For any business, managing cash is highly important if the business wants to have a long life. A business which cannot manage its cash properly may face the worst risk, i.e., bankruptcy. The business cannot provide sufficient cash for purchasing raw materials to produce goods and services and also to pay fixed and variable costs. To fill the gap between receiving and spending cash, all companies ought to possess a good cash management.
Every company has fixed and variable costs to run its businesses. A company which able to reduce its variable costs may have a comparative advantage from other companies because it can produce more efficient from other companies. As a result, this company can offer cheaper goods and services to expand the market share or earn a higher profit. However, the firm cannot receive the payment immediately after selling its products and services. Sometimes a firm has to wait for 30 or 60 days or even longer concerning the settlement period set up by the firm. A delayed payment facility is a service to attract and to enhance the business cooperation with the customers.
Meanwhile, the firm has to keep purchasing raw materials and paying the fixed and variable costs. Sometimes, the suppliers also set a delay payment facility to the production firm. When the term of payment from customers is the same as the payment to the suppliers, the firm does not require additional cash resources to meet the obligation to the suppliers. In many occasions, the due date of account receivable and payable is not the same. Should the period of account receivable is longer than the account payable, the firm has to find financing source to provide sufficient cash for repaying the bills.
There are two ways to fill the gap between account receivable and payable. First, the firm can get cash from debt financing. The firm can apply for a loan facility to the bank or other financial institutions. Before deciding for applying loan facility to the bank, the company has to make a good financial plan about the payment sources for paying the principal and interest of the loan. If the repayment sources come from the business expansion, the firm has to ensure that the expansion will be enough to repay its debt. Second, the firm can get cash from equity financing. The firm can issue shares to the stock market to raise funds. The advantage is that firm does not have to pay the interest for the equity financing.
To sum up, cash management is crucial for all businesses. Cash management is highly important for all businesses to have a sustained business. There are two ways to fill the gap between account receivable and payable, i.e. debt financing and equity financing. Finding the suitable funding model is necessary to every firm for gaining success.