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Management of Cash

Management of Cash

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Published by: priyankakohli88 on Jun 04, 2010
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Management of Cash
Cash management refers to management of cash balance and the bank balance andalso includes the short terms deposits. Cash is the important current asset for theoperations of the business. Cash is the basic input needed to keep the business runningon a continuous basis. It is also the ultimate output expected to be realised by sellingthe 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 themanaging of:1.cash flows into and out of the firm2.cash flows within the firm and3.cash balance held by the firm at a point of time by financing deficit or investingsurplus cash.
Cash Management Cycle
Sales generate cash which has to be disbursed out. The surplus cash has to be investedwhile deficit has to borrow. Cash management seeks to accomplish this cycle at aminimum cost and it also seeks to achieve liquidity and control.
Facets of Cash Management 
: In order to resolve the uncertainty aboutcash flow prediction and lack of synchronisation between cash receipts andpayments .the firm should develop appropriate strategies regarding the following four facets of cash management:
Cash Planning: Cash inflows and outflows should be planned to project cashsurplus or deficit for each period of the planning period. Cash budget should beprepared for this purpose.
Managing the cash flows: The flow of cash should be properly managed. Thecash flow should be accelerated while the cash outflows should be decelerated.
Optimum cash level: The firm should decide about the appropriate level of cashbalances. The cost of excess cash and danger of cash deficiency should be matched todetermine the optimum level of cash balances.
Investing surplus cash: The surplus cash balances should be properly investedto earn profits. The firm should decide about the division of such cash balancebetween 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, organisationstructure, competition, culture and options available. The task is complex anddecisions taken can affect important areas of the firm. For example-to improvecollections if the credit period is reduced, it may affect sales.
Motives of holding cash
A distinguishing feature of cash as an asset is that it does not earn any substantialreturn for the business. Even though firm hold cash for following motives:
Transaction motive: This refers to the holding of cash to meet routine cashrequirement to finance. The transactions, which a firm carries on in the ordinarycourse of business.
Precautionary motive: This implies the needs to hold cash to meetunpredictable contingencies such as strike, sharp increase in raw materialsprices. If a firm can borrow at short notice to pay them unforeseen contingency,it will need to maintain relatively small balances and vice-versa.
Speculative motives: It refers to the desire of the firm to take advantageof opportunities which present themselves at unexpected movements andwhich are typically outside the normal course of business.
Compensatory motive: Bank provides certain services to their client freeof cost. They therefore, usually require client to keep minimum cash balancewith them to earn interest and thus compensate them for the free service soprovided.
Objectives of cash management 
There are two basic objectives of Cash Management:Meeting cash disbursement:This is the first basic objective of cash management, according to which the firmshould have sufficient cash to meet the various requirement of the firm at differenttime period. Cash has been described as “Oil to lubricate the ever turning wheels if business, without it the process grinds to a stop.”Minimising funds locked up as cash balances:In this process the finance manager is confronted with two conflicting aspects. Ahigher cash balance ensures power savings with all its advantages. But this will resultin a large balance of cash remaining idle. Low level of cash balance may result in
failure of the firm to meet the payment schedule. The finance manager should,therefore try to have an optimum cash balance.Managing your cash balances is one of the most important parts of working capitalmanagement. If an organization runs out of cash resources it will have to stopoperating immediately .There may not even be the money to pay the salaries at the endof the month, and the banks might have started dishonouring cheques. Furthermore,the trustees or directors could stand charged with wrongful or fraudulent trading,which could entail personal liability or even imprisonment.If the organization has too much liquidity in the long term, it may well be invested infairly low return areas, such as bank deposit accounts. Long term surplus should beinvested in making the organization grow.Cash planning: Cash planning is a technique to plan and control the use of cash. Ithelps to anticipate the future cash flows and needs of the firm and reduces thepossibility of idle cash balances and cash deficits. Cash planning protects the financialconditions of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given project. Cash plans are very crucial indeveloping the overall operating plans of the firm. Cash planning may be done ondaily, weekly or monthly basis. The period and frequency of cash planning generallydepends upon the size of the firm and philosophy of management.Cash forecasting and Budgeting: cash budget is the most significant device toplan for and control cash receipts and payments. A cash budget is a summerystatement of the firm’s expected cash inflows and outflows over a projected timeperiod. It gives information on the timing and magnitude of expected cash flows andcash balances over the projected period. This information helps the financial manager to determine the future cash needs of the firm, plan for the financing of these needsand exercise control over the cash and liquidity of the firm. The time horizon of a cashbudget may differ from firm to firm. A firm whose business is affected by seasonalvariations may prepare monthly cash budgets. Daily or weekly cash budgets should beprepared for determining cash requirement if cash flows show extreme fluctuations.Cash flows for a longer intervals may be prepared if cash flows are relatively stable.
Importance and Significance of Cash Budget 
Cash budget is an effective tool of cash management and it may help the managementin the following ways:1. Identification of the period of cash shortage so that the financial manager mayplan well in advance about arranging the funds at an appropriate time.2. Identification of cash surplus position and duration for which surplus would beavailable so that alternative investment of this excess liquidity may be

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