Managing Cash Flow

262 Investing, Financing, and Borrowing
gaining the advantages of leverage. As in so many other situations, balancing the
risk and the return is part of the job of investment management generally and cash
management specifically. Using or not using borrowed funds is a choice that the
company must make based on its attitude toward the risk as well as the availability
of borrowed funds. Company management must review and analyze this
process to determine the adequacy of the company’s borrowing procedures and
whether the company is using borrowing and the concept of leverage effectively.
LEVERAGE — USING OTHER PEOPLE’S MONEY
TO MAKE MONEY.
CONCLUSION
The company that never has a cash excess or shortfall is rare indeed. Because cash
flows erratically within the typical organization, it is necessary to plan for both
excesses and shortfalls. The latter, to be sure, are more hazardous and such situations
need to be dealt with more urgently than the case of excess cash. But an inadequately
handled excess of cash means the organization is not properly utilizing
all its resources to the benefit of its owners. That represents ineffective financial
management and should not be tolerated.
The company has numerous choices as to how to handle both shortfalls and
excesses of cash. Identifying the alternatives and deciding which are the appropriate
ones for the company to use are as important to the cash management
process as any of the others discussed in this book. If the company is well managed
and plans its cash flow properly, it normally will not have problems finding
resources to use to cover any cash requirements. And setting up policies in
advance as to what should be done with any cash excesses will allow the company
to handle that situation easily and effectively.
NEITHER BORROWING NOR LENDING DO
UNLESS IT MAKES GOOD SENSE TO YOU.