A Company’s Net Daily Cash Position

On a typical day, a company will have several instances of both cash outflows and cash inflows. These cash flows, however, do not offset each other and a company is left with a net cash position daily that can be either negative or positive.

Managing a company’s cash position is about taking steps to ensure that the net cash position is not negative at the end of each day. In managing the cash position, a company’s treasury department usually gathers information from several sources and at several times during the day. It then uses this information to make decisions that aim to result in a net positive cash position at the end of the day.

The Effect of Different Types of Cash Flows on the Net Daily Cash Position

The greater the magnitude and frequency of cash inflows relative to cash outflows that a company has each day, the greater the likelihood that the company will have a positive net daily cash position.

Typical cash inflows for a company include the following:

• Receipts from sales, operations, etc.;
• Fund transfers received from subsidiaries, joint ventures, and other third parties;
• Investment proceeds;
• Debt proceeds;
• Interest income;
• Tax refunds; and
• Other income.

Typical cash outflows for a company include the following:

• Payments to suppliers;
• Salary disbursements;
• Other payables;
• Fund transfers to subsidiaries;
• Amount paid for investments
• Debt repayments;
• Interest expense;
• Dividend payments;
• Tax payments; and
• Other expenses.

Question

Which of the following cash flows will have the effect of increasing or making more positive a company’s daily cash position?

A. Payables

B. Maturing investments

C. Debt repayment

Solution

The correct answer is B.

Proceeds from maturing investments represent a cash inflow, which has the effect of increasing a company’s net daily cash position.

Options A and B are incorrect. Payables and debt repayment, on the other hand, are cash outflows which will have the opposite effect.

Reading 35 LOS 35d:

Describe how different types of cash flows affect a company’s net daily cash position