Management Of Cash

Management of cash is one of most important areas of overall working capital management. This is due to the fact that cash is the most liquid type of current assets. As such, it is the responsibility of finance function to see that various functional areas of business have sufficient cash whenever they require the same. At the same time, it has also to be ensured that funds are not blocked in form of idle cash, because it will effect interest cost & opportunity cost. As such, management of cash has to find a mean between these 2 extremes of shortage of cash as well as idle cash.

Motives of holding Cash/ Need:-

1) Transactive Motive:- Business needs cash for various payments in ordinary course of its operation which includes payment for purchase of material, wages, dividend, taxes etc. Similary business gets cash from its selling activities & other investment. But there is no coordination between inflow and outflow of cash. When expected cash receipt is short of required payment, cash is needed by firm so that liabilities could be paid, if cash receipts match with cash payments business does not need cash for transactional purpose.

2) Precautionary Motive:- Firms need cash to meet some contingencies. For example.

  1. Strikes, floods, failure of important customers.
  2. Slow rate of cash collection from debtors.
  3. Rejection of orders by customers due to their dissatisfaction.
  4. Rise in cost of raw material etc.

3) Speculative Motive:- It means to make use of profitable opportunities by firm. Sometimes, firm wants to make use of such profitable opportunities which are outside operation of business. For this purpose, firm retains some cash. Some of these opportunities are:-

  1. Opportunity to purchase raw material at low price by payment of cash immediately.
  2. Opportunity to purchase securities at falling prices.
  3. Purchasing raw material at a time when its prices are lowest.

(4) Compensation Motive:- Bank provide number of services to its customers like clearance by cheque, credit information about other customers, transfer of funds etc. for certain services banks charge commission but same of services are provided by them free of cost for which they require indirect compensation. For this purpose they wish their customer to maintain minimum cash balance.