resent? When credit control is getting to this level,
outsourcing could be the solution to improve cash flows, reduce debtor days
and potential bad debt, or management needs a very tactful credit
management.
Weekly credit control report is a vital cash management tool that
significantly assists management decision making. The report shows new
invoices, outstanding invoices, expected payments, payments received and
other details base on the nature of business and level of details required.
Collectability of debt and creditworthiness of the customer are effective
contingent consideration that affects cash inflows. Prompt collection from
customers/clients, minimum collection cost, aggressive follow up on overdue
invoices, and possibly, requires up-front deposits at the time of sale are great
formulae that aid business growth. There should be dynamic model for
customers/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 Sales
Outstanding (DSO). Sales sell to anyone irrespective of the customer/client
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payment capacity that would often result to bad debt, to achieve their
performance. Sales commission plan should be drawn to give the enterprise
the best compensation; it should be at the best interest of the company and
should be aligned to corporate objectives. For instance, sales commission
could be structured such that commission would only be paid when customer
pays, to motivate collections, but should avoid sales taking up credit control
tasks rather than sales. Judicious use of Bad Debt Reserves to Receivables
ratio assists in improving cash flows and earning through strategic credit
management. Finally, the ultimate tool for credit control and management is
relationship. In a business experience, a credit control officer achieved what
other approaches, including restlessness and litigation, could not through
relationship. The best credit control officer is a relationship professional.
Cash/Bank reconciliation is a methodological procedure of comparing
two sets of related cash/bank accounts or records from different systems and
any other sources, categorizing and analyzing differences, and making needed
amendments. Bank reconciliation is a powerful accounting and control
process by which an entity's cashbook balances is compared with the bank's
cash balance as of a given period to note any differences. Bank reconciliation
to a business is like a compass, map, and sextant to a traveller to navigate. It is
the heart of every organizations book keeping system. Bank reconciliation
unveils reconciling items, which result from timing difference, and adjusting
matters for necessary corrections. Life is not perfect, mistakes are made; bank
reconciliation exposes errors that are inadvertent and the deliberate ones,
timing differences and bank charges/interests to light. Effective and timely
management of bank reconciliation activities significantly increases
management ability to proactively identify and resolve issues that can result in
misstatements in financial reporting records. Simplicity of preparing bank
reconciliation statement is a function of the complexity of operations. The
daunting veracity of bank reconciliation statement is that it must balance,
nothing like limbo. Weird experience on reconciliation can be caused by
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Basics of Cash Management for Financial Management & Reporting

many hushed reasons like incorrect beginning balance (i.e. item(s) not
considered 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 after
dispatch of statement), and many others. These problems are preventable by
setting-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 be
made in the accounting system, segregation of duties must be instituted, and
reconciliations should be appropriately filed and available for future
reference. Reconciliation is best done periodically in a continuum i.e. weekly,
monthly, or quarterly depending on the size, the level of activity, associated
risk of error and complexity of operation. Where the system is poor and
reconciliation has piled up for many periods, it is highly cumbersome and
difficult to reconcile. In such situation, there is a need for high technical skills
and experience, particularly on the comprehensive understanding of business
of the organization. To solve such problem there are two approaches:
periodic/graduating reconciliations and lump sum/single reconciliation. The
periodic/graduating reconciliation is easier, methodological, recommended,
but time-consuming, while experts use lump sum/single reconciliation that is
facilitated by the design and adoption of special reconciliation model.
Organizations can forestall the burden associated with reconciliation by using
automated bank reconciliation. Many accounting software come with bank
reconciliation automation, which reduces the time it takes to complete the
reconciliation considerably and simplify reconciliation unto a straightforward
task.
The external reporting counterpart of cash budget and management cash
flows analysis report is statement of cash flows. The comprehensive
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Basics of Cash Management for Financial Management & Reporting

explanation for statement of cash flows is International Accounting Standard

7 (IAS 7), which requires the presentation of information about the historical
changes in cash and cash equivalents of an enterprise. It is categorisation of
cash flows into operating, investing, financing, and change in cash and cash
equivalent activities. It is less detail when compared to management cash
flows report, which is not restricted to just four categorisation, and it can be
fiddled because it is accrual base (although reconciled using cash basis) and
not the actual cash expended and received. In practice, cash flows statement
can 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 in
the bud easily. However, it is noteworthy that every cash management tool
must be relevant, reliable, consistence, understandable, timely, and
comparable.

