Which of the following statements is CORRECT? Answer The best way to judge the e

Question

Which of the following statements is CORRECT? Answer The best way to judge the effectiveness of a firm's cash management procedures is to look at the ratio of its cash balances to its sales. The higher this ratio, the more effective the firm's cash management procedures are. A good lock box system will reduce the likelihood that a firm's cash will be stolen, and thus the better the lock box system, the higher the firm's cash balances are likely to be. A good cash budgeting system will improve the ability of a firm to forecast its cash requirements, and this will enable it to carry larger cash balances. If a firm can set up its billing and payments procedures so as to synchronize receipts and payments, this will enable it to operate with lower cash balances, which is good. If Firm A's sales tend to fluctuate violently and unpredictably, whereas Firm B's sales are stable and predictable, then Firm B should carry larger cash balances because they are less likely to be lost during a downturn.

Explanation / Answer

A good cash budgeting system will improve the ability of a firm to forecast its cash requirements, and this will enable it to carry larger cash balances. If a firm can set up its billing and payments procedures so as to synchronize receipts and payments, this will enable it to operate with lower cash balances, which is good.

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