Cash Management

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

Why a business needs cash management?

Cash is important Current Asset for running a business. Cash is always needed for running a business enterprise on scientific lines. A reasonable cash balance is always preferred it should not be less than the demand nor more than the reasonable demand. The lesser quantity of cash then legitimate need will disturb daily business routine. Similarly, the excess cash will be unwise it will affect the profitability of the organisation.
The cash balance is most unproductive asset of the organisation, its importance is that it is used for paying liabilities. Thus it is recommended that a reasonable cash balance be maintained so that liquidity and profitability be maintained.

What is included in Cash Management?

The word cash is used in two senses—one in narrow sense wherein coins, currency notes, cheques, bank drafts, demand deposits etc. In a broad sense, it indicates near cash assets: marketable securities, time deposits with the bank as these assets can be converted into cash easily. Thus, cash management deals with
(1) Meeting cash disbursement as per the payment schedule.
(2) Minimizing the idle cash balance.

Problems of Cash Management

Cash management encounters the following basic problems.
(a) Controlling level of Cash
(b) Controlling cash inflows
(c) Controlling cash outflows
(d) Optimum investment of surplus cash

(a) Controlling Level of Cash:

The basic object of cash management is to minimize the level of cash balance with the organisation. This can be achieved by preparing the Cash Budget.

(b) Controlling Cash Inflows:

Once the cash budget is prepared the financial manager should see that there should not be a gap between actual cash inflows and its outflows. Due importance must be given to cash collection techniques.

(c) Controlling Outflows of Cash:

The techniques of fast collection and slow disbursements will helpful in controlling outflows of cash. The cash collection should be with an accelerated, while its disbursement must be slow as much as possible. The outflows can be controlled if the centralized system for cash disbursement is exercised. The payment must be made on due date i.e., not before the due date and not after the due date.

(d) Optimum Investment of Surplus Cash:

The excess cash represents the surplus cash available with finance manager after meeting all outflows. The surplus cash is the excess cash available over minimum cash balance such excess should be invested in the purchase of temporary (short period) investments. The excess cash should be invested in securities where funds are safe, the liquidity: the fund should be available whenever required.

Benefits of holding cash or objectives of cash management :

The following are the main objectives of cash management.

(i) Useful in making payment as per schedule:

The main object of cash management is to pay its liabilities on the due date. The payment of purchase of Raw material, wages, salary, interest, dividend, taxes and routine payments.

(ii) No Danger of Insolvency:

Sufficient cash holding will increase the goodwill of the organisation and pay its creditors and taxes on due date thus, danger of insolvency will not be faced.

(iii) Good relation with Bank:

The reasonable cash balance will be helpful in paying customers on the due date. No need to go for Bank credit in the form of cash credit, Bank overdraft and bill discounting.

(iv) Facility of Cash Discount:

The reasonable cash balance will benefit in large scale purchases and its payment in cash will be useful in availing cash discount facility.

(v) Good relations with Suppliers:

The reasonable cash balance is always desirable to pay suppliers on the due date. This will increase the creditability of the firms which will give a rich dividend in the future profitability of the organisation.

(vi) Helpful in odd situations:

When a firm has a reasonable cash balance, it can match out odd business situations. For example, Deflation is such a situation where shortage of currency in circulation in such situation commodities will be cheaper, a firm has sufficient cash balance will be benefited by purchasing commodities and assets.

Factors affecting cash management or Level of Cash

The following are the factors which affect the cash requirement of a concern:

(i) Matching of cash flows:

The cash management is needed to match out cash outflows with cash inflows. The financial manager should see that there should be parity between the two. When outflows are more than cash inflows in such situation proper cash planning is needed, otherwise the firm will face insolvency or closure of the firm.

(ii) Non-recurring Expenditure:

These are the expenses needed for purchasing fixed assets or their expansion. The planning of such projects is needed after a gap of years. The need for such amount will be huge.

(iii) Cash-short costs:

These are the expenses which are caused due to cash paucity. The cash budget is a forecast of cash requirement and its specific period when the same will be needed. The cash-short costs are the sale of securities, its brokerage etc., cost of borrowings such as interest on debentures.

(iv) Cost of excess cash balance:

When a firm keeps more cash than its reasonable requirement, it will reduce the chances of investment of surplus cash balance. The interest loss will be upon the organisation. The interest loss is known as cost of excessive cash balance.

(v) Management cost:

These are the costs which are incurred for cash management such as salary, clerical expenses and these are always of fixed nature.

(vi) Uncertainty:

There are cases when cash inflow may face uncertainty such as the amount to be received from debtors may be delayed the firm should keep some margin for such emergencies or uncertainties.

(vii) Repayment of loans:

The firm may be liable to redeem its long term loans must keep in mind such sum while estimating cash requirements. In general, long term loans are repaid either by issuing new shares or debentures.

(viii) Capacity to Borrow in Emergency:

When a firm has the ability to borrow in emergencies can work with the lesser cash balance, The borrowing capacity of the firm depends upon: firm’s relation with banks, the nature on fixed assest to be mortgaged, rate of interest and demand and supply of short period loans.

(ix) Management Attitude and Policy:

The attitude and policies of management with regard to liquidity, risk of insolvency and credit sales are largely affected by cash requirement. Sometimes management prefers liquidity more than profitability in such situation level of cash requirement will be high.

(x) The efficiency of Management in Managing Cash:

When management follows and practices such policies by which debtors are realized on due date and creditors are paid late in such state of affair lesser cash balances will be needed.

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