A small company specializing in the sale and installation of swimming pools was profitable but has devoted very little attention to the 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 on one occasion. 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. (Note: In answering the questions for this situation, refer both to this chapter and to Chapter 10, where we describe cash budgets.)

Question 1 What are the advantages and weaknesses of the minimum cash balance practice?

Question 2 There is a saying, If it aint broke, dont fix it. In view of the firms present success in paying bills promptly, should it be encouraged to use a cash budget? Be prepared to support your answer.