Introduction
Enterprises should have superior cash management techniques. Moreover, companies should have excellent credit management policies to help them in managing their credit services. Firms ought to establish viable financial management policies to overcome the financial crises that arise due to inflation (Baccarin, 2009). Besides, they should monitor their accounts receivables to determine if they meet the desired budget. This paper aims at identifying some of the approaches that firms can use to guarantee sustainability.
Intel Corporation
According to Dardan, Busch, and Sward (2006), cash management strategy depends on a number of elements, which include marshaling and running the cash flow and investing excess cash. Intel Corporation has an effective cash management strategy. The company invests its excess cash in productive ventures, which yield high returns. The Intel Corporation’s cash flow statement demonstrates that the company is ever keen when investing its surplus cash (Dardan et al., 2006). In addition, the company’s total expenditure is on the decrease while its net income is on the increase. The trend indicates that the company has managed to marshal and manage its cash flow.
Company’s credit policy
The four top factors in an enterprise’s credit policy are “consistency and credibility, dealing with debtors, practices within the policy, and policy enforcement” (Pike & Cheng, 2003, p. 1016). A company ought to portray a consistent approach when dealing with debtors. Failure to be consistent may compel debtors to doubt the creditors’ credibility. A company’s collection policy should indicate the approved individuals to bargain and make exceptions. Debt collectors should know their boundaries when dealing with debtors. Moreover, a company should identify the kind of practices that it will employ when dealing with defaulters (Pike & Cheng, 2003). Practices within the system help to determine the company’s attitude towards debtors. Policy enforcement refers to the implementation of a policy. In most cases, debtors may not pay until creditor takes action.
Tight short-term and easy short-term financial management policy
A tight short-term financial management system is applied during inflations. The policy is aimed at limiting the business’ risk desire. In other words, the companies only use the available financial resources for the most urgent and significant needs (Baccarin, 2009). On the other hand, a short-term financial management policy is flexible; therefore, it does not prohibit a firm from investing the available funds. Additionally, the system encourages firms to take risks by investing in projects that they anticipate to bring good returns.
Monitoring accounts receivables
Institutions can use a number of techniques to monitor accounts receivables. One of the techniques is “comparing the percentage of monthly sales that remain outstanding at the end of a selected period with some standards based on previous experience” (Lewellen & Johnson, 2000, p. 105). The technique gives the receivables’ manager a precise account of collections. Another technique, which can be used to monitor accounts receivables, is the use of variance analysis. In this approach, the debtor’s budget is computed by “multiplying single estimates for expected sales by individual estimates for the day’s sales outstanding” (Lewellen & Johnson, 2000, p. 107). If there is a disparity between the actual sales and the anticipated sales, a revised budget is computed to show the new sales level.
Maturity matching approach
Maturity matching approach, which is also known as hedging technique, refers to a working capital financing strategy where a firm uses short-term liabilities to meet its short-term needs. The primary assumption of this approach is that every asset ought to be reimbursed with a liability matching its maturity (Hutchinson, Lo & Poggio, 2004).
Risk of financing long-term assets with short-term liabilities
Financing long-term assets with short-term liabilities requires a firm to refinance the loan, since the time for which money is needed is high. Hence, a business cannot expand or invest in new ventures due to financial constraints. Another risk of financing long-term assets with short-term liabilities is that the lender may decline to renew the loan (Hutchinson et al., 2004). Such a situation may force a firm to sell assets leading to closure.
Risk of financing short-term assets with long-term liabilities
The risk of financing short-term assets with long-term liabilities is that a firm continues to pay interest on the debt even at the period when the liability is not being used. The extra cost affects the profit of the business (Hutchinson et al., 2004). Eventually, the company makes a small profit margin, which may affect its ability to expand.
Conclusion
For a firm to succeed, it should have a good financial management strategy. Apart from managing its cash flow, a business should have superior credit management policy. In many cases, debtors do not pay until creditors take action. Hence, it is important for a firm to manage its credit. Monitoring accounts receivables through variance analysis would go a long way to helping the company to achieve its sales. In addition, a business needs to have a superior maturity matching technique to protect it from the risks associated with capital financing. The company needs to finance short-term assets with short-term liabilities and vice versa.
References
Baccarin, S. (2009). Optimal impulse control for multidimensional cash management system with generalized cost functions. European Journal of Operational Research, 196(1), 198-206.
Dardan, S., Busch, D., & Sward, D. (2006). An application of the learning curve and the nonconstant-growth dividend model: IT investment valuations at Intel Corporation. Decision Support Systems, 41(4), 688-697.
Hutchinson, J., Lo, A., & Poggio, T. (2004). A nonparametric approach to pricing and hedging derivative securities via learning networks. The Journal of Finance, 49(3), 851-889.
Lewellen, W., & Johnson, R. (2000). Better ways to monitor accounts receivable. Havard Business Review, 3(2), 101-109.
Pike, R., & Cheng, N. (2003). Credit management: an examination of policy choices, practices and late payment in UK companies. Journal of Business Finance & Accounting, 28(8), 1013-1042.