cash management 1

CONTENTS…………………….

Meaning of cash Nature of cash Motives for holding cash Meaning of cash management Objectives of cash management Advantages of cash management Scope of cash management Factors determining cash needs Cash cycle or cash turnover Different stages in cash cycle model

Meaning of cash

In a narrow sense ,it includes coins, currency

notes, bank draft, withdrawals by cheques on

demand and bank balances in bank accounts.

In a broader sense ,the term cash refers to as

near cash assets.

Cash is there for described as the oil to

lubricate the ever-turning wheels of business:

without it the process grinds to a stop.

Nature of cash

• Cash serves as a liquid asset.

• It is the medium of exchange on the common

purchasing power.

• Cash and near cash-assets can be immediately

sold and converted in to cash.

• Cash is a working assets to meet the day to day

payment of operational obligations.

• Cash is the most significant and least

productive asset.

• Cash is an asset , it earns only when it is in

use.

• Cash is the basic input needed to keep the

business running on a continuous basis.

Motives for holding cash

1. Transaction motive

2.Precautionary motive

3. Speculative motive

4.Compensation motive

1. Transaction motive

It refers to the holding of cash required by

a firm to carry its day to day business

transactions in the ordinary course of

business.

2.Precautionary motive

The precautionary motive of holding cash is

to meet the unpredictable cash obligations

of a firm.

3.Speculative motive

This refers to maintaing cash balance ,the

firm to take advantage of investing in profit –

making opportunities and which is typically

outside the normal course of business.

4.Compensation motive

This motive for holding cash balance is to

compensate banks for providing certain

services to their clients free of charge.

Meaning of cash management

Cash management is one of the key areas of

working capital management .it involves the

management of cash in such a way that

sufficient cash is always available to meet the

obligation of the firm.

Objectives of cash management

1. Cash outflows objectives

2.To minimize the cash balance

3. Effective control of cash

Advantages of cash management

1. Good relations with banks.

2.Removes the technical inefficiency

3. Goodwill

4.Advantages of cash discount

5.Advantages of business

opportunities

6.Facing unexpected events

Scope of cash management

Determining optimum level of cash

Cash planning and forecasting

Managing the cash flows

Investing surplus cash

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 borrowings by the

firms in emergency

Policy of management

Efficiency in management of

cash flows

Cash cycle and cash turnover

Cash cycle refers to the process by which cash

is used to purchase raw materials from which

finished goods are produced, which are then

sold to customers who later pay the bills

The firm receives cash from

customers and the cycle repeats itself.

The term cash turnover means the

number of times the firm’s cash is

actually turned over each year.

Different stages in cash cycle modelPurchase of raw materials on account.

Average time involved in holding stock of

inventory.

Sell finished goods on account

Average time involved in account

receivable or book debts

Collect account receivable

Average time involved in accounts

payable

Pay accounts payable

References

Dr: P Periasamy,2011, Financial

management, Vijay Nicole Imprints Pvt Ltd

Chennai.

J. C Varshney,2009, Financial

management, Wisdom Publications ,Delhi.

M.Y Khan and P.K Jain,2004,finanacial

management, Tata McGraw-Hill Publishing

Company Ltd,New Delhi.