Firms need to manage cash in almost all areas of operations that have anything to do with cash. The goal of the firm is to get cash as soon as possible and at the same time, keep waiting to pay the cash out as long as possible. Some of the examples of how firms do this are discussed below.
A firm holding the cash tries to maximize its benefits and want to pay out the cash until the last possible moment. An example is given here.
In the last bank account example, say, you invest $500 in liquid investments rather than investing that amount in a checking account that pays no interest. Assume that the bank allows you to maintain a balance of $0 in your checking account.
Now, you can write a $100 check to the Water Company and then transfer funds in “just in time” (JIT) fashion. By employing this JIT system, you will get interest on the entire $500 till you need the $100 to pay the water company.
Firms often have such policies to maximize idle cash.
The goal here is to shorten the time to receive the cash as much as possible. Firms that make sales on credit tend to decrease the amount of time customers wait to pay the firm by offering discounts.
For example, credit sales are often made with terms such as 3/10 net 60. It means that a 3% discount on the sale when the payment is made within 10 days. The “net 60,” term means that the bill is due within 60 days.
The goal now is to put off the payment of cash for as long as possible and to manage the cash being held. By using a JIT inventory system, a firm can delay paying for inventory until it is needed. The firm also avoids carrying costs on the inventory. The companies buy raw materials in JIT systems.