Discuss the premise that cash is the 'essential commodity' of a Research Paper

Discuss the premise that cash is the 'essential commodity' of a business, that cash lubricates the business and allows operation - Research Paper Example Cash is particularly important for business because people and organizations will not be normally willing to accept anything other than cash in settlement of their claims against the business. This paper will specifically discuss the importance of cash management and cash planning in a business environment. Importance of Cash Financial experts indicate that cash is the ‘essential commodity’ of a business, that cash lubricates the business and allows operations to run efficiently. It is clear that cash is necessary to meet the day to day needs of a business. Evidently, a business firm cannot run its operations efficiently unless it has enough cash to pay its employees and debtors. In addition, adequate cash reserves are vital for business to invest in infrastructure and other expansion projects and to deal with unexpected contingencies. Experts opine that a firm’s cash flow is a key factor determining the long term success of the business. To illustrate, investors and shareholders give particular focus to the strength of cash reserves while evaluating financial position of a company. Clearly, companies lacking adequate cash reserves cannot offer attractive dividends to stakeholders and this condition in turn would adversely affect their long term sustainability. The intensity of market competition is very high today, and therefore firms need to significantly invest in business promotion in order to successfully confront competitors. If an organization does not have adequate funds to promote its business in the market, it will probably lose its market share to competitors and eventually the business may go out of the market. Importance of Cash Management and Planning As discussed already, cash is an ingredient element for business growth and therefore effective management and planning of cash is vital to ensure long term business success. Assuring sufficient funds as and when required is a potential challenge for financial managers in every or ganization. When an organization has sufficient funds to implement its business plans to address economic downturns, it can focus on its business operations confidently. On the other hand, when an organization struggling with inadequate cash flow, it is forced to review and modify its business plans. Under such circumstances, a firm cannot run its operations effortlessly. In the view of Williams, effective cash management is particularly important to maintain safe debt levels (n. p.). The financial management has to critically analyze the firm’s ability to repay debts before making a borrowing decision. Excess borrowing beyond the capacity of the organization will certainly affect the feasibility of the business even when the borrowing rates are low. Therefore, cash management is inevitable while dealing with debt financing. In addition, cash management plays a significant role in enabling effective utilization of money. As Nikolai et al. point out, cash management is particu larly concerned with the management’s ability to identify cash shortage problems before they arise and to develop potential strategies to resolve those issues recognized (317-318). Proper management of cash is crucial to ensure that the organization has sufficient funds to finance purchases and other expansion activities during the peak season. Thoughtful cash management is