INTRODUCTION

Cash management is one of the most important areas of overall working capital
management due to the fact that cash is the most liquid type of current assets.
As such it is the responsibility of the finance function to see that the various
functional areas of the business have sufficient cash whenever they require the
same.

At the same time, it has also to be ensured that the funds are not blocked in the
form of idle cash, as the cash remaining idle also involves cost in the form of
interest cost and opportunity cost. As such the management of cash has to find
a mean between these two extremes of shortage of cash as well as idle cash.

Cash management is one of the critical areas of working capital management

and assumes greater significance because it is the most liquid asset used to satisfy
the firm’s obligations but it is a sterile asset as it does not yield anything. Therefore,
the finance manager has to manage cash so that the firm maintains its liquidity
position without jeopardizing profitability.

Problem of prognosticating cash flows accurately and absence of perfect

coincidence between the inflows and outflows of cash add to the significance of
cash management. In view of the above, at one time a firm may experience
dearth of cash because payments of taxes, dividends, seasonal inventory, etc.,
build up while at other times, it may have surfeit of cash stemming out of large
cash sales and quick collections of receivables.

It is interesting to observe that in real life a finance manager spends considerable

time managing cash which constitutes relatively a small proportion of a firm’s
current assets. This is why in recent years a number of new techniques have been
evolved to minimize cash holding of the firm.

Successful cash management involves not only avoiding insolvency (and

therefore bankruptcy), but also reducing days in account receivables (AR),
increasing collection rates, selecting appropriate short-term investment vehicles,
and increasing days cash on hand all in order to improve a company's overall
financial profitability. It empowers businesses with the ability to forecast cash
flows, plan future business strategies, and manage cash accordingly.

Lack of control over cash flows and inefficient cash management can be harmful
to the business. More often than not, it is the improper management of cash that
has caused businesses to fail. Effective cash management is therefore a necessity
for businesses.