Advise VALCOs management about possible ways of managing a cash deficit in the short and long-term - Essay Example

For example, the actual cash disbursements exceed budgeted cash out flow for wages and taxes, amount payable for supplies, or even dividend payments to shareholders. This being said, a firm usually prepares a cash budget before time to forecast the cash disbursements and receivables it will realize in near future. The cash inflow is subtracted from cash outflow (or payments) and the result is a cash deficit or a cash surplus depending on which amount is higher than the other. A cash deficit, when not financed, will carry over the next period.

Consistent deficits of the cash budget reflect inefficient cash management, and because cash is an important resource, it has to be managed effectively. There are many ways to manage a cash deficit in the short term. Short term means a period of one year or less. Valco has two options to finance its cash deficit in the short term. The first is through making some changes internally and second is using external means to finance the deficit. By internal changes what is meant are changes in Valco’s policies.

First, the company must strive to reduce the debtor cycle. Debtor cycle refers to the number of days it takes debtors to pay for the credit sales. Quick recovery from debtors will ensure that cash is not tied up in the form of account receivable and is free to be used to pay other expenses. Another option that Valco has is to reduce its credit sales. This however, does not come without repercussion as it may mean a reduction in overall sales revenue if Valco stops giving the option of credit to its customers.

Valco can try to reduce its credit sales (and hence the amount tied up in debtors) by offering cash/trade discounts if the customers pay in cash at the time of transaction. This will encourage cash sales and therefore a flow of cash payments. (Davoren, n.d.)Also, as the evidence from the question suggests, the raw material stock was increased for the second month, this means