CASH MANAGEENT

. Importance of Cash When planning the short or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Bear in mind that more businesses fail for lack of cash than for want of profit.

Importance of cash management

Cash management is one of the key areas of working capital management. Management of cash is very important because cash is the common denominator to which all current assets can be reduced.

Cash includes:
Currency Cash equivalents- cheque , DD, postal orders etc. Near cash items- marketable securities, time deposits in banks etc.

They serve as a reserve pool of liquidity

Motives for holding cash

1. Transaction motive holding cash to meet routine expenses 2. Precautionary motive for meeting unforeseen contingencies like flood, strikes , cancellation of order for goods etc. 3. Speculative motive to take advantage of profitable opportunities as and when they arise 4. Compensative motive kept with the bank for providing certain services and loans.

The basic objectives of cash management are:

1. To meet cash disbursement needs 2. To minimize funds committed to cash balances These are mutually contradictory and the task of cash management is to reconcile them. The crucial problem of cash management is to solve the liquidity- profitability dilemma.

Liquidity- Profitability Dilemma

More Cash

More Cash

Optimum cash balance

No cash

Maximum Liquidity

No Liquidity Maximum Profit

No Profit