Cash Management Should Always Take Essay

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The rationale behind this is that current liabilities represent obligations that must be met. In meeting those obligations, the firm will deplete its asset base. The longer the firm can delay payment - thereby retaining those assets - the longer the firm can earn a return on those assets. This equation is especially powerful during periods of high inflation. Liabilities, such as those for outstanding trade payable, are in nominal terms. Therefore, unless the firm is in a deflationary environment, the value of payables in real terms will diminish over time. Thus, the longer the firm delays payment, the less they will have to pay in real terms. During periods of high inflation, the amount paid in real terms can be significantly less. Therefore, all other factors being equal, a firm benefits from delaying payables as much as possible.

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Effective cash management is recommended at all times, but is essential during periods of high inflation. The need arises because one component of the equation is in nominal terms while another is in real terms. This creates a situation where money can be made or lost simply due to the effects of inflation. The objective of the firm is to generate profit. Effective cash management practices, especially during periods of inflationary pressure, are a potential source of profit as the firm exploits the difference between the real value of a transaction and the nominal value. Failure to conduct effective cash management can result in the firm losing money on the real-nominal exchange, which is detrimental to the firm's objectives.

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