Cash management

Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis.It is also the ultimate output expected to be realised by selling the service or product manufactured by the firm. The firm should keep sufficient cash neither more or less.

Cash shortage will disrupt the firm’s manufactured operation while excessive cash will simply remain idle, without contributing anything towards the firm’s manufacturing operation as while excessive cash will simply remain idle, without contributing anything towards the firm’s profitability.

Cash is the money which a firm can disburse immediately without any restriction. The term cash included coins, currency and cheques held by the firm, and balances in its bank accounts. Sometimes near-cash itmes,such as marketable securities or bank times deposits, are also included in cash.

The basic characteristic of near-cash asset is that they can readily be converted into cash. Generally, when a firm has excess cash, it invest it in marketable securities . This kind of investment contribute some profit to the firm.


Cash management is concerned with the manager of

i) Cash flows into and out of the firm.

ii) Cash flows within the firm.

iii) Cash balances held by the firm at a point of time by financing deficit or investing surplus cash.

It can be represented by a cash management cycle.Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control.

Cash management assume more importance than other current assets because cash is the most significant and the least productive assets that a firm holds.

It is significant because it is used to pay the firm’s holds. It is significant because it is used to pay the firm’s obligations.However, cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore,  the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.

Cash management is also important because it is difficult to  predict cash flows accurately, particular the inflows, and there is no perfect coincidence between the inflows and outflows of cash.The firm should evolve strategies regarding the following four facets of cash management.

1)Cash planning- Cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash budget should be prepared for this purpose.

2)Managing the cash flows-The flow of cash should be properly managed. The cash inflows should be accelerated while,as far as possible, the cash outflows should be decelerated.

3) Optimum cash level- The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances.

4) Investing surplus cash- The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short-term investment opportunities such as bank deposits, marketable securities, or inter-corporate lending.


The firm’s need to hold cash may be attributed to the following three motives.

1) The transaction motive-The transactions motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchase, wages and salaries, other operating expenses, taxes, dividends etc. The need to hold cash would not arise if there were perfect synchronization between cash receipts and cash payments.

2) Precautionary Motive- The precautionary motive is the need to hold cash to meet contingencies in the future. It provides a cushion or buffer to withstand some unexpected emergency. The precautionary amount of cash depends upon the predictability of cash flows. If cash flows can be predicted with accuracy, less cash will be maintained for an emergency. The amount of precautionary cash is also influenced by the firm’s ability of the firm to borrow at short notice,less the need for precautionary balance.

Speculative Motive- The speculative motive relates to the holding of cash for investing in profit-making opportunities as and when they arise. The opportunity to make profit may arise when the security prices will hold cash, when it is expected that interest rates will rise and security prices will fall.

Securities can be purchased when the interest rate is expected to fall. The firm will benefit by the subsequent fall in interest rate is expected to fall; the firm will benefit by the subsequent fall in interest rates and increase in security prices.

Cash planning-Cash flows are inseparable parts of the business operations of firms. A firm needs cash to invest in inventory,receivable and fixed assets and to make payment for operating expenses in order to maintain growth in sales and earning.

Cash planning is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash balances.



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