Cash Flows Analysis

Cash flows analysis can be used to reveal relationship of values, group

of values between cash and other accounts. It reveals trends of events over
accounting periods and evaluates the strengths and weaknesses in the internal
environment, 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 generated
from and where cash go to and reveals the relationship therein. For instance,
cash conversion cycle (CCC) also called cash flows cycle (CFC), analysis the
length of time between payables and receivables. This aid the enterprise to
minimize the length of time cash are tied-up, thereby reduce the working
capital needed for operations. Cash flows analysis can be presentational
analysis in form of analytical review, cash flows analysis or cash ratio
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Basics of Cash Management for Financial Management & Reporting

analysis. Prediction of business future is crucial from all perspectives. Early

warning signal aids preventive actions; cash flows analysis can be used, using
financial accounting ratios to predict business failure.
The common and known form of cash flows analysis is on cash flows
ratios, with nominators and denominators from audited, and assured financial
statements cash flows statements, balance sheet and profit and loss
accounts. For financial management purposes, management cash flows
analysis is more detailed and customised to the nature of an organisation
operation. Unlike cash flows statement, that is uniform irrespective of
organisation under direct and indirect methods, cash flows analysis of a
trading company is clearly dissimilar from that of a manufacturing. In fact,
within trading enterprises, as an example, management cash flows analysis
report could be very distinct because of financial management strategy, which
is drawn from corporate objectives, dictates the drivers. Management cash
flows analysis reveals the actual situation in details and tremendously assists
management in forecasting, planning, and control. Management cash flows
analysis is different from cash budget and cash forecast, it is a stewardship
report in details for both inflows and outflows
Preparation of management cash flows analysis report can be tedious
where there is no automated cash module. In most organisation, it is tedious
and as a result it is either not done or it is carried out once in a blue moon
when there is strong management request for one, example is for annual
fiscal estimation purpose. Automation of this function rarely comes with
financial accounting software because of the above-discussed issue of
customisation. Software designers can build a special cash module for the
purpose of cash flows analysis as standalone or integrated module in the
accounting system. However, for expert modeller, this is no problem; excel
affords the opportunity to put-up creativity in generating this important report
timely, accurately and with ease.
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Basics of Cash Management for Financial Management & Reporting

While finance primarily look ahead, understanding past financial

performance in order to predict accurately financial future is very important.
Aside the preparation of management cash flows analysis, finance should
evaluate, and explain the causes behind the figures to see the root cause and
corrective action needed. Cash ratios are powerful tools that assist
management decipher fact out of figures, know where to concentrate efforts,
ascertain quality of report, evaluate efficiency of cash utilisation and future
potentials, assess credit worthiness for loans/credits, and inter firm
comparison to bring into light management competitiveness. This analytical
tool 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, financial
meltdown, has made cash ratios appreciated and a popular metrics as
performance indicators and control tools. Besides the famous ratios such as
current, acid test ratios, the following are samples of recently popularised cash
ratio.
4.1 Operating cash flows ratio (OCF)
The operating cash flows ratio is one of the most important cash flows
ratios. Cash flows are an indication of how cash move into and out of an
enterprise. Operating cash flows connotes cash flows that an entity accrues
from operations to its current debt. Operating cash flows measures how liquid
an entity is in the short run by relating cash flows from operations to current
liabilities. The operating cash flows ratio (OCF) measures a company's ability
to generate the resources required to meet its current liabilities. The equation
is:
Operating cash flows ratio (OCF) = Cash flows from operations /
Current liabilities
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Basics of Cash Management for Financial Management & Reporting

Cash flows from operations, which is the numerator, is on cash flows

statement, while the current liabilities, which is the denominator, is on the
balance sheet. The ratio reveals how much the enterprise is generating cash
from its operations to take care of its current liabilities. Ratio 1.00 and above
connotes the enterprise is making sufficient cash to meet its immediate
obligations. The higher the ratio, the better the firms liquidity position,
conversely, a ratio lower than 1.00 is an indication that cash has to be sourced
elsewhere to keep the firm afloat. And, the fact that going concern is at risk if
the 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 measure
a company's ability to pay back its current debt. Cash Current Debt coverage
is calculated as follows:
Cash current debt coverage (CCD) = (Cash flow from operations cash
dividends) /Current interest-bearing debt
The cash flows from operations less cash dividend represents a
company's retained operating cash flow is on the cash flows statement, while
the current interest bearing debt is on the balance sheet. Where the firms
CCD is 1.00 or higher, the firm is generating enough cash to fulfill its current
debt obligations. The higher the ratio, the more the firm is at ease on the debt
on its balance sheet. The firms industry also determines the comfort zone.
However, when the CCD is less than 1.00, the firm is not making enough cash
to pay back its current debt commitments. Cash current debt ratio is a variant
of acid-test ratio to measure liquidity. It reveals the relationship between the
cash 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

