To demonstrate the concept well, let us assume that we are driving a car and the first thing that we might do is to glance the fuel meter at the car dashboard. What is the most matter to us is the fuel information at that time whether we still can continue driving or have to stop at the next petrol station to replenish the fuel. It is not last week fuel data or last month data that cares us, we want the car's fuel position now in order to make decision whether to stop at the next petrol station or not. This apply to the same concept where company's cash position is concerned. What we really want is the company's cash position now and not last week or last month data. The data has already historical and cannot be used to make decision whether we want to prepare payment or to invest surplus fund in short term investment.
Basically, I just want to share with you three types of cash data that we normally familiar with it and to certain extent we can use the data. The first data is cash flow statement at the end of the month. This is the most popular method and recommended by all Accounting text book and academicians. The cash flow statement is normally derived from Balance Sheet and Profit & Loss Account for the month. While the cash flow report generated using this concept is correct and according to the Accounting Standard, we need additional report that can give us more meaningful daily cash flow report for us to make daily financial decision.
Here it comes the second method of cash flow data which is called Daily Cash Position. If we take into consideration the daily incoming cheques and daily cheques disbursement, your cash balance will show you a correct cash position at any point of time. The third method which is the most dangerous method is by simply call the bank and requested the cash balance without comparing with the daily cash position as explained in the second method above.
The most difference between the second and third method is the bank balance today is not the same with daily cash position. This is because cheques that we have already disbursed are not necessarily all presented on that day and the bank balance will includes the unpresented cheques or our cheques prepared that still not cleared by the banking system. If we want to make decision on the bank balance alone, this will definitely act as a time bomb which will fatally destroyed your business. Bank balance will overdrawn due to miscalculation of cheques prepared.
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