Cash Management

What is Cash Management

Cash Management

What is cash Management

It’s money that a firm can disburse immediately into operational financial and investing activities of business without any restriction. The term cash includes the coins, currencies, and cheques which are by the firm in the balance in a bank account. It’s also including some absolute liquid assets of the firm such as marketable securities and time deposit into the banks. Cash is the most liquid assets of the business, it also has vital importance to the daily operations of the business firm. Cash is treated as the working capital of the firm during operational activities because it provides cash to the firm to meet the urgent and quick financial needs. It also very helps to meet the petty expenses of the firm.

There are three basic reasons for a firm to hold cash in hand:

  1. To meet the need for daily transactions.
  2. To protect the firm against the uncertainty and bad time into the business.
  3. To take the benefit of unexpected investment opportunity within the business.

Cash Management

Cash management is the corporate process of collecting and managing cash as well as using it for short term investing. Cash is treated as a key component in a company financial stability and solvency. Cooperate treasury and business manager are frequently responsible for overall cash management and related responsibilities to remain solvent.

The term cash management is concerned with the managing of cash flow into and out of the firm, cash flow within the firm and cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Cash management is the responsibility of the finance manger to provide proper cash to the firm. He has to also ensure the funds are not blocked by banks or govt. and thus remain treated as idle. The term cash is considered here in different ways such as:

  • In narrow sense cash is considered as coins, currency note only.
  • In boarder sense, the term cash also include the absolute liquid and liquid assets that can be easily converted into cash such as a marketable securities and bank deposits or also already existed into a cash form.
  • Cash management is generally used for management of both cash and near cash assets, near cash assets, are such as marketable securities and other term deposits into banks.

The objective of Cash Management

There are two basic objectives of cash management.

  1. To meet the requirement of disbursement need as per the payment schedule and purchase of plant etc. Such as payment for wages, purchase, taxes, bill, and raw material, etc.
  2. Every business has a minimum cash amount of the cash that is locked up in the cash balance. A high cash balance ensures proper payment with all its advantages, but this will result in large balances of cash reaming idle.
  3. Low level of cash balance may result in the failure of the firm to meet the payment schedule.
  4. Transaction motive, a Transaction balance is kept by the firms with the motive of meeting routine activities.
  5. Precautionary motive, a firm keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies such as floods, strikes, etc. The unexpected slowdown in the collection of accounts receivable. The sharp increase in the cost of raw materials, cancellation of some order of goods.
  6. Speculative motives, the firm also keep cash balance to take advantage of unexpected opportunities, typically outside the normal course of the business. An opportunity to purchase raw the material at reduces price, make purchase favorable prices and also buying securities when the interest rate is expected to decline.

These objectives are mutually contradictory and thus it’s very difficult for them to maintain a balance between the two above mention objectives.

Factors of Cash Management

There are some important factors which are involved in effective cash management.

  • Cash planning​: Cash flow planning is when a business forecasts short & long term business expenses against the projected income cash.
  •  Managing the cash flows: ​Ineffective cash management a system cash budget is the summary of the firm expected cash inflows and outflows over a projected time period.
  •  Optimum cash level: ​There are some different forms of cash level existed into the business cycle. Short term cash optimum level is used to determine operating cash requirement which exist during the operating activities of the business.
  •  Investing surplus cash: This factor is very helpful for the firm to evaluate effective investing cash projects for gaining high rate of surplus upon them. it also provides effective and valid information related to the near cash assets such as marketable securities bonds, term participation certificates, and other banking instruments.

Problems involve in cash Management

These are some major problems which are involved in the cash management system.

Controlling the level of cash:

The level of cash locked up in the cash balances should be only that is required for business operations. This is obtained by preparing the cash budget. It also shows the time and the amount for the inflow and outflow of the cash.

Controlling the level of inflow of cash

After preparing the cash budget the finance manager should ensure that there is no deviation in the inflow of the cash. All the finance managers are advised to use accurate techniques so that cash come in the firm should not get diverted to anywhere.

Controlling the outflow of cash

This relates to the cash payment to be given to the creditors. The purpose of controlling the outflow of cash is completely different from the purpose of cash inflow. In outflow of the cash, the payments are delay mush as possible and also we slow down the process of cash payments.

Investing the surplus cash

There are some main issues which firm face at the time of investment of cash, where to invest and also determine the amount of surplus cash in hand. The investors also face problem in how to use the safe level of cash for investment purpose.