Professional Documents
Culture Documents
Cash management refers to management of cash balance and the bank balance and
also includes the short terms deposits. Cash is the important current asset for the
operations of the business. Cash is the basic input needed to keep the business running
on a continuous basis. It is also the ultimate output expected to be realised by selling
the service or product manufactured by the firm. The term cash includes coins,
currency, and cheque held by the firm and balance in the bank accounts.
Factors of Cash Management: cash management is concerned with the
managing of:
1.cash flows into and out of the firm
2.cash flows within the firm and
3.cash balance held by the firm at a point of time by financing deficit or investing
surplus cash.
Sales generate cash which has to be disbursed out. The surplus cash has to be invested
while deficit has to borrow. Cash management seeks to accomplish this cycle at a
minimum cost and it also seeks to achieve liquidity and control.
• Cash Planning: Cash inflows and outflows should be planned to project cash
surplus or deficit for each period of the planning period. Cash budget should be
prepared for this purpose.
• Managing the cash flows: The flow of cash should be properly managed. The
cash flow should be accelerated while the cash outflows should be decelerated.
• Optimum cash level: The firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be matched to
determine the optimum level of cash balances.
• Investing surplus cash: The surplus cash balances should be properly invested
to earn profits. The firm should decide about the division of such cash balance
between alternative short –term investment opportunities such as bank deposits,
marketable securities, or inter-corporate lending.
The ideal cash management system will depend on the firm’s product, organisation
structure, competition, culture and options available. The task is complex and
decisions taken can affect important areas of the firm. For example-to improve
collections if the credit period is reduced, it may affect sales.
A distinguishing feature of cash as an asset is that it does not earn any substantial
return for the business. Even though firm hold cash for following motives:
• Transaction motive: This refers to the holding of cash to meet routine cash
requirement to finance. The transactions, which a firm carries on in the ordinary
course of business.
Cash budget is an effective tool of cash management and it may help the management
in the following ways:
1. Identification of the period of cash shortage so that the financial manager may
plan well in advance about arranging the funds at an appropriate time.
2. Identification of cash surplus position and duration for which surplus would be
available so that alternative investment of this excess liquidity may be
considered in advance.
3. Better coordination of the timing of cash inflows and outflows in order to
avoid chances of shortages or surplus of cash.
Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on
short or long –term basis. Generally, forecasts covering periods of one year or less are
considered short term. Those extending beyond one year are considered long –term.