Cash Management in the Credit Firms


Cash is the amount of funds that is dispensable either in the bank; at hand or in the business but does not include accounts receivable or the value of property. This is the case because it takes cash either in the bank or at hand; to pay expenses like rent; to pay employees and suppliers. It should also be noted that profit growth is not always a guarantee to increase in business cash. This is the case because profit is the amount of money a business expects to earn if all customers pay their debts on time and business expenses are evenly distributed over the time period in question. Cash is also the amount of money that a business is capable to spend as it is against the ethics of business to spend the profits earned.

Cash flow on the other hand, is the in and out flow of cash for a business entity over a given period of time. In this case the outflow of cash is measured by the amount you pay to suppliers; creditors and salaries. Cash inflow on the other hand is the amount received from clients; credit firms and investors. Positive cash flow is the case when cash into the business is more than that going out, while negative cash flow is when the cash out is more than the cash into the business. (Kotter & Dan, 2002)

Main Part

Available cash is the amount calculated from summing all cash sources (inflows) then deducting the total cash outflow before the payment of business debts. Assuming a beginning cash of 10,000 dollars then the cash available for the month of July; August: and September is:

  • July: 10,000 + 14,985 – (4,182+ 23,134) = -2,331.
  • August: -2,331+ 13,487 – (4,224+ 20,820) = -13,888.
  • September -13,888+ 14,835– (4,266 + 22902) = -26,221.

Working capital is the metric operating liquidity available to a business which is the sum of the fixed assets and the working capital. The working capital is calculated by summing the current assets of a business then subtracting the current liabilities where a working capital deficit is reported if the figure is negative. In the case of Watree Lodge management the records are showing a working capital deficit; and therefore there is need for measures to correct the deficit so that the liquidity of the business improves so that it is able to continue operations by meeting short-term debts and running expenses. This can only be achieved through strict management of accounts receivable and payable; cash and inventories. These are the decisions made based on the cash flow, liquidity and profitability of the business entity. (Kotter & Dan, 2002)

Cash conversion cycles should be reviewed; these are the net number of days or period between the setting aside of cash for the purchase of raw materials; the conversion of these raw materials into finished goods and consequently receiving of payment from consumers on purchase of the goods. This can be achieved through reducing the duration involved between these stages of operation so as to avoid the constriction of cash, for use in doing other operational activities of the business. It can also be achieved through shortening the raw material acquisition and manufacture duration. (Gomez & Robert, 2008)

Another way to improve the working capital situation in this case, is through evaluating the level of return on capital that is shown as a percentage of the income for the time period to the capital employed. This figure is a result of working capital management based on capital investment decisions which are important because they show the link between long-term decision making and short-term policy formulation. An example in this case is the policy to invest more on purchase of current capital like stock rather than long term assets. (Richard, 2003)

The firm can also enforce policies useful in management of current assets. This can be achieved through short-term funding to ensure that cash flows and returns are done on matters of priority in the operation of the business. Cash management should be improved with the view to establish the firm’s cash balance at which the business is capable of funding its day to day expenses while managing to minimize cash holding costs, like buying of raw-materials in advance.

Through inventory management, where the balance between allowing for un-interrupted production and reduced investment on raw-materials is achieved and the firm is also at a level of operation where re-ordering costs are maintained at a minimum. This in return boosts working capital build up therefore reduced probability for deficiencies. (Gomez & Robert, 2008)

Debtor management is also another tool that can be used to improve the working capital in that; it seeks to put in place an effective credit policy which is attractive to customers while still managing to convert the debts into cash in the shortest duration possible. This in return impacts positively on the cash flow and cash conversion operations bringing about increased revenue that results to an increased return on capital that helps correct this situation. Short-term financing from sources deemed most appropriate like getting credit on supplies; borrowing short-term loans from banks or factoring to convert debts held by debtors into cash. (Richard, 2003)

According to the information from the banking situation of this Greenville restaurant, it is evident that the major account of this firm has 10,000 dollars which earns interest at a rate of 0.5%. According to financial projections and estimations this interest rate is very low and therefore these funds would be better used if invested in the business or elsewhere. The second bank account which is probably a current account runs at no interest rate and has withdrawals done frequently; this gives the idea that this account can be useful if used to manage funds that are needed by the business for its day to day operations.

However the fixed account that is having a balance of 10,000 dollars can be used by the business to access credit services from suppliers who offer credit sales. This account can also be used to acquire overdraft facilities that can help manage the operational needs in improving the working capital situation. This account can also help the restaurant access credit card facilities that can minimize the costs used on reception of payments from customers as well as a line of credit access. (Gomez & Robert, 2008)

The need for the current account is not much justifiable; as the daily running of the business, immediate bills and expenses can be managed through the use of the cash received from the sales of the business. This is applicable as it is indicated that the business receives 50% of the amount of purchase on making a sale. On the area of receiving the remaining 50% of the amount on sales, I would recommend that the restaurant considers using bank deposits as a mode of receiving payments so as to help avoid the excessive spending on the different money transfer modes. About the different modes of payment used by the firm I could advice the business to adapt the mode that is least expensive so as to avoid the loss of funds on receiving payments. (Richard, 2003)

The banking services available for use by the Greenlees’ on opening of new business include; the access to secured loans as they are capable of pledging the assets they already have to get funds to help setup the new businesses or rather access funds to manage the new businesses. The business is also capable of accessing mortgage loans on pledging the assets they own to get funds to build or buy the fixed assets needed while setting up the new businesses. The business is also able to access bank overdraft services; credit card services and access to corporate bonds that could be of great importance in the running of the different businesses.

The bank may also be useful in offering financial advisory services regarding the opening of the new businesses. This information from the banks could be about the areas with a high market potential; securities underwriting; safekeeping of business documents; sale distribution and brokerage; and underwriting of bonds. (Kotter & Dan, 2002)

The Greenlees’ can better manage their credit card payments by having to concentrate on a few credit card service giving institutions. This will in turn help reduce the expenses on the different credit card institutions; provide choice for these services at the institution offering lower costs and help develop consistency in record keeping of the various transactions. (Gomez & Robert, 2008)


It is evident from this paper that the major financial problems facing this firm could be as a result of having to meet the many avoidable expenses that the business is exposing itself to. However as a measure to help keep these shortcomings at a minimum, the business may have to engage more of its practice in maintaining their working capital at reasonable rates so as to ensure smooth operation of the business and higher profitability. On matters of banking and use of credit card facilities some changes are needed to help avoid the loss of funds on costs that can be avoided.


Gomez, M. and Robert, L. (2008). Management: People, Performance, Change, 3rdedition. New York.

Kotter, J. & Dan, S. (2002). The Heart of Change. Boston: Harvard Business School Publishing.

Richard, B. (2003). Vocational Business: Training, Developing and Motivating People by – Business & Economics.

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