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Basics of Cash Management for Financial Management & Reporting

The cash conversion cycle measures liquidity risk by showing the

sensitivity of cash to investment in resources for operations. It measures time
span in days between cash disbursement and cash collection. Cash conversion
cycle assist on credit purchase and credit sales policies to enhance cash
management.
Basically, the cash cycle calculation can be performed with: Inventory to
product conversion time + receivables collection time - Payables payment
time 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 as
below:
Cash Conversion Rate = Free Cash Flows / Net Income
4.4 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 balance
sheet).
There is no best way of evaluating financial performance and there are
advantages and disadvantages in using earnings per share or cash flows as the
basis of measurement. Earnings before interest, tax, depreciation and
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amortisation, EBITDA, is now commonly used as a close approximation of a

cash 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 or
profit choice. It is generally useful to use both. However, rely heavily on
profit performance measures with a strong emphasis on EPS (Earnings Per
Share) and the price/earnings ratio (P/E).
4.5 Price/Cash Flow Ratio
This ratio compares companys market value to its operating cash flow.
The company market capitalization is divided by operating cash flow. This
could be carried out on unit basis by using market price per share as
nominator, while operating cash per share (Operating cash flow/Number of
shares) as denominator. Some analyst use free cash flows in the denominator
in place of operating cash flow. The closing price of the stock on a particular
day is usually share price. A lower price/cash flow ratio connotes a better
value stock, everything being equal. Calculation of price/cash flow ratio is as
follows:
Price/cash flow ratio = Share price/Operating cash flow per share
It compares the company's share price to the cash flow the company
generates on a per share basis. It is a valuable ratio for a company that is
publicly traded. Because of the realism of cash, the price to cash flow ratio is
often considered a better measure of a company's value than the price to
earnings ratio, most analysts use price/earnings ratio in valuation analysis.

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4.6 Cash Flows Margin Ratio

This is popular with the name burn rate or runaway rate. It shows how a
firm can efficiently transform sales to cash. The Cash Flows Margin ratio is
an important ratio as it expresses the relationship between cash generated
from operations and sales. Every enterprise needs cash to discharge
obligations to owners, creditors, government, and invest on capital assets and
expansion. The calculation is:
Cash Flows Margin Ratio = Cash flows from operating cash flows / Net
sales
The numerator of the equation comes from the firm's Statement of Cash
Flows. The denominator comes from the Income Statement. Larger
percentage indicates better ability of the firm to translate sales into cash. A
pattern of receivables that rise significantly faster than sales may be indicative
of aggressive revenue recognition. It might also reveal the implementation of
lower credit standards as a ploy to capture less creditworthy customers to
creatively 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 the
frequently used total debt/total assets ratio. Like debt to assets ratio, cash
flows from operations to average total assets ratio measures the solvency,
ability to pay debts and ensure going concern. The cash flows from operations
to average total liabilities ratio is better, it measures ability over a period of
time 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

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Cash flows from operations is taken from the Statement of Cash Flows
and average total liabilities is an average of total liabilities from several time
periods of liabilities taken from balance sheets. The higher the ratio, the better
the 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 cash
ratio; it reveals how much an enterprise is able to generate cash from earnings
and the long run sustainability of the firm. This ratio allows for comparing
earnings to cash flows, increasing earnings and decreasing cash flows is an
indication of decrease in earnings in the future. The occurrence of increasing
earnings combined with decreasing cash flows imply accounting shenanigans,
or cash management problems such as cash conversion cycle problem, poor
credit control and management; accounts receivables could increase because
customers do not have the cash to pay. An unforeseen sales slowdown could
push inventory levels up. However, these events can also foretell an earnings
slowdown. 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 enterprises after tax profit divided by the number of shares. The
denominator is the change in operating cash flows, which is found right on the
cash flows statement, represents in a company's accounting earnings adjusted
for non-cash items and changes in working capital. Earnings management can
be 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 enough
cash to justify its performance. In this case, the company is either creative in
reporting or the cash management needs overhauling. The ratio is not
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exclusive; it can be compared with other firms and the trend analysis is a fine
tool. It is critical that cash flow from operations not lag behind net income for
an extended period of time. Whenever a company is not collecting the cash
related to its reported earnings, then it calls into question the quality of those
earnings. If net income to operating cash flows ratio was employed; big
corporate 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 relationship
between bad debt reserves and days sales outstanding to discern how much
the enterprise is taking caution by making adequate prudence against bad
debts. This ratio is necessary on the premise that there is a problem of
possibility of understatement of uncollectable debts when bad debt reserves
are out pacing receivables. The most often adjusted account by external
auditors is receivables accounts and the associated reserves. To calculate this
figure, a company's accounts receivable balance for the end of a certain period
is divided by average sales per day during the same period.
Bad Debt Reserves to Receivables = Bad Debt reserves / Days Sales
Outstanding (DSO)
Days sales outstanding (DSO) is a ratio used to measure the average
length of time that a firm's receivables are outstanding. When DSOs are
increasing, then in most cases the company should book a similar increase in
bad debt reserves. If it does not, then that could serve as an important warning
sign. Bad debt reserve account is on balance sheet. Any receivable written off
during a period depletes bad debt reserve balance, while additional provision
increases the balance. Normally, like in the golden rule of double entry,
increase in reserve leads to corresponding increase in bad debt expenses
during reporting period.

