THE IMPLICATION OF EXCESSIVE AND INSUFFICIENCY OF CASH TO ENTITY’S

CASH MANAGEMENT AND EFFECTS TO THE FINANCIAL PERFORMANCE

SCOPE AND DISCUSSION OF THE PROBLEM

This research aims to address the problem regarding the implication and impact

of keeping excessive and having insufficient amount in the entity’s cash in the following:

1. CASH MANAGEMENT

a. Definition

Cash is the most liquid asset used primarily by companies to pay

their obligations and other purposes. Cash management is the process of

collecting and managing cash flows (Kenton, 2020).

b. Poor Financial Planning

Unable to manage cash properly is just a reflection of the

company’s poor financial management and planning.

Cash Mismanagement

In business operation, entity acquired multitude of cash inflows and

outflows that must be carefully managed in order to meet payment

obligations, plan for future payments and maintain business stability.

Thus, cash mismanagement may be the cause of different cash flow

problems like excessive amount of cash reported or insufficiency.

The following are few examples of cash mismanagement that leads

entity to have shortage and excessive cash (Hiiemaa, 2021):

a. Cashier giving customers less or too much change.

b. Entering incorrect payment methods (cash, credit, debit cards).

c. Not handling returns properly (cash back, exchanging item,

taking store credit)

d. Fraud and theft.

Over Investment/ Under Investment

Investments can serve as catalysts for continued growth of a

business; thus, it needs to be planned and managed wisely or it may

result to different problems.

 Over-investing may be the cause of having insufficiency or

shortage in the amount of cash. It is the practice of investing

more into an asset than what that asset is worth on the open

market (Egba, 2021).

Sometimes, entity lose out on an investment completely while

chasing gains that may not be feasible, which will result to a

 greater loss and may lead to shortage in the cash while

recording many defective investments.

 Under-investing is clearly one of the reasons why a company

is recording excessive amount of cash. Holding onto cash at

the expense of the investments, not just in stocks but also in

new product development and business expansion, may be

missing many significant market opportunities (Kokemuller,

2021).

Unnecessary Borrowings

Borrowing large amount of money may prevent company from

running out of funds, but in fact it only delays a potential future financial

obligation (Jacob, 2018).

Unnecessary borrowings will continuously add cash to the company

that results to excessive amount of cash, for a meantime. Loans involve

interest that may cause additional future burden to the entity.

2. FINANCIAL PERFORMANCE

a. Definition
 Financial performance is a subjective measure of how well a firm

can use assets from its primary mode of business and generate revenues.

The term is also used as a general measure of a firm's overall financial

health over a given period.

It is a complete evaluation of a company’s overall standing in

categories such as assets, liabilities, equity, expenses, revenue, and

overall profitability.

b. Relationship of cash management to the financial performance

c. Effect of keeping excessive cash to the financial performance

Poor cash management can harm the company’s performance in

both subtle ways and obvious ones. Problems do not just arise from a lack

of cash; having too much cash can also negatively affect a business.

Holding excess cash can be like increasing the cost of goods without an

increase in prices. Excessive cash will simply remain idle, without

contributing anything towards the firm’s profitability.

d. Effect of having inadequate cash to the financial performance

According to Said (2011), there is a need for proper management

of cash, since it is the most important current asset for the operation of

business. The firm should keep sufficient cash, neither more or less.

Inadequate cash will disrupt the firm’s operations.

ADVANTAGES AND DISADVANTAGES

1. EXCESS CASH

ADVANTAGES OF EXCESS CASH

 It helps an organization manage its cash flow efficiently.

 Excess cash on hand is a way to meet day-to-day

obligations in case the on boarding of new clients takes

time.

 Ensures that the organization isn't forced to borrow

money. Since borrowing costs are high, organizations

should maintain some excess cash on hand to avoid

taking short-term loans.

 It ensures that the organization is able to meet its

obligations, such as payroll, rent, administration expenses

and loan payments, even if it doesn't generate any revenue

for a specified period.

 It helps the entity to take advantage of speculative

investment opportunities such as to exploit discounts for

prompt payments and to improve credit ratings.

DISADVANTAGES OF EXCESS CASH

 It lowers your return on assets

  The business loses an opportunity to generate additional

returns.

 It increases your cost of capital

 It increases overall risk by destroying business value and

can create an overly confident management team.

2. INSUFFICIENCY OF CASH

DISADVANTAGES OF INADEQUATE CASH

 Damage Morale

 Prevent Business Growth

 Discourages Investors

 This could slow down production and prevent a business

from fulfilling orders that have already been accepted.

 Insufficient capital can prevent the purchase of inventory to

fill new orders resulting in lost business, which makes it

difficult to increase cash flow.

 Can jeopardize future business and the company’s

reputation.

ILLUSTRATIONS

RECOMMENDATIONS

Planning for cash flows in advance such as preparing a projected cash

flow statement. Projected cash flow statement is best defined as a listing of

expected cash inflows and outflows. By monitoring and forecasting your cash
inflows and outflows, you can better predict cash flow shortfalls and organize

debt finance ahead of time if necessary.

• Train cashiers the habit of counting back change to the customer.

• Established policies and procedures in handling transactions related to cash

short and over. They should include before and after count verification,

accountability of employee assigned on cash drawer, manager authorizations for

voids, refunds, and closing the cash drawer after every transaction. As well as

Calculators and unauthorized credit cards "skimming" devices near the cash

registers must be prohibited and stated in policy.

• Managers should remove excess cash and large bills from the cash register

and place in the safe.