Cash Flow Synchronization

If you as an individual were to receive income once a year, you would probably put it in the bank, draw down your account periodically, and have an average balance for the year equal to about half your annual income. If instead you could arrange to receive income weekly and to pay rent, tuition, and other charges on a weekly basis, and if you were confident of your forecasted inflows and outflows, then you could hold a tiny average cash balance.

Exactly the same situation holds for businesses—by improving their forecasts and by timing cash receipts to coincide with cash requirements, firms can hold their transactions balances to a minimum. Recognizing this, utility companies, oil companies, credit card companies, and so on, arrange to bill customers, and to pay their own bills, on regular "billing cycles" throughout the month. This synchronization of cash flows provides cash when it is needed and thus enables firms to reduce the cash balances needed to support operations.

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