CASH MANAGEMENT - Accounts and Finance for Managers

The management of cash resources should not be only in a position to afford liquidity but also it should not require the firm to keep the cash resources simply idle; which should be invested in the marketable securities to earn some rate of return whenever the firm feel excessive holding of cash resources.

Motives of holding cash

Transaction Motive: If the cash outflows are more than that of the cash inflows, the firms are expected to maintain the cash resources.

Precautionary Motive: Some times the firm may be required to meet out the contingent needs which could not be foreseen during its life span; warrants the adequate maintenance of working capital.

Speculative Motive: It is a motive holding the cash resources by the firm to exploit the opportunities available in the market. If the vendor of raw materials announces that there is a greater discount towards the bulky purchase of raw materials, may lead the firm to bring down the cost of purchase. For which, the cash resources are required and made use of to the tune of announcements.

Compensation motive: Banks provide certain services to the firms only on the basis of the certain amount of balances in the accounts. That is the motive holding cash resources to avail services from the banker viz compensation motive.

Objectives of Cash Management

  • Meeting the cash requirement: Meeting of cash requirements on time which normally involves in the maintenance of the goodwill of the firm. The firm should keep the adequate cash balances to meet the requirement which are greater in importance.
  • Minimising the funds locked up in the cash balances: The funds locked up in the form of cash resources should be more, but it should only to the tune of the requirement.

Basic Problems of Cash Management

Controlling level of cash

Preparing the cash budget: Through the preparation of the budget, the cash requirement could be identified which would normally facilitate the firm to trim off the excessive cash in holding.

Providing room for unpredictable discrepancies: The separate amount should be maintained for the purpose to meet out the discrepancies which are not easily foreseen.

Controlling of inflows of cash

Concentration banking: The amount of collection from the local branches are normally deposited in a particular account of the firm, as soon as the deposit has reached the certain limit, the amount in the respective branch account will be transferred to the account at where the firm maintains in the head office. This process of transfer is normally taking place only through telegraphic transfer during the early days but on now a days the anywhere banking is facilitated to transfer the amount of deposit instantaneously.

Lock box system: The process of collection is carried out with the help of local post offices only in order to avoid the postal delays in the transit. This system enhances the speed of the collection at rapid and finally the local branch messenger collects the cheques from the parties through specified post box allocated for the process of collection.

Controlling of cash outflows

Centralizing of disbursing the payments: The centralizing the process payment may facilitate the enterprise to take advantage of time in settling the payments i.e., reduces the need of immediate cash requirements.

Stretching payment schedule: It is another methodology to avail the maximum possible credit period to postpone the payment by making use of the cash resources most effectively.

Investing the excessive cash surplus

Determine the need of the surplus cash: Identify the excessive cash resources which are kept simply idle more than the requirement.

Determination of the various avenues of investment: After identifying the various investment opportunities, the excessive cash resources should be invested to earn appropriate rate of return during the slack season at when the firm does not require greater volume of working capital and vice versa.


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