UNIT 6
Cash Management
Introduction
Cash is the important current asset for operations of the business. It is the basic input needed to
keep the business running on a continuous basis. The firm should keep sufficient cash, neither
more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive
cash will simply remain idle, without contributing towards the firm’s profitability. Thus, a major
function of the financial manager is to maintain a sound cash position.
Concept of Cash Management
Cash management as the word suggests is the optimum utilization of cash to ensure maximum
liquidity and maximum profitability. It refers to the proper collection, disbursement, and
investment of cash. For a small business, proper utilization of cash ensures solvency. Hence, cash
management is a vital business function; it is a function that manages the collection and
utilization of cash. An optimum cash management system is one that not only prevents the
insolvency but also reduces the days in account receivables, increases the collection rates, chooses
the suitable investment vehicle that improves the overall financial position of the firm.
Cash management is concerned with the managing of:
1. Cash flows into and out of the firm;
2. Cash flows within the firm;
3. Cash balances held by the firm at a point of time by financing deficit or investing surplus
cash.
The aim of cash management is to maintain adequate control over cash position to keep the firm
sufficiently liquid and to use excess cash in profitable way.
Cash Management Cycle:
The concept of cash management can be further understood in terms of the cash management
cycle. Sales generate cash which has to be disbursed. The surplus cash has to be invested while
deficit has to be borrowed. Cash management seeks to accomplish this cycle at minimum cost. At
the same time, it also seeks to achieve liquidity and control. The cash management cycle can be
explained by the following figure:
, Aspects of Cash Management
The firm should develop strategies regarding the following four aspects of cash management:
1. Cash Planning: Cash inflows and outflows should be planned to project cash surplus or
deficit for each period of planning. Cash budget should be prepared for this purpose.
2. Managing the Cash Flows: The flow of cash should be properly managed. The cash
inflows should be accelerate while, as far as possible, the cash outflows should be
decelerated.
3. 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.
4. Investing Surplus Cash: The surplus cash balances should be properly invested to earn
profits. The firm should decide about the division of cash balance between alternative
short-term investment opportunities like bank deposits, marketable securities etc.
Functions of Cash Management
Cash management is required by all kinds of organizations irrespective of their size, type and
location. Following are the multiple managerial functions related to cash management:
Investing Idle Cash: The Company needs to look for various short term investment
alternatives to utilize surplus funds.
Controlling Cash Flows: Restricting the cash outflow and accelerating the cash inflow is an
essential function of the business.
Planning of Cash: Cash management is all about planning and decision making in terms of
maintaining sufficient cash in hand and making wise investments.
Managing Cash Flows: Maintaining the proper flow of cash in the organization through cost-
cutting and profit generation from investments is necessary to attain a positive cash flow.
Optimizing Cash Level: The organization should continuously function to maintain the
required level of liquidity and cash for business operations.
Motives for holding Cash
The firms’ need to hold the cash may be attributed to the following three motives:
1. The transaction motive
2. The precautionary motive
3. The speculative motive
Cash Management
Introduction
Cash is the important current asset for operations of the business. It is the basic input needed to
keep the business running on a continuous basis. The firm should keep sufficient cash, neither
more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive
cash will simply remain idle, without contributing towards the firm’s profitability. Thus, a major
function of the financial manager is to maintain a sound cash position.
Concept of Cash Management
Cash management as the word suggests is the optimum utilization of cash to ensure maximum
liquidity and maximum profitability. It refers to the proper collection, disbursement, and
investment of cash. For a small business, proper utilization of cash ensures solvency. Hence, cash
management is a vital business function; it is a function that manages the collection and
utilization of cash. An optimum cash management system is one that not only prevents the
insolvency but also reduces the days in account receivables, increases the collection rates, chooses
the suitable investment vehicle that improves the overall financial position of the firm.
Cash management is concerned with the managing of:
1. Cash flows into and out of the firm;
2. Cash flows within the firm;
3. Cash balances held by the firm at a point of time by financing deficit or investing surplus
cash.
The aim of cash management is to maintain adequate control over cash position to keep the firm
sufficiently liquid and to use excess cash in profitable way.
Cash Management Cycle:
The concept of cash management can be further understood in terms of the cash management
cycle. Sales generate cash which has to be disbursed. The surplus cash has to be invested while
deficit has to be borrowed. Cash management seeks to accomplish this cycle at minimum cost. At
the same time, it also seeks to achieve liquidity and control. The cash management cycle can be
explained by the following figure:
, Aspects of Cash Management
The firm should develop strategies regarding the following four aspects of cash management:
1. Cash Planning: Cash inflows and outflows should be planned to project cash surplus or
deficit for each period of planning. Cash budget should be prepared for this purpose.
2. Managing the Cash Flows: The flow of cash should be properly managed. The cash
inflows should be accelerate while, as far as possible, the cash outflows should be
decelerated.
3. 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.
4. Investing Surplus Cash: The surplus cash balances should be properly invested to earn
profits. The firm should decide about the division of cash balance between alternative
short-term investment opportunities like bank deposits, marketable securities etc.
Functions of Cash Management
Cash management is required by all kinds of organizations irrespective of their size, type and
location. Following are the multiple managerial functions related to cash management:
Investing Idle Cash: The Company needs to look for various short term investment
alternatives to utilize surplus funds.
Controlling Cash Flows: Restricting the cash outflow and accelerating the cash inflow is an
essential function of the business.
Planning of Cash: Cash management is all about planning and decision making in terms of
maintaining sufficient cash in hand and making wise investments.
Managing Cash Flows: Maintaining the proper flow of cash in the organization through cost-
cutting and profit generation from investments is necessary to attain a positive cash flow.
Optimizing Cash Level: The organization should continuously function to maintain the
required level of liquidity and cash for business operations.
Motives for holding Cash
The firms’ need to hold the cash may be attributed to the following three motives:
1. The transaction motive
2. The precautionary motive
3. The speculative motive
