LIQUIDITY MANAGEMENT
Float and Cash Management

All assets on he left side of the balance sheet are supported by all claims and liabilities on the right. Among these support claims are those of trade creditors, landlords and employees, all of whom have superior claims to those who appear below them on the balance sheet, and who charge no explicit cost for the use of their credit or value until they are paid. In larger corporations these items can be in the millions dollars each month and, thus , constitute a float, or continual large body of funds to be paid, which represent cost free financing to the business.

Some of the techniques employed by major companies to optimize the value of their cash float include the geographical location of their payee banks which permit the saving of one or two days before a check paid is charged to their account, for example. Other techniques include the use of "lock boxes" where a customer check is collected and credited to the Company's account on the day it is mailed. In addition, many companies use pre authorized checks to collect their accounts days sooner than would otherwise be possible. Some companies use discounting the outstanding bill to encourage the customer to pay earlier. For example it is not uncommon for a customer to be billed 2/10/net 30, which means that if the customer pays the bill within 10, he can deduct 10%.. Each of these methods is designed to maximize the amount of free cash flow the company has available in its float.

The rationale for these methods is obvious: the more cash the company has free of explicit cost the lower will be its overall cost of capital and the higher it profitability will be.

One of the largest uses of cash is for payroll, and the more frequent the pay period the less free cash will be available. Therefore, many companies seek to pay their management and technical people, particularly, less frequently than weekly, though there are laws governing hourly workers in some trades and businesses where weekly payment of wages is required.

The whole idea of float management is to use every legal and ethical method to delay the debiting of obligations incurred to the cash account, while simultaneously employing every legal and ethical means to collect outstanding obligations. It is practiced by every major corporation in the world and has broad business acknowledgment and acceptance as well as legal status.

For the smaller business, dealing with larger suppliers, for example, it is more difficult to practice, especially if that smaller business is totally dependent on that supply source. Nevertheless, it is important for that small business to use money or goods and services provided to it free of cost for as long as good business practice will allow. The profitability of all business is contingent, at least in part, by the allowances in business practices provided by suppliers and others for their right to do business with that business.


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