Cash Management

Techniques to determine Cash Management

Cash Management Techniques

Techniques to determine Cash Management

The level of working capital is related t the inflow and outflow of cash into the business. Working capital is very important in business for payment of operating cost and also payment to creditors. That’s why it’s very difficult to maintain a level of working capital that allows to make it enough for the critical time and also to continue the business operations. There are some techniques which are applied by cash managers into the business.

  1. Start budgeting: Creating a cash budget is the most fundamental financial management technique and it’s a valuable tool to help firms improve money management and cash flow. If firms have tacked it spending than it must know much to spend in different areas. To make a budget, list of total monthly income and all monthly expenses along with the amount allocated to each category. Cash manager, first of all, makes a cash budget to get a proper handle on cash flow. The bookkeepers, accountants, accounting software and even spreadsheets can help the cash manager to control the inflow and outflow of cash over a period of time. A cash budget is treated as the source for forecasting of cash in business for future protection of cash receipts and cash disbursement. You should have proper knowledge of Cash Equivalent as well.
  1. Using short term financing: Short term financing such as a line of credit can be used to make emergency purchases or to bridge the gap between payable and receivables. A line of credit can be negotiated with firm financial institutions. This should be done before any need which arises into the firm. The firm needs short term credit to meet short term needs and also need to increase the growth of working capital into the business. Banks shareholders and other investors can sometimes provide this cash injection and provide long term financing for working capital. Firms must determine their operating cash requirement and also anticipate short financing which leads to manage the investment of surplus cash.
  1. Using long term financing: Large assets purchases such as equipment and real assets should usually be financed with long term loans rather than with your working capital. This allows the firms to spread the payments over the average life of assets. The firm pays a high rate of interest but will have to reserve working capital for daily operational activities. Discounted Cash flow also based on future pricing impact.
  1. Dealing with business risk:There are many businesses involved in running a business and seriously challenged for firms in the future for operating activities. Does the firm need to consider the numbers of scenarios such as “what if the big orders suddenly come”? “What if a big order suddenly canceled”? This type of risk analysis is the most important part of cash management. This business can be avoided by increasing the number of clients in business which increase the revenue and also improve cash management and also make firms efficient to meet the diversity into the market.
  1. Collect quickly : To guard against the late payments, bill as early as possible and make those invoices as clear and as detailed as possible. It may also be considered the worth of changing other billing practices such as invoice frequency. Instead of waiting the end of month, generate the invoice as soon as the goods or services are delivered.
  1. Monitor Firm cost and inventory: In this technique the firm makes sure it getting the best possible deal from its suppliers. It can do this by shopping around and getting quotas from other suppliers. If they pay better and high amount which lead to efficiently managed cash into firms. Analyze inventory turnover to determine which items are selling and which are not which have strong effect on working capital.


  1. Concentration banking: Decentralized system of account receivable for the firms having their operations spread over a large geographical areas. The firms established a large number of collection centers in different geographical areas. The collection centers deposit the cheques from debtors to the branch of manager bank. The banks transfer a certain amount of money on daily bases to the bank of head office which results the faster collection of cash.


  1. Managing cash collection and disbursement: In managing cash collection and disbursement is to accelerating cash collection, decentralized the cash collection and lock box system techniques are involved. In case of accelerating cash collections the decentralized cash collection system is finalized. In which number of collections centers are involved. These collection centers will collect cheques from customers and deposit in their local bank accounts. You can visit for Free Cash Flow Statement.


  1. Lock box system:A technique is used to speeding up the collection of cash in case of concentration banking the cheques are received by the collection centers and then deposited in the bank by the collection centers. While in lock box system the firms hires the PO boxes and gives the authority to the banks to pick the remittances directly from the lock box and deposit in the firm account directly. This reduced the gap further in the collection of cheques and deposit of the cheques.


Models to determine the optimum level of cash

  1. Baumol Model
  2. Miller-orr- Model


Baumol Model

This model of cash management is based on minimization of two costs such as carrying cost and prime or transaction cost. Carrying cost is occur when the firm holds cash and it is not circulation the firm in losing the opportunity to invest it somewhere. This is also known as opportunity cost. This model is also known as the carrying cost model. In case of transactional cost the firm has to keep it cash in securities that can be converted in cash, it has to pay certain costs like commission ,admin cost etc.As per this model that amount of cash (both in hand and in securities)is the optimum where total of the 2 costs in minimum.


C= (2XUXP/S) 1/2

C stand for optimum cash balance

P stands for fixed cost per transaction’

S stand for opportunity cost per month or annum

U stand for annual or monthly cash requirement




Baumol model is suitable where cash outflow is steady and can be predicted with accuracy in advance. Where the cash flows are random Millor-orr- model is used. This model consisted of setting an upper limit, lower limit and return point for the cash.

  • Upper limit is represented by “h”
  • lower limit by “o”
  • Return point by “Z”.