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4.10 Operating Cash Flows to Total Assets

Operating cash flows to total asset ratio is useful for internal assessment
and to compare the company to other firms in the industry. The numerator is
right on cash flows statement, while the denominator is on the face of balance
sheet. It shows the destination of the company. The formular for this ratio is
as below:
Operating Cash Flows to Total Assets = Operating Cash Flows /
Total Assets
The higher the ratio, the more cash that is available for retaining for
growth. Enterprises should strive to improve operating cash flows to total
assets ratio for the sustainability of the organisation. .
Analysis of cash ratios over a period of years allows trailing historical
trends and variability in the ratios over time. Ratios can be used to identify
aspects of an enterprise that require profound investigation

Cash Management and Fraud

According to International Standard on Auditing 315 (ISA 315), an

important management responsibility is to establish and maintain internal
control on an ongoing basis. Managements monitoring of controls includes
considering whether they are operating as intended and that they are modified
as appropriate for changes in conditions. Hence, the accuracy and
completeness of the accounting records are the responsibility of the
Company's management. Even though internal control over financial
reporting may appear to be well designed and effective, controls that are
otherwise effective can be overridden by management in every entity. Many
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financial statements frauds have been perpetrated by intentionally overriding

the substance by senior management of what might otherwise appear to be
effective internal controls. Because management is primarily responsible for
the design, implementation, and maintenance of internal controls, the entity is
always exposed to the danger of management override of controls, whether
the entity is publicly held, private, not-for-profit, or governmental. When the
opportunity to override internal controls is combined with powerful incentives
to meet accounting objectives, senior management may engage in fraudulent
financial reporting. Thus, otherwise effective internal controls cannot be
relied upon to prevent, detect, or deter fraudulent financial reporting
perpetrated by senior management (AICPA; 2005). The auditors
responsibility is to report to the members of the company whether the
financial statements give a true and fair view of the state of the Company's
affairs and of the profit or loss for the year, and whether they are properly
prepared in accordance with law.
Organisation should use as little number of banks as possible that suits
nature of business, and requirements to achieve enhanced manageable cash.
The more banks an organisation maintains, the more the cost of servicing the
accounts and the more the control system is weakened. Management of many
bank accounts can be cumbersome; reconciliation of accounts,
correspondences like cheques confirmation, ledger accounting, and
preparation of cash position, among many others. Dormant bank accounts, if
not closed or regularly monitored, can constitute serious internal control threat
for the reason that such accounts can be exploited for nefarious purposes. To
trim down or select banks, management should consider qualitative factors,
such as competitive advantages of bank, proximity to business, client-ship, as
well as quantitative factors like bank charges, interest charges, withdrawal
charges etc. Fortified/Bullet-proofed cash management requires management
to institute serious control policies like monthly reconciliation, approval
limits, segregation of duties, arithmetical and accounting accuracy,
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authorisation, approval, physical control, among others. Bank could be

