Cash Management

Objectives:

 To define Cash Management

 To know the objective of Cash Management
 To understand the advantages
 To identify motives of holding cash
 To determine the factors of cash need
 Able to know what are the Problems of Cash
Management
Introduction

 Cash is one of the current asset of

business

 Any business organization need it all the

time.
 A business organization need to keep
sufficient cash.

 Any shortage of cash will hamper the

business operation

 On the other hand excess of cash is also

not going to help.
Cash Management

 A business organization desires to utilize

available cash in most effective way

 But management of cash is not as simple

 It is challenging to decide how much

cash should be put aside to meeting any
exigency.
Objectives of Cash Management

 To maintain cash balance.

 Effective control cash.

 To keep the optimum cash balance

requirements at minimum level by
prompt collection and late disbursement.
Importance of Cash Management

 Business analyst report that poor

management is the main reason for
business failure.

 Poor cash management is probably the

most frequent stumbling block for
entrepreneurs.
Advantages of Cash Management
1. Good relations with banks.
2. Removes the technical inefficiency
3. Goodwill
4. Advantage of cash discount
5. Advantage of Business opportunities
6. Facing unexpected events.
Motives of Holding Cash

 Transaction motive
 Precautionary motive
 Speculative motive
 Compensation motive
Transaction motive

 It refer to the holding of cash required by

a firm to carry its day to day business
transactions in ordinary course of
business.
Precautionary motive

 The precautionary motive of holding

cash is to meet the unpredictable cash
obligation.
Speculative motive

 This refers to maintaining cash balance,

the firm to take advantage of investing
profit-making opportunities and which is
typically outside the normal course of
business.
Compensation motive

 This motive for holding cash balance is

to compensate banks for providing
certain services to their clients free of
charge.
Factors determining cash needs

 Credit position of the firm.

 Production policy of the firm.

 Nature of demand of the products of the

firm

 Terms of purchase and sale

 Receivables

 Relation with banks

 Capacity of borrowing by the firm in

emergency

 Policy of management

 Efficiency in management of cash flow

Problems of Cash Management

1. Controlling Level of Cash

2. Controlling in-flow of Cash
3. Controlling out-flow of Cash
4. Optimal investment of excess cash
1. Controlling Level of Cash

 Every organization try to keep minimum level of

cash balance
 For deciding minimum level of cash the
following things are taken into consideration:
A. Predictable Discrepancies
B. Unpredictable Discrepancies
C. Source of Fund
D. Relationship with Bank
2. Controlling in-flow of Cash

 Adequate control on cash in-flow is also

problematic area

 It is concerned with speedy collection of

cash and also with preventing fraudulent
diversion of cash in-flow.
3. Controlling out-flow of Cash

 In order to control out flow of cash, most

company follow centralized cash payment
system.

 All payments from regional branch office is

transferred to head office in turn pay the bills
directly to the parties.
4. Optimal investment of excess
cash

 The proper investment of excess cash in

company at short notice is also a problem area.

 Finance manager use its prudence and

direction for investment of excess cash.
Sample Problem
Sample Problem