Introduction:

Cash is the lifeblood of any business, and with the turmoil in the financial markets, many companies are struggling to ensure the cash flow and liquidity needed to maintain normal operations. Once primarily the domain of cash managers and treasury managers, todays critical cash-flow and liquidity concerns are demanding executive-level attention. With credit restrictions and an overall decline in demand for most goods and services, chief financial officers are witnessing business drivers change from sales growth to liquidity coverage and from return-on-capital-employed to cash-to-cash cycles. Now, liquidity flexibility must be protected first and foremost. Long-term goals will not be achieved if short-term liquidity obligations cannot be met. Against this backdrop, most companies must increasingly depend on their commercial cash flows to sustain operations. This has critical implications for executives across all industries and geographies.

Cash Management:
Cash and liquidity management are important parts of modern day business operation. They are extremely crucial for the proper running of any business concern. Cash and liquidity management is especially applicable in the context of everyday business operations of a company. Financial managers actively attempt to keep cash (non-earning asset) to a minimum  It is critical to have sufficient cash to minimize emergencies  Steps to improve overall profitability of a firm:  Minimize cash balances  Have accurate knowledge of when cash moves in and out of the firm The most liquid asset of a company is its cash. Normally it has been observed that the amount of corporate assets held by a particular company is only one to three percent of the amount of cash the company has in its possession.

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Corporate Definition of Cash Management:

The effective planning, monitoring and management of liquid / near liquid resources including:  Day-to-day cash control  Money at the bank  Receipts  Payments

Bank Definition of Cash Management:

The effective planning, monitoring and management of liquid / near liquid resources including:  Provision of bank accounts  Deposit / withdrawal facilities  Provision of information regarding bank accounts and positions  Money transfers and collection services  Investment facilities  FX  Financing facilities Cash management is the lifeblood of small businesses, especially in tough economic times. Owners have to understand working capital management and cash management techniques. They have to understand the concept of free cash flow. They have to be able to prepare cash budgets and statements of cash flows. They have to be able to manipulate their cash flows as economic conditions change.

Reasons for Keeping Cash:

 Cash is usually referred to as the "king" in finance, as it is the most liquid asset.  The transaction motive refers to the money kept available to pay expenses.  The precautionary motive refers to the money kept aside for unforeseen expenses.  The speculative motive refers to the money kept aside to take advantage of suddenly arising investment opportunities.
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International Cash Management:

International cash management services including deposit and investment products, foreign exchange, interest rate derivatives and treasury services.  International cash management is the set of activities determining the levels of cash balances held throughout the Multinational Enterprise (cash management) and the facilitation of its movement cross-border (settlements and processing).  These activities are typically handled by the international treasury of the Multinational Enterprise.  Cash balances, including marketable securities, are held partly to enable normal day-today cash disbursements and partly to protect against unanticipated variations from budgeted cash flows. These two motives are called the transaction motive and the precautionary motive.  Efficient cash management aims to reduce cash tied up unnecessarily in the system, without diminishing profit or increasing risk, so as to increase the rate of return on invested assets.  Over time a number of techniques and services have evolved that simplify and reduce the costs of making cross-border payments.  Four such techniques include:  Wire transfers  Cash pooling  Payment netting  Electronic fund transfers  Financial managers try to keep as much cash as possible in a country with a strong currency and vice versa  Sweep account:  Allows companies to maintain zero balances  Excess cash is swept into an interest-earning account

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Factors differentiating international cash management from domestic based systems:

 Differing payment methods and/or higher popularity of electronic funds transfer  Subject to international boundaries, time zone differences, currency fluctuations, and interest rate changes  Differing banking systems and check clearing processes  Differing account balance management and information reporting systems  Cultural, tax, and accounting differences

Advantages of International Cash Management:

Following are the benefits of good cash management:  Control of financial risk  Opportunity for profit  Strengthened balance sheet  Increased customer, supplier, and shareholder confidence  Efficient liquidity levels  Enhanced profitability  Quicker headquarter action  Decision making enhanced  Better volume currency quotes  Greater cash management expertise

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Aspects of Cash Management:

Following are the main aspect of cash management:  Cash budgeting  Optimal cash balances  Long term cash forecasting  Investment of surplus fund  Cash collection and disbursement

Importance of Liquidity in International Cash Management:

The term liquidity refers to how fast something can be converted into cash. Liquid assets are those that are thought to be turned to cash immediately. Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors. Good liquidity usually indicates that a business has good internal cash controls and solid accounting processes Several financial ratios measure the liquidity of the firm. Those ratios are the current ratio, the quick ratio or acid test, net working capital, and the interval measure or the burn rate. Cash is the most liquid asset a company has on its balance sheet. Other assets considered liquid include accounts receivable (A/R), marketable securities, and prepaid expenses. Assets that are easily converted into cash are generally considered liquid because they allow businesses to generate cash quickly during a cash shortage.

Calculating Liquidity:
Several ratios are used when calculating a company's liquidity. Examples include:    Current Ratio = Current Assets / Current Liabilities Acid-Test Ratio = (Cash + A/R + Short-term Investments) / Current Liabilities Working Capital = Current Assets - Current Liabilities

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Financial ratio - analysis will help

you determine how liquid your firm is or how

successful it will be in meeting its short-term debt obligations. 

Current ratio - will help you determine the ratio of your current assets to your current
liabilities. Current assets include cash, accounts receivable, inventory, and occasionally other line items such as marketable securities. You need to have more current assets than current liabilities on your balance sheet at all times.

Quick ratio -

will allow you to determine if you can pay your short-term debt

obligations, or current liabilities, without having to sell any inventory. It's important for a firm to be able to do this because, if you sell have to sell inventory to pay bills that means you have to find a buyer for that inventory. Finding a buyer is not always easy or possible.

Importance of Cash Liquidity:

Liquidity is an important factor that investors use when gauging the overall health of a company. A strong cash position usually means debt is under control and any short-term liabilities can be paid off quickly in hard economic times. High liquidity ratios are also a sign that the company is generating sales and managing expenses, based on the size of A/R and cash on hand. Liquidity is basically current assets that are easily convertible into cash and they are very important for managing cash flows because if a firm require cash to pay its debt then the most liquid asset can fulfill this requirement. If a firm is more liquid or possess more liquid asset then it can easily pay off its debt or obligations by converting them into cash.

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