disproportionate in charging charges and interest; the organisation can recover
the overcharge through (bank interest and charges) audit with the assistance of
experts.
There are many ways to a true; quality accounting requires preparing
schedules, statements, summaries, registers, analysis, reports to corroborate
accounts. Enterprise need to maintain at least two kinds of cashbook record
ledger cashbook and treasury cashbook, for the purposes of arithmetical and
accounting control, fraud prevention, availability of comparable record to
reconcile and adjust intentional and unintentional errors. Ledger record is for
financial reporting while treasurer cashbook is a memorandum record. Aside
the aforementioned collaboration, cash position report is another level of
cashbook accounting that serves as a decision support tool. As employee,
particularly one that handles cash gets used to a system, such employee attains
exclusive understanding of the system and the loopholes therein. The
tendency to commit irregularities is heighted, such that professional on
normal course of duty is very likely not to detect consequential irregularities.
It takes high professional competence, qualitative skills, eagle eye, and
comprehensive understanding of the organisations operations to seize such
fraud. Good internal control arrangement reduces premeditated and
inadvertent 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. Cash
management requires working out cash requirement for a week base on the
cash budget, cash position reports, creditors awaiting payments and other
realities of business. There should be a threshold, payments outside petty cash
threshold items should be made with negotiable instrument or transfer to
enhance control, reduce volume of cash in hand transactions, and avert
cumbersome record keeping. Payments to employees, aside impress
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transactions, are better done through bank. Good finance practice is to release
confirmed cheque so that cheques get cleared on time to allow beneficiaries
access to fund. Not releasing cheques timely can cost the organisation
tremendously in the end; organisation can be deprived of the imperative
service/good thereby telling drastically on operations, loss of reputation,
which can lead to payments in cash or draft. Additional costs such as
commission, lead-time, interest on bank draft, transport cost, security hazard
of carrying cash.
Some organisations by nature of operation maintain high sum of cash in
hand. Such organisation should make additional security arrangement; aside
private office security, additional arrangement of keeping one or two police
from nearest police station on payroll will drastically avert burglary and
robbery. It is noteworthy to mention that petty cash is the most susceptible
accounts of all cash accounts to fraud; therefore, there should be strong, strict,
consistent control. Personnel in charge should not be allowed to be in charge
for too long, because exclusive understanding and awareness of loopholes can
be too costly for organisation. Cash theft has variety, such as understated
sales, sales register manipulation, skimming, collection procedures, false
entries to sales account, theft of cheques received, cheques for currency
substitution, lapping accounts, inventory padding, theft of cash from register,
and deposit lapping. Similarly, fraudulent disbursements can be personal
purchases 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 can
be perpetrated over period of time that can exceed the shareholders fund.
Incidents of imprudent management of cash that resulted to erosion of
shareholders fund abound: Parmalat, the biggest dairy company in Europe
based in Italy that collapsed in 2003, went under because of non-existent cash
in bank, Satyam Computer Services overstated cash by $1.5 billion but the
company was saved by Indians, Bernard L. Madoff Investment utilised ponzi
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scheme to strip people about $17 billion to satisfy his veracious craving for
cash, Tyco International used creative accounting to divert companys fund to
its CEO and CFO
Company laws require that the management of an enterprise is
responsible for ensuring internal control system. It is appalling how often
organizations rely utterly on external auditors to improve internal control
system. Management should ensure that internal controls system guarantee the
cash. In addition, the cash balances are properly described and classified and
adequate disclosures are made of restricted or committed funds and of cash
not subject to immediate withdrawal.

Creative Cash Flows Reporting

Cash flows statement, the third major component of financial

statements, 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 than
the others categories; hence, financial analysts consider operating cash flows
as a leading signal of liquidity sustainability. Accounting standards are
flexible on certain issues. Accountants can work within the standards, by
taking advantage of the flexibility in accounting standards, or work out of the
standards to prepare cash flows statement. Manipulation by taking opportunity
of accounting standards only increase reported cash flow but factually
overstate sustainable cash flow position. Cash equivalents such as investments
can be debt/equity security held either for trading purposes or as available for
sale. Creativity comes in when instruments with fixed maturity date, not held
to take advantage of short-term price swings are classified as operating rather
than investing activities. This is common with non-financial enterprises
because such cash equivalents are not part of their normal operation. Another
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instance is capitalisation of costs, which hitherto expenses, thereby moving

