Question

City Farm Insurance has collection centers across the country to speed up collections processes. The company also makes its disbursements from remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by three and one-half days and disbursement time increased by two days because of these policies. Excess funds are being invested in short-term instruments yielding 4 percent per annum.
a. If City Farm has $4.50 million per day in collections and $3.50 million per day in disbursements, how many dollars has the cash management system freed up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)
b. How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

Answer 1

Answer:

City Farm Insurance

a. City Farm cash management system has freed up $1,000,000 ($4,500,000 - $3,500,000).

b. City Farm can earn on short-term investments an amount equivalent to $21,900,00 {($1,500,000 x 365) x 4%}

Explanation:

A good cash management system combines accounting with financial management to produce financial visibility and provide business insights that can help the entity to increase its earnings with short-term investments.  This is because it frees up investable cash.  An entity can invest its excess cash in these instruments: money market funds, treasury bills, and certificates of deposit, offered by commercial banks.