Cash Management“The world sometimes turns upside down and only those with light liquid assets float to the top again. – Anthony H Allen.Whenever any long-term investment is considered the future cash flows from the project, the uncertainty of those cash flows, and the opportunity cost of the funds invested in the project are evaluated. Investment in current assets are also evaluated by all organisations in the same manner but over a short-term period. The time value of money plays an important role in the valuation of long term investments as these investments produce expected cash flows into the future. In the case of current assets (cash, marketable securities, accounts receivables, inventory) provide expected cash flows only in the short term, therefore the time value of money is of lesser importance while evaluating current assets.
Whenever decisions are made for new product development and marketing there is capital investment. Aside from the outlay for assets to produce the product the investment requires:
More cash to handle the increased volume of transactions.More inventory (raw materials, work in progress and finished goods)More accounts receivable ( because selling more goods on credit means increasing credit to customers)Investments made in current assets support the day to day operations of the firm. Therefore investment in long term projects there has to be investment in current assets in order to support the day to day operations that will be required by the project. Current assets are the “Working Capital” put together to work in order to generate benefits monetary or other wise from the investment made.
How much investment should be made in current assets? This is a difficult question as this depends on various factors such as:The type of business and productThe length of the operating cycleCustoms, traditions, ad the industry practicesThe degree of uncertainty of the businessThe type of business, whether extractive, retail, manufacturing or service, affects the way an organisation invests. In some industries, large investments in machinery and equipment are necessary. In other industries, such as retail firms less is invested in plant and equipment and other long-term assets and more is invested in current assets such as inventory and receivables. The firms operating cycle – the time it takes the firm to turn its investment in inventory into cash – affects how much the firm ties up its assets in current assets. The operating cycle includes the time it takes to manufacture the goods sell,
The Business Development team found that:The most important part that is important to understand about the operating cycle before buying or selling a business is that, in some areas:The cost of production. This part depends on:Why the operation is in the market and what you need. The volume per unit of goods and services needed to get to market. The business need to be profitable and grow quickly.The importance and impact of technology. The value of technology in its ability to do what you want it to take advantage of in the market. The importance and impact of technologies that can offer a competitive advantage and cost advantages to a business. The economic impact on future activities. The importance of improving and securing the market for products and services. Where would this have a significant impact, whether to other businesses or the service industry?
The Investment and Regulation Team in 2016 made the point that:The Investment and Regulation Team believes that the investment and financial and business performance for the industry should inform a firm’s investment strategy, and therefore should, be based on its annualised investment estimates. The team also emphasises that the investment and investment returns for the firm should be based on current market conditions, in-depth analysis, and the fact that the firm makes investments in many different industries. The Investment Group makes the commitment to support companies to achieve a financial performance that maximises their net capital return. The Investment Group, on the other hand, has taken a slightly different approach. The investment – in companies such as a bank asset management agency, a public utility company, a government securities regulator, or a government-owned investment company, such as a pension fund – is based on a group of investment estimates. Based on these assumptions and some of the other estimates, an investment would typically require to have the firm’s stock price rising or falling within 7-10% of the previous year’s market capitalisation. These estimates can have an impact on the firm’s overall operating performance, and the return made by the firm on its investment estimates. The Investment Group’s long-term strategy relies on its investment in various industries. They also help investors to identify potential performance weaknesses that might inhibit their returns based on any of the current industries.
The Financial Performance Team in 2016 said:Investment and policy makers should be informed of the impact an investment can have on the firm’s financial performance. As our overall investment strategy is based partly on the annualised investment estimates, it should also be based on our own business investment projections and on a short-term outlook.
The Financial Performance Team in 2016 suggested that:The business sector is the leading source of financial performance when a firm invests. While the Financial Performance Team believes that businesses should make business decisions based on historical performance, it takes into account the ongoing need for strategic and business strategy initiatives. The focus should be on the fundamentals of the firm’s business, as well as the ability of the business to grow and thrive on the changing environment. In this context, we think that businesses can best achieve their economic growth potential by having a strong financial position at current cash consumption levels with a view to maximising returns on investment and improving their own current cash consumption accounts. The Financial Stability Board is part of the Financial Stability Council; the government is part of the National Financial Stability Programme, and some other agencies such as the government’s Financial Stability Board are part of the Financial Stability and Emerging Markets Authority.