INTRODUCTION

Cash management is one of the key areas of working capital management. Cash is one of the current assets of a business. A concern should always keep sufficient cash for meeting its obligation. Any shortage of cash will hamper the operation of a concern and any excess of it will be unproductive. Cash is the most unproductive of all assets. While fixed assets like machinery, plant, etc and current assets such as inventory will help the business in increasing its earning capacity, cash management has assumed much important.

OBJECTIVES OF CASH MANAGEMENT

The basic objectives of cash management are two types
(a) To meet the cash disbursement needs.

(b) To minimise funds committed to cash balances.

NATURE OF CASH:
For some persons, cash only money in the form of currency (cash in hand). For other person, cash means both cash in hand and cash at bank. Some even include near cash assets in it. They take marketable securities too as part of cash. These are the securities which can be easily converted into cash. These viewpoints reflect the degree of freedom of the persons using the cash. Whether a person wants to use immediately or to use it depends upon the needs of the concerned person. Cash itself does not produced goods or services. It is used as a medium to acquire other assets. It is the other assets which are used in manufacturing goods or services. The idle cash can be deposited bank to earn interest. A business has to keep required cash for meeting various needs. The assets acquired by cash again help the business in producing cash. The goods manufactured or services produced are sold to acquire cash. A firm will have to maintain a critical level of cash. If at a time it does not have sufficient cash with it, it will have to borrow from the market for reaching the required level. There remains a gap between cash inflows and cash outflows. Sometimes cash receipts are more than the payments or it may be vice-versa at another time. A financial manager tries to synchronies the cash inflows and cash outflows. But his situation is seldom found in the real world. Perfect synchronization of receipts and payments of cash is only an ideal situation.

Cash Management
Cash management has assumed important because it is the most significant of all the current assets. It is required to meet business obligation and its unproductive when not used.

Cash management deals with the following:

I. Cash inflows and outflows. II. Cash flows within the firm. III. Cash balance held by the firm at a point of time. Cash management needs strategies to deal with various facets of cash.

(a) Cash planning:

Cash planning is a technique to plan and control the use in cash. A project cash flow statement may be prepared, based on the present business operation and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash.

(b) Cash forecasting and Budgeting:

A cash budget is the most important device for the control of receipts and payments of cash. A cash budget is an estimate of

cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast and expected cash intake and outlay. The short term forecasts can be made with the help of cash flow projections. The finance manager will make estimate of likely receipts in the future and expected disbursements in that period. Though it is not possible to make exact forecast even then estimates of cash flows will enable the planners to make arrangement for cash needs. It may so happen that expected cash receipts may fall short or payments may exceed estimated. A financial manager should keep in mind the sources from where he will meet short term needs. He should also plan for productive use of surplus cash for short periods. The long term cash forecasts are essential for proper cash planning. These estimates may be for three, four, five, or more years. Long term forecasts indicated companys future financial needs for working capital, capital projects etc. Both short term and long term cash forecasts may be made with the help of following methods: (i) (ii) Receipts and disbursements method. Adjusted net income method.

(i). Receipts and disbursements method:

In this method the receipts and payments of cash are estimated. The cash receipts may be from cash sales, collection from debtor, sale of fixed assets, receipts of dividend or other incomes of all items; it is difficult to forecast sales. The sales may be cash as well as creditors basis. Cash sales will bring receipts at the time of sale while credit sales will bring cash later on. The collection from debtors will depend upon the credit policy of the firm. Any fluctuation in sales will disturb the receipts of cash. Payment may be made for cash purchase, to creditors for goods, purchase of fixed assets, for meeting operation expenses such as wage bill, rent, rates, taxed or other usual expenses, dividend to share holders etc.

The receipts and disbursements are to be equaled over a short as well as long periods. Any shortfall in receipts will have to be met from banks or other sources. Similarly, surplus cash may be invested in risk free marketable securities. It may be easy to make estimates for payments but cash receipts may not be accurately made. The payments are to be made by outsiders, so there may be some problem in finding out the exact receipts at a particular period. Because of uncertainty, the reliability of this method may be reduced.

(ii) Adjusted net income method:

This method may also be known as sources and uses approach. It generally has three sections: sources of cash, uses of cash and adjusted cash balance. The adjusted net income method helps in projecting the companys need for cash at some future date and to see whether the company will be able to generate sufficient cash. If not, then it will have to decide about borrowing or issuing shares, etc. In preparing its statement the items like net income, depreciation, dividends taxes, etc can easily be determined from companys annual operating budget. The estimation of working capital movements becomes difficult because items like receivables and inventories are influenced by factors such as fluctuation in raw material costs, changing demand for companys products any likes delay in collections. This method helps in keeping a control on working capital and anticipating financial requirements.

MANAGING CASH FLOWS:

After estimating the cash flows, efforts should be made to adhere to the estimates of receipts and payments of cash. Cash management will be successful only if cash collection is accelerated and cash disbursements, as far as possible are delayed. The following methods of cash management will help

METHODS OF ACCELERATING CASH INFLOWS:

Prompt payment by customers:

1.

In order to accelerate cash inflows, the collection from customers should be prompt. This will be possible by prompting billing. The customers should be promptly informed about the amount payable and the time by which it should be paid. It will be better if self addressed envelope is sent with the bill and quickly reply is required. Another method for prompting customers to pay earlier is to allow them a cash discount. The availability to discount is good saving customer and in an anxiety to earn it they make quick payments.

2.

Quick conversion of payments into cash:

Cash inflows can be accelerated by improving the cash

collecting process. Once the customer writes a cheque in favor of the concern the collection can be quickened by its early collection. There is a time gap between the cheque sent by the customers and the amount collected against it. This is due to many factors:
(i)

Mailing time i.e., time taken by post office for transferring cheque from customer to firm, referred to as postal float.

(ii)

Time taken in processing the cheque within the organization and sending it to bank for collection, it is called lethargy, and

(iii)

Collection time within the bank i.e., time taken by the bank in collecting the payment from the customers bank, called bank float. The postal float, lethargy and bank float are collectively referred to as deposit float. The term deposit float refers to the cheques written by the customers but the amount not yet useable by the firm. An efficient cash management will be possible only if the time taken in deposit float is reduced and make the money available for use. This can be done by decentralization.

3. Decentralization collection:
A big firm operating over wide geographical area can accelerate collection by using the system of decentralized collection. A number of collecting centers are opened in different areas instead of collecting receipts at one place. The idea of opening different collecting center is to reduce the mailing time from customers dispatch to cheque and its receipt in the firm and then reducing the time in collecting these cheques. On the receipt of the cheque it is immediately sent for collection. Since the party may have issued the cheque on a local bank. It will not take much time in collecting it. The amount so collected will be sent in the central office at the earliest. Decentralization collection it. The amount so collected will be sent in the central office at the earliest. Decentralization collection saves mailing and processing time and thus reduces the financial requirements.