cash outflows from operating activities to investing activities, hence, inflate
free cash flow. Besides the above weaknesses that can be utilised, enterprises
can boost operating cash flow through acquisitions because operating results,
as well as weaknesses therein, are included in the acquirers results.
Obliquely, financing cash flows can be coined as part of operating cash
flows by manipulating reported operating activities, thereby overstating
sustainable cash flows reported. Financing cash inflow can be moved to
operating activities by increasing trade and non-trade creditors, overdrafts.
The qualities of cash flows is in operating and free cash flows, which is cash
flows after deducting investing cash flows from operating cash flows and
show the cash available to pay the financier of the enterprise. Imagine
enterprise with no cash available to pay shareholders and creditors but claim
to be highly profitable. Therefore, cash is a better measure of performance in
the end than profitability. However, there is a need to avoid the agency cost of
free cash flows by financing projects earning low returns. Such decision is
tantamount to minimising, rather than maximising, shareholders wealth and
is inimical to the company and the economy because of inefficiency in the
utilisation of resources.
One major challenge about cash flows statement is that auditors do not
carry out detail examination as done for revenue and balance sheet accounts.
There are many intricacies behind every amount on the face of cash flows
statement. This gives the preparers of financial statements opportunity to take
advantage of this lapse. An enterprise could utilise factoring to drive up cash
balance on the financial statements. It is noteworthy that poor cash flows
while the two other financial statements composites are good is a signal that
there is a smoke.

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7 Use of Communication and Public Relations Skill

for Cash Management
Enterprise should avoid the practice of getting in touch with
client/customer on credit control, solitary when the need arise for client to
make payments. Courteous e-mails, telephone calls, Short Message Service
(SMSs), visits to express appreciation are treasured gift of gratitude and
kindness. Additionally, yearend gift of souvenir, which at the same time
serves as publicity and promotional tool, and presence at the ceremonial
events of client/customer and their key officers are qualitative mechanisms
that can assist cash inflow, reduce bad debts and cost of collecting debts.
Contemporary business is built on relationship; good rapport with
client/customer and every source of inflow is crucial. A dedicated wellpolished professional(s) can handle credit control function adequately, and
bring into play timely follow up that closes the gap in a professional manner
that does not present an outlook of pestering.
Close working relationship with bankers is pertinent for cash
management. Ability of a treasury person to work into the bank and come out
with result is a measure of efficiency. In organisation, staff and management
are less concern about how finance is managed; their important concern is
timely provision of cash for remuneration, operations, projects, office
maintenance, and others as need arise. The survival of every firm depends
greatly on cash inflow. A good finance management understands working
habit of the customer/client and her payment policies
The fact that cash is king should not intoxicate treasury. It is a smart
decision to intimate creditors of the organisations liquidity condition and
reach a favourable date for payment to preserve creditors confidence in the
enterprise. Getting creditors acquainted on time enhances their willingness to
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flex payment terms particularly during unusual circumstances perhaps to

justify business relationship. The person that experienced it best tells Story.
The companys liquidity problem could become a wild bush fire, especially in
small size industry. This will give opportunity of deferring payments, working
capital option, without adverse consequences.
A business can create a good reputation or otherwise through
management of creditors. By one mean or another, every organisation is an
agent 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 by
her agent. Building and maintaining good reputation is paramount for
sustainability of business. Good cash management takes care of every
stakeholders interest. Generally, finance chiefs bother about salary and
shareholders interest, but treat creditors payment with levity. Who knows,
your creditors can be your brand ambassadors and can have enormous
influence on your business. Furthermore, creditors are the next source of
financing enterprise after shareholders; future negotiation with the creditors
could be impaired.
It is wise to organise payment logically. Entities owe smallest debts are
often the most restless; they spread default news, aggravate situation and can
de-market quick and fast. They should be paid-off as soon as possible.
Listening skill is imperative, cash management practice demand careful
listening to external and internal clarifications and utilising the information in
prioritisation. A listening finance is a great finance.

Cash versus Profitability

One major problem with the current global capitalism is the wrong
impression that earnings are the acme of organization success. This
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overreliance and pressure has considerably dwindled the quality of earnings.

