SITUATION
A small company specializing in the sale and installation of swimming pools was profitable but devoted very little attention to management of its working capital. It had, for example, never prepared or used a cash budget. To be sure that money was available for payments as needed, the firm kept a minimum of $25,000 in a checking account. At times, this account grew larger; it totaled $43,000 at one time. The owner felt that this approach to cash management worked well for the small company because it eliminated all of the paperwork associated with cash budgeting. Moreover, it enabled the firm to pay its bills in a timely manner.
Question 1 What are the advantages and weaknesses of the minimum-cash-balance practice?
Question 2 There is a saying "If it ain't broke, don't fi x it." In view of the firm's present success in paying bills promptly, should it be encouraged to use a cash budget? Be prepared to support your answer.