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Home » Finance Homework Help » Cash Management
Cash Management
The main objective of this particular aspect of financial management is to explain the reasons for holding cash and to underlie the need for cash management. Here the techniques of preparing cash budget will have been discussed and focuses on the management of cash collection and disbursement. It also emphasizes the need for investing surplus cash in marketable securities. Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm.

Cash management is concerned with the managing of (i) cash flows into and out of the firm, (ii) cash flows within the firm and (iii) cash balances held by the firm at a point of time by financing deficit or investing surplus cash. It can be represented by a cash management cycle as shown in sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management sells to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control. Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a firm holds. It is significant because it is used to pay the firm’s obligations. However, cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore, the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.

Cash management is also important because it is difficult to predict cash flows accurately, particularly the inflows, and there is no perfect coincidence between the inflows and outflows of cash. During some periods, cash outflows will exceed cash inflows, because payments for taxes, dividends, or seasonal inventory buildup. At other times, cash inflow will be more than cash payment because there may be large cash sales and debtors may be realized in large sums promptly.

Some of its main topics are:

1. Cash budgeting and planning
2. Cash management facets
3. Investing surplus cash in marketable securities
4. Motives for holding cash
5. Optimum cash balance Baumol's model
6. Sptimum cash balance Miller-Orr model
7. Sensitivity analysis
8. Short-term forecasting methods
9. Types of short-term investment opportunities

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