Besides, profit is short term and therefore imposes myopic insight into
business vision. While cash is like blood, profit is like water to every
enterprise. Organization could utilize the duo as performance metrics.
However, better decision would be made using cash when liquidity is the key
limiting factor. Profit, alongside other variables such as cash management, is
the determinant of cash flows. Enterprise can operate where profitability is
dying, but cannot continue as a going concern with no cash because bills
cannot be paid with profit, but profitability will catch up eventually when
margin loss stifles out cash. The ravaging global meltdown is a result of every
individual selling without recourse to corporate governance, credit risks,
profitability, until the liquidity disappeared completely from the market. Net
cash flows is a more appropriate measure of profitability in the end because in
the long term it is accurately done; for a good enterprise, in the end, cash
flows must be positive.
The two basic underlying assumptions of financial reporting are accruals
and going concern. The real measure of organisation performance is cash.
Organisational performance is evaluated by ability and certainty to generate
cash. No matter the immensity of profit/reserve or asset, convertibility to cash
or cash equivalent is critical. Enterprise must be cautious about cash flow;
quest for profitability should not be allowed to kill cash flow requirement
because it is vital for organisations solvency and survival. Profitability is not
all that matters; cash-generating capability is germane, a profitable venture
that generates less cash than the cash consume is a bubble. That is, Cash flow
is a major determinant of going concern status of enterprise. While cash is
essential for organisation survival and short-term nature, profitability is a
basic requirement for growth and development in the long term. A good cash
management function is analogous to the three Rs (Risk, Return, and
Relationship); Risk risk of cash management, Return Profitability,
Relationship - Cash and Profitability relationship.
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High-quality cash management is apparent in positive cash flow, excess

of cash receipt over cash payout with smart deployment of excess. Poor cash
management can lead to increase expenses like finance charges, extra
inventory cost. External and internal business environments influence cash
requirements and inflow of organisation; so, enterprise should revise cashmanagement strategy as realities demands on regular basis. During the period
of pressure on cash, profit is adversely affected. This is common at the
inception of new business, restructuring exercise, business usual season of
low cash inflow, period of business expansion, and others. Every organisation
requires strong cash management. To keep company afloat in hard times, cash
management is vital, not accounting profit.
The most important work of Finance Chief in a more difficult macroeconomic environment is to ensure that the company has good cash
management to be financially healthy, and meet obligations at any time. The
opportunity of capital market for funds may not be available every time in the
future, as we are presently experiencing, cash management functions will be
the redeeming feature and would be more important and appreciated. For
strategic control purpose, cash report forms actual to be compared with cash
forecast to enhance system as compared to result-oriented style. To perk up
net cash flow, disbursement procedures should be enhanced by continuously
keeping an eye on account payable on a regular weekly or monthly schedule,
constant evaluation and taking advantage of discounts for early payment, pay
as close to the due date as possible. Cash flows differ from profit by timing
differences, which impinge on capital assets generating income in the future
and working capital utilisation. In the end, there is a positive correlation
between profitability and net operating cash flow. Thus, analysis of the
relationship between profitability and net operating cash flow can reveal
creative accounting.

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Foreign Currency Cash Management

Foreign exchange rate fluctuation can push a bottom line from profit
unto loss. Contrary to the believe by some finance folks that exchange
difference is an ordinary paper profit/loss, the risk of foreign exchange is
basically on profit and it is real. The main issue on foreign currency
management is hedging of exposure to adverse foreign exchange difference
and encouragement of currency speculation for profit. Generally, foreign
exchange risk hedging is either forward contract or option rate. To reduce
inherent foreign exchange risk conversion, enterprise can hedge the risk by
forward contracts, fixed forward or floating/option contracts; invoicing
foreign clients/customers in local currency; and matching income against
expense/expenditure in the domiciliary bank account. Other strategies are
protection clause on sale price in foreign currency or adjusted exchange rate
moves outside a defined range; invoicing in a strong currency; and pricing
policy, by building extra profit margin into selling price to act as a cushion in
the event that exchange rates move adversely.
Superior foreign exchange management utilises innovation to
strategically manage cash to achieve organisations objectives by adopting
integrated liquidity and investment to optimise cash and enhance efficient
allocation of resources. The basic manual to unleash the immense opportunity
is the central/reserve banks foreign exchange manual as updated from time to
time. For instance, proceeds of export in the domiciliary account afford
exporters (of goods/services) unfettered access to funds like ability to make
offshore fund transfer above the statutory limit. Another example is the
opportunity 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 through
intercompany accounts and settle the net payable through foreign exchange.
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Basics of Cash Management for Financial Management & Reporting

