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Concept of Cash Management

Updated on September 1, 2014

Meaning of Cash

With reference to cash management, the term "cash" Is used in two senses. In a narrow sense it Includes coins, currency notes, cheques, bank drafts held by a firm with it and the demand deposits held by it in banks. In a broader sense it also includes "near- cash-assets" such as marketable securities and time deposits with banks. If we want we can sell or convert such securities or deposits. The term cash management is generally used for management of both cash and near-cash-assets.

Cash Flow

Cash plays an important role In the economic life of a business. A firm receives cash from sales debtors, and other sources like sale of assets, investment etc. It needs cash to make payments and to pay salaries, wages, rent, interest, dividends etc. Thus in a firm there Is constant inflow and outflow of cash. In short, what blood is to human body cash Is to business. So a major responsibility of financial management is to plan cash and maintain adequate cash balance. Cash flow statement Is an important tool of cash planning and control. At the same time, it serves as a valuable tool of financial analysis also.

The objectives of cash flow analysis are:

1. To show the causes of changes in cash balance between two balance sheets.

2. To show the factors contributing to the reduction of cash balance in spite of increase In profits and vice versa.

Cash Management

Cash Is most important factor in financial management. Every activity in an enterprise revolves round the cash because cash is limited In every enterprise and It cannot be raised as and when one likes it. So It Is desirable that available cash must be managed properly.

Every firm is desirous of utilising the available cash effectively so as to accomplish the goals of the concern le maximisation of profit with minimum efforts. But management of cash Is not as simple as it might appear. In case the firm does not keep sufficient cash In hand, it shall not be in a position to meet the unexpected challenges, which will bring down its credit In the market. But if firm keeps enough cash reserves to meet the expected challenges and cash remains unutilised in the business it will result In both. If heavy amounts are blocked for unforeseen contingencies, the company will not be in a position to carry on its day to day working efficiently. It is where the real problem of cash management comes ie. how much cash should be set aside for the unexpected challenges and how much for the regular day-to-day working.

So it really not an easy problem to solve. In fact no hard and fast rule can be suggested for the problem. All that financial management can do in this regard is to study the past records and take the necessary decision bearing in mind the present economic circumstances and the behaviour and practice of the sister concern

Management of Cash Flows

In order to manage cash properly, the finance manager has to ensure that cash is flowing in and flowing out as per the plan. This requires comparison of actual performance against predetermined plans and objectives, finding out discrepancies. If any, analysing causes for variation and finally taking remedial measures to correct anomaly. It is all possible with the help of cash budget report.

Moreover efficient utilisation of cash involves accelerating cash inflows and slowing disbursements.


Importance of Cash management

Cash management is one of the critical areas of working capital management and assumes greater significance, because it is the most liquid asset used to satisfy the firm's obligations. As It does not yield anything, it Is considered as a sterile asset. So finance manager has to manage cash so that the firm maintains its Liquidity, position without jeopardizing the profitability.

Problem of keeping cash inflows accurately and absence of perfect coincidence between the inflows and outflows of cash add to the significance of cash management. In view of the above at one time, a firm may experience dearth of cash because of payments like taxes, dividends, seasonal inventory etc. while at other times it may have more cash due to large cash sales and quick collections of receivables.

It Is interesting to know that in real life management spends its considerable time In managing cash which constitutes relatively a small portion of a firm's current assets. That is why in recent years a number of new techniques have been evolved to minimise cash holding of the firm.


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    • profile image

      Robert G. 4 years ago

      I just wrote a book on the subject of personal financial management and will revise it to include a chapter on investment income -

    • herbacoachtommy profile image

      Tommy Olsson 5 years ago from Sweden

      Well written