CASH MANAGEMENT

Why Cash Management is important?

 Cash is money that is easily accessible either in the bank or in the business

 Take advantage of strategic investments

 Take advantage of opportunities to reduce costs

Good cash management is simple. It involves:

 Knowing when, where, and how your cash needs will occur

 Knowing the best sources for meeting additional cash needs

 Being prepared to meet these needs when they occur, by keeping good relationships with
bankers and other creditors

The starting point for good cash flow management is developing a cash flow projection.

Cash Management System

The tasks of a cash management system include:

 Analyzing financial transactions within agreed posting periods.

 Identifying and mapping future trends in financial budgeting as accurately as possible.

 Cash concentration

Objectives of Cash Management

 The prime objective of cash management is to channelize the

flow of cash from the surplus to deficit units to maintain the
appropriate liquidity position of the organization. In addition,
the objectives of cash management can be broadly subdivided
into two heads – maintaining the inflow and outflow of cash and
sustaining the cash position held by the organization to meet the
current obligations.

CONCEPT OF CASH MANAGEMENT

 Cash management helps to maintain the balance between the

twin objectives of liquidity and cost.

 The modern finance manager is required to manage the cash

flow arising out of the operations of the business firm.
  The finance manager who is responsible for cash management
also controls the transactions that affect the firm’s investment in
marketable securities.

 In case of excess cash , marketable securities are purchased and

in the case of shortage of cash , a part of the marketable
securities is liquidated to procure enough cash.
FACTORS AFFECTING CASH NEED & MANAGEMENT

CASH CYCLE: The term cash cycle refers to the length of the time between the payment for purchase of
raw materials and the receipt of sales revenue.

CASH INFLOWS & OUTFLOWS: Every business firm has to maintain cash balance its expected inflows &
outflows are not always synchronized.

COST OF CASH BALANCE: One of the factors to be considered while determining the minimum cash
balance is the cost of maintaining cash or of meeting shortages of cash.
Motives for Holding Cash

Transactions Motive -- to meet payments arising in the ordinary course of business

Speculative Motive -- to take advantage of temporary opportunities

Precautionary Motive -- to maintain a cushion or buffer to meet unexpected cash needs

Cash Conversion Models

• The Baumol model is a simple approach that provides for cost-efficient cash balances by
determining the optimal cash conversion quantity.

• The firm manages its cash inventory by calculating two costs:

– the cost of converting marketable securities into cash and vice versa, and

the cost of holding cash rather than marketable securities

Uncertainty Model Miller-Orr

• When uncertainty of cash flows is very high resulting in random fluctuations in cash balances,
EOQ-Cash model may not work and one has to find a solution in stochastic models.

• Miller and Orr set up two control limits of cash holding: upper limit and lower limit

• When cash balances reaches the upper limit, a transfer of cash to market securities takes
place by purchasing securities and when it reaches a lower limit, a transfer from market
securities to cash takes place by selling securities

• When cash balance stays within these bounds, no transaction takes place.