This will drastically reduce bank charges and interests on domiciliary

accounts. Corporations should take advantage of Society for Worldwide
Interbank Financial Telecommunication (SWIFT) and others such as NIFT,
NEFT, CIFTS, RTGS through their bankers to achieve effective and efficient
foreign currency exchange management. In a trade incident, a company made
a remarkable saving by transferring fund, even above statutory limit, as
invisible transaction, and avoided hassles of buying foreign currency and
restriction of maximum fund transfer limitation.
Generally, cash management measurement basis is historical cost, but
foreign exchange accounting is not. Reporting of foreign currency
transactions should be at the current (spot) rate, rates of exchange at the date
of the transaction (or a reasonable approximated average). While nonmonetary (assets and liabilities) items should be reported at the historical cost
(exchange rate at the date of the transaction), monetary (assets and liabilities
and cash flows) items should be reported using the closing foreign exchange
rate. The use of official rate, particularly to value monetary item, is laudable
now that national central/reserve banks and monetary authorities are
converging interbank rate with official rate. Todays current rate is historical
tomorrow, thus the consequential exchange difference. Foreign exchange
reporting impacts three items, namely; foreign currency transaction, foreign
operations and exchange rate translation difference. In summary, the manual
for foreign exchange cash management reporting is the International
Accounting Standard (IAS) 21 and other associated International Financial
Reporting Standard (IFRS) interpretations
Generating revenue and incurring expense in foreign currency lead to
fluctuations and associated risks which could impact an enterprise. Besides,
the nature and operations of foreign currency transactions give way for
complex situations that could harbour irregularity. For that reason,
Management should put up adequate controls to check hoax while auditors
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should 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 requires
well-trained professional to be in charge. It is a complex and evolving aspect
of finance that is on reducing cash conversion cycle to achieve efficiency and
effectiveness in the management of the most liquid asset of every entity
through forecasting and planning, internal control, cash management tools,
and other models. Cash flows ratios, that are recently popularised, assist
management and financial analysts to decipher the facts behind the figures on
the financial statements. This ratios are so powerful that they can reveal
SWOT (strengths, weaknesses, opportunities and threats), errors, creativity
and avert corporate failures.
Management should institute sturdy internal control. Safeguard of cash
comes in strongly because an entity can only manage what it has. The five
components of control namely; control environment, risk assessment,
information system, control activities, and monitoring control should be in
place to ensure cash is safeguarded. Management should be wary about an
employee, particularly the one in charge of cash, getting exclusive
understanding and capacity on the system as this can heighten the tendency to
commit irregularities. Countless number of corporate failures were a result of
imprudent management of cash. Accountant could be skimpy, they could
work within the accounting standard or work out of accounting standards to
increase reported cash flows. Hence, the sustainability cash flows position
would be distorted not enhanced.

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Basics of Cash Management for Financial Management & Reporting

Good working relationship with clients/customers and other medium of

cash inflows is vital for cash management; moreover, a good sales day is the
good day in finance. The fundamental secret of a successful credit
control/management is relationship. Similarly, close working relationship
with bankers is pertinent for cash management. Though treasury is powerful,
it should rather be used to build an adoring brand for the entity before
stakeholders. Furthermore, Profitability as the acme of organisational success
has imposed myopic insight into business vision. Net cash flows, in
collaboration with profitability, are a more appropriate measure of
performance, 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 and
consider cash management a strategic partner within the business. New startups must give cash management serious attention; possibly, it should be
placed ahead of profitability. Secondly, organisations should have a dedicated
module for the purpose of cash management because accrual accounting is not
apt for cash management. Beside the usual accrual basis of accounting, a
secondary accounting subsystem base on cash basis to aid forecasting and
planning, enterprise approach, strategic business decision, cash flows analysis,
and maximise returns on cash, should be operated as standalone or intergraded
into the system like Enterprise Resource Planning (ERP) system.
Inventiveness stem from order and routine, simplicity is the ultimate
sophistication; finance with cash management built on a dedicated cash basis
is flexible, speedy, and shows where cash is coming from and where it is
going. Small enterprises can take advantage of the robust in database
management software by deploying the likes of Microsoft Access and utilise
analytical powers of Microsoft Excel to manage cash.
Thirdly, regulatory bodies should mandate disclosure of actual corporeal
cash and cash equivalent balance and reconciliation of same to book balance
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(as per audited financial statements), as well as disclosures of foreign

currency impacts (particularly on earnings), to enhance quality of financial
reporting. Furthermore, because cash is a better indicator of performance
reality, 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 the
realities behind the figures on cash flows statements.

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Basics of Cash Management for Financial Management & Reporting

BIBLIOGRAPHY
Akinsulire, O., 2002, Financial Management, El-Today Ventures
Limited, Lagos.
American Institute of Certified Public Accountants (AICPA), 2005,
Management Override Of Internal Controls: The Achilles Heel of Fraud
Prevention, the Audit Committee and Oversight of Financial Reporting,
American Institute of Certified Public Accountants, Inc., New York, NY
10036-8775, http://www.aicpa.org.
Baharom,
K.,
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