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