Basics of cash management for financial management & reporting

Basics of Cash Management for Financial Management & Reporting

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Basics of Cash Management

For Financial Management and Reporting

By Hameed Gbolahan Soaga

Tel: +2347033561230, +2348052078611

E-mail: [email protected]

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


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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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1 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-a-

vis 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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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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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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nine discusses foreign currency cash management; and lastly, section ten is

the conclusion and recommendations.

2 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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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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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

Sundry Revenue

(Financing, Investing)

Office/Overhead

expenses

C

ash

Personnel cost

Capital expenditure

Production expenses

Sales & Distribution

cost

Other outflows

Statutory expenses

(i.e. tax)

Other inflows


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3 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 management-

planning 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

today’s 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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Cash Management

Financial Management Financial Reporting

Cash-flow Projection

Cash Budget

Cash Position

Cash Book

Cash/Bank Reconciliation

Cash-flows Statement

Credit Control & Management

Statement

Cash Position Balance

(After adding back

provisions and adjusting

for timing differences &

amendments)

Cash Budget

Actual Balance

Cash-Flow Statement

(After adjusting for

timing differences &

amendments)

Cash Book Balance

(After adjusting for

timing differences &

amendments)

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

Figure 3: Inter-Relationship between Cash Management Mechanism

Balances

= = =


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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 organization’s 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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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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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.

4 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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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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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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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 firm’s 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 firm’s

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 firm’s 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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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 company’s 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 enterprise’s 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


Page | 24

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

5 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. Management’s 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


Page | 26

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,


Page | 27

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 organisation’s 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


Page | 28

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


Page | 29

scheme to strip people about $17 billion to satisfy his veracious craving for

cash, Tyco International used creative accounting to divert company’s 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.

6 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 acquirer’s 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 well-

polished 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 organisation’s 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


Page | 32

flex payment terms particularly during unusual circumstances perhaps to

justify business relationship. The person that experienced it best tells Story.

The company’s 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

stakeholder’s 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.

8 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 organisation’s 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.


Page | 34

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 cash-

management 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 macro-

economic 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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9 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 organisation’s 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 bank’s 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.


Page | 36

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 non-

monetary (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. Today’s 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


Page | 37

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.


Page | 38

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 start-

ups 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


Page | 39

(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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