Cash and the External Balance Sheet

The external balance sheet reports just one cash account. But many businesses keep several bank checking and deposit accounts, and some keep a fair amount of currency on hand. A business may have foreign bank deposits in Euros, English pounds, or other currencies. Most businesses set up separate checking accounts for payroll; only payroll checks are written against these accounts.

Managers should monitor the balances in every cash account in order to control and optimize the deployment of their cash resources. Therefore, information about each bank account should be reported to the manager.

Managers should ask these questions regarding cash:

  • Is the ending balance of cash the actual amount at the balance sheet date, or did the business engage in window dressing in order to inflate its ending cash balance? Window dressing refers to holding the books open after the ending balance sheet date in order to record additional cash inflow as if the cash was received on the last day of the period.

    Window dressing is not uncommon. If window dressing has gone on, the manager should know the true, actual ending cash balance of the business.

  • Were there any cash out days during the year? In other words, did the company’s cash balance actually fall to zero (or near zero) during the year? How often did this happen? Is there a seasonal fluctuation in cash flow that causes “low tide” for cash, or are the cash out days due to running the business with too little cash?

  • Are there any limitations on the uses of cash imposed by loan covenants by the company’s lenders? Do any of the loans require compensatory balances that require that the business keep a minimum balance relative to the loan balance? In this situation the cash balance is not fully available for general operating purposes.

  • Are there any out-of-the-ordinary demands on cash? For example, a business may have entered into buyout agreements with a key shareholder or with a vendor to escape the terms of an unfavorable contract. Any looming demands on cash should be reported to managers.

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