Introduction

• Cash management is one of the key areas of

working capital management. Apart from the
fact that it is the most liquid asset, cash is the
common denominator to which all currents
assets can be reduced because the other
major liquid assets, that is, receivables and
inventory get eventually converted into cash
 Motives For Holding Cash
Transaction Motive
An important reason for maintaining cash balances is the
transaction motive. This refers to the holding of cash to
meet routine cash requirements to finance the
transactions which a firm carries on in the ordinary course
of business. A firm enters into a variety of transactions to
accomplish its objectives which have to be paid for in the
form of cash. For example, cash payments have to be
made for purchases, wages, operating expenses, financial
charges like interest, taxes, dividends, and so on
• Precautionary Motive
• In addition to the non-synchronisation of anticipated cash inflows and
outflows in the ordinary course of business, a firm may have to pay cash
for purposes which cannot be predicted or anticipated The unexpected
cash needs at short notice may be the result of:
• Floods, strikes and failure of important customers;
• Bills may be presented for settlement earlier than expected; Unexpected
slow down in collection of accounts receivable;
• Cancellation of some order for goods as the customer is not satisfied;
and
• Sharp increase in cost of raw materials. The cash balances held in for
such random and unforeseen fluctuations in cash flows are called as
precautionary balances
• Speculative Motive
• It refers to the desire of a firm to take advantage of opportunities
which present themselves at unexpected moments and which are
typically outside the normal course of business. The speculative
motive helps to take advantage of:
• An opportunity to purchase raw materials at a reduced price on
payment of immediate cash;
• A chance to speculate on interest rate movements by buying
securities when interest rates are expected to decline;
• Delay purchases of raw materials on the anticipation of decline in
prices;
• Make purchase at favourable prices.
• Compensating Motive
• Yet another motive to hold cash balances is to compensate
banks for providing certain services and loans. Banks provide a
variety of services to business firms, such as clearence of
cheque, supply of credit information, transfer of funds, and so
on. While for some of these services banks charge a
commission or fee, for others they seek indirect compensation.
Usually clients are required to maintain a minimum balance of
cash at the bank. Since this balance cannot be utilised by firms
for transaction purposes, the banks themselves can use the
amount to earn a return. Such balances are compensating
balances.
 Objectives
• Meeting Payments Schedule
• In the normal course of business, firms have to make
payments of cash on a continuous and regular basis to
suppliers of goods, employees and so on. At the same
time, there is a consist inflow of cash through collections
from debtors. Cash is, therefore, aptly described as the ‘oil
to lubricate the ever-turning wheels of business: without it
the process grinds to a stop.' A basic objective of cash
management is to meet the payment schedule, that is. to
have sufficient cash to meet the the cash disbursement
needs of a firm.
• Minimising Funds Commited to Cash Balances
• The second objective of cash management is to minimise
cash balances. ln minimising the cash balances, two
conflicting aspects have to be reconciled. A high level of
cash balances will, ensure prompt payment together with
all the advantages. But it also implies that large funds will
remain idle, as cash is a non-earning asset and the firm
will have to forego profits. A low level of cash balances, on
the other hand, may mean failure to meet the payment
schedule. The aim of cash management, therefore, should
be an optimal amount of bank balances.
 Methods of accelerating cash inflows

• Prompt payment by customers

• Quick conversion of payment into cash
• Decentralised collections
• Lock box system
 Slowing cash outflows
• Paying on last date
• Payment through drafts
• Adjusting payroll funds
• Centralisation of payments
• Inter bank transfer
• Making use of float
Marketable Securities/ investment of surplus
funds
• Once the optimum level of cash balance of a firm
has been determined, the residual of its liquid
assets is invested in marketable securities. Such
securities areas short-term investment instruments
to obtain a return on temporarily idle funds. The
basic characteristics of marketable securities affect
the degree of their marketability/liquidity. To be
liquid, a security must have two basic
characteristics: a ready market and safety of
principal
 Treasury Bills
• These are obligations of the government. They
are sold on a discount basis. The investor does
not receive an actual interest payment. The
return is the difference between the purchase
price and the face (par) value of the bill. The
treasury bills are issued only in bearer form. They
are purchased, therefore, without the investors'
name upon them. This attribute makes them
easily transferable from one investor to another
 Negotiable Certificates of Deposits (CDs)

• These are marketable receipts for funds that have

been deposited in a bank for a fixed period of
time. The deposited funds earn a fixed rate of
interest. The denomination and maturities are
tailored to the investors' need. The CDs are offered
by banks on a basis different from treasury bills,
that is, they are not sold at a discount. Rather,
when the certificates mature, the owner receives
the full amount deposited plus the earned interest
 Commercial Paper
• It refers to short term unsecured promissory note sold by
large business firms. As they are unsecured, the issuing side
of the market is dominated by companies which typically
maintain sound credit ratings. Commercial paper (CPs) can be
sold either directly or through dealers. Companies with high
credit rating sell directly to investors. The denominations in
which they can be bought vary a wide range. They can be
purchased similarly with varying maturities. These papers are
generally sold on discount basis in bearer form although at
times commercial papers can he issued carrying interest and
made payable to the order of the investor.
 Bankers' Acceptances
• These are drafts (order to pay) drawn on a specific
bank by an exporter in order to obtain payment for
goods he has shipped to a customer who maintains
an account with that specific bank. They can also be
used in financing domestic trade. The draft
guarantees payment by the accepting bank at a
specific point of time. The seller holds such
acceptance may sell it at a discount to get
immediate funds. Thus, the acceptance becomes a
marketable security.
 Intercorporate Deposits
• Intercorporate deposits, that is, short-term
funds deposits with other companies is a fairly
attractive form of investment of short-term
funds in terms of rate of return which
currently ranges between 12 and 15 per cent.
However, apart from the fact that one month's
time is required to convert them into cash,
intercorporate deposits suffer from high
degree of risk.
 Bills Discounting
• Surplus funds may be deployed to
purchase/discount bills. Bills of exchange are
drawn by seller (drawer) on the buyer
(drawee) for the value of goods delivered to
him. During the pendency of the bill, if the
seller is in need of funds, he may get it
discounted. On maturity, the bill should be
presented to the drawee for payment
Money Market Mutual Funds/Liquid Funds

• Are professionally managed portfolios of

marketable securities. They provide instant
liquidity. Due to high liquidity, competitive
yields and low transactions, these funds have
achieved significant growth in size and
popularity in recent years