Cash Management 1
Transcript of 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.