An Assessment of Corporate Cash Management

Practices
Lawrence J. Gitman, Edward A. Moses, I. Thomas White





Submitted to:
Dr. Dilli Raj Sharma
School of Management
Tribhuvan University




Submitted by:
Shishir Dhakal
Roll no.27
2014


Topic: An Assessment to Corporate Cash Management Practices
Background
This article presents an assessment on the efficacy of corporate cash management practices.
Although academicians have developed a great deal of theory on cash management, there may
still be a gap--although perhaps narrowing-- between the theory and practice of cash
management. This gap appears to be widest among the smaller firms. The firms surveyed in this
paper seem aware of the basic cash management strategies, although they appear to pay greatest
attention to collections, while paying least attention to payments. Actually, this emphasis
parallels that in the cash management literature. The apparent failure of some firms to more
directly adapt cash management theories may be attributable either to a lack of the quantitative
sophistication required to understand and apply these theories or the belief that the high cost of
implementing certain theoretical developments may not justify the potential benefits. Both these
possibilities seem to be confirmed by the fact that the large firms surveyed appeared to utilize
more sophisticated techniques and as a result turned over their cash more quickly than did the
smaller firms. One possible explanation may be that these differences in disposition toward cash
management result from the fact that, while academicians tend to develop precise theoretically-
correct models, practitioners need generalized easy-to-use managerial models whose application
can be justified on the basis of cost. The growth in databases accompanying the rapid expansion
of computer information-processing technology should favorably affect future ability to apply
new developments in practice. At the same time, the types of models needed will rapidly change
because of a variety of environmental factors, the most obvious being changes in banking laws
and the procedures used to make and receive payments.

Objectives
To assess the current practice of cash management.
To find the difference between theory and practices of cash management.
Methodology
Questionnaire based survey of sample of top 150 and bottom 150 firms was sampled. Different
sizes of firms were used as to determine how size makes a significant difference in the practice
of cash management. Questionnaires were mailed to the treasurer of each company. Fifty seven
of the top 150 firms (38%) and 41 of the bottom 150 firms (27%) responded to the questionnaire
for an overall response rate of 32.6%. Of the firms responding to the questionnaire, 88 were
involved mainly in some form of manufacturing, with distribution and energy a distant second
and third. Approximately 80% of the firms were organized with a centralized finance function.

Findings
The most popular marketable security is commercial paper, with repurchase agreements,
treasury securities, and negotiable certificates of deposit following.
"Speeding up collection of accounts receivable" is found to be the most important cash
management policy, and "slowing payment of accounts payable" as the least important.
A much higher proportion of the larger firms used the more sophisticated techniques
associated with working capital management.
The more sophisticated the cash management policies, other things being equal, the shorter
the cash cycle.
Market price stability is found to be the most important investment criterion, with
marketability a close second.
The practitioners place greater emphasis on the cash collection function than on the cash
disbursement function.

Conclusion
There is a gap in the theory and the practices of cash management. Comparison of theory and
practical can be performed in cash collection and quantitative analysis. But now a days, the firms
seem to be aware of the cash management strategies. The use of sophisticated financial decision
making techniques appears to be growing, even if at a fairly slow rate.