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What is Cash?

31 Mar 2017Economics Essays

Introduction – Cash as a transaction medium

Cash is frequently associated with money in societies. Indeed it is one of the most common mediums through which goods and services are exchange for. In this respect cash holds an importance to society due to its potential to transfer goods and services. In the forthcoming sections an examination of the role of money in the business environment will be conducted.

Role of Money

The purchasing power capability of money in the business environment led to the development of a considerable number of procedures in the accounting and finance field. Cash is frequently regarded as the “lifeblood of the organisation”. Without it the organisation will perish in a few weeks. Cash will affect both the organisation internally and external individuals/entities that are linked with the company. The individuals/entities affected by cash and the influence of such element are described below (Pike et al. 1999, pp 7-8):

  • Customers – as already pinpointed in section 1 cash serves as a very common medium through which goods and services are exchange. Therefore the client can conduct a sale with the business through cash.
  • Suppliers – it is true that it is common practice that credit terms are set between suppliers and the organization. However, the possibility that the final payment is conducted in cash is still very high. The organization can also perform cash purchases and again cash serves as the medium through which the goods are bought from the supplier.
  • Employees – the staff of the organization are paid remuneration at the end of month in line with the employment contract. Cash again serves as a direct or indirect medium that sustains the contract of employment. Indeed in the absence of cash the employee will stop working in the organisation. If the employee is paid directly in cash there is a direct effect. If the employee is paid through a bank automated clearing system, even though the money is electronically transferred to the bank the employee will still eventually withdraw cash to meet the day-to-day expenditure, leading to an indirect effect.
  • Lenders – providers of debt finance also initiate transactions with the organisation through cash. In such a stance cash serves as the medium to transfer the loan, which in turn will lead to interest paid in cash and capital repayments paid also in cash.
  • Government – cash is also another key player for the Government. The corporate taxation that the Government collects is in the form of cash and any monetary grants that the government provides are also transcribed into cash.
  • Equity Investors – the shareholders, which in accordance to the Companies Act 1985 are the legitimate owners of the company also utilise cash to commence transactions with the firm. Whenever share capital is issued, cash is provided by the investors to acquire the shares. The return provided by the company to shareholders, commonly known as dividends is also in the form of cash.

As one can noted from the points above, cash is an extremely important element for the organisation. Indeed in Finance, a number of methods have been developed to assess the cash capability of the organisation. For instance the cash conversion cycle equation is utilised by financial analysts to determine the number of days taken by the company to convert the inputs of production into cash flow (Investopedia 2009).

More elaborate techniques have been developed in order to control other current assets and thus ensure a sound cash flow. For example, a financial manager keeps a keen eye to ensure that not a lot of money is tied up in stock. If the organisation keeps high levels of stock, there is the risk of cash problems, because substantial money is tied up in stock. In these respect methods like the Economic Order Quantity has been developed to keep a good balance of cash (Pike et al. 1999, p 401). Companies like Toyota have gone further to diminish the burden of stock on cash by developing techniques like Just-in-Time Inventory (Lucey 2003, p 578).

Particular attention is also devoted to the credit terms provided to debtors and granted from creditors in order to ensure a sound cash balance. Indeed large organisations develop a Credit Control Department who holds the

Reporting of Money to External Users

At this stage one can understand the importance of cash for the organisation. In this respect management hold the responsibility to report in a true and fair view the cash flow of the organisation. In fact one can find the Cash Flow Statement as an integral part of the financial statements in line with applicable standards (IAS 1 – Presentation of Financial Statements 2000, p 82). The Cash Flow Statements is a statement that outlines the cash movements during a particular time frame, classified between operating, investing and financing activities (Weetman 2003, pp 183-184) . Such statement will be examined carefully by interested users in order to evaluate their economic decisions and thus enhance good cash in their pockets.

References:

  • IAS 1- Presentation of Financial Statements (2000). International Accounting Standards. London: International Accounting Standards Committee.
  • Investopedia (2009). Cash Conversion Cycle (on line). Available from: http://www.investopedia.com/terms/c/cashconversioncycle.asp (Accessed 13th April 2009).
  • Lucey T. (2003). Management Accounting. Fifth Edition. London: Continuum.
  • Pike R. and Neale B. (1999). Corporate Finance and Investments. Third Edition. London: Prentice Hall.
  • Weetman P. (2003). Financial and Management Accounting. Third Edition. London: Prentice Hall.

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