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Cash Management

CASH MANAGEMENT: 1 Objectives of Cash Management 2 Basic Problems of Cash Management 3 Cash Management Models


1 Objectives of Cash Management

2 Basic Problems of Cash Management

3 Cash Management Models

Cash Management


Business concern needs cash to make payments for acquisition of resources and services for the normal conduct of business. Cash is one of the important and key parts of the current assets.

Cash is the money which a business concern can disburse immediately without any restriction. The term cash includes coins, currency, cheques held by the business concern and balance in its bank accounts. Management of cash consists of cash inflow and outflows, cash flow within the concern and cash balance held by the concern etc.

1 Objectives of Cash Management


Meeting the cash requirement


Meeting of cash requirements on time which normally involves in the maintenance of the goodwill of the firm. The firm should keep the adequate cash balances to meet the requirement which are greater in importance.


Minimising the funds locked up in the cash balances


The funds locked up in the form of cash resources should be more, but it should only to the tune of the requirement.


2 Basic Problems of Cash Manage ment


Controlling level of cash


(a)  Preparing the cash budget: Through the preparation of the budget, the cash requirement could be identified which would normally facilitate the firm to trim off the excessive cash in holding.


(b) Providing room for unpredictable discrepancies: The separate amount should be maintained for the purpose to meet out the discrepancies which are not easily foreseen.


Controlling of inflows of cash

(a) Concentration banking



The amount of collection from the local branches are normally deposited in a particular account of the firm, as soon as the deposit has reached the certain limit , the amount in the respective branch account will be transferred to the account at where the firm maintains in the head office. This process of transfer is normally taking place only through telegraphic transfer during the early days but on now a day the anywhere banking is facilitated to transfer the amount of deposit instantaneously.


(b) Lock box system


The process of collection is carried out with the help of local post offices only in order to avoid the postal delays in the transit. This system enhances the speed of the collection at rapid and finally the local branch messenger collects the cheques from the parties through specified post box allocated for the process of collection.


Controlling of cash outflows


(a)  Centralizing of disbursing the payments

The  centralizing  the  process  of  payment  may  facilitate  the  enterprise  to  take advantage of time in settling the payments i.e., reduces the need of immediate cash requirements.


(b) Stretching payment schedule


It is another methodology to avail the maximum possible credit period to postpone the payment by making use of the cash resources most effectively.


Investing the excessive cash surplus


(a)  Determine the need of the surplus cash

Identify the excessive cash resources  which are kept simply idle more than the requirement.

(b) Determination of the various avenues of investment


After identifying the various investment opportunities , the excessive cash resources should be invested to earn appropriate rate of return during the slack season at when the firm does not require greater volume of working capital and vice versa.


3 Cash Management Mode ls


Cash management models analyse methods which provide certain framework as to how the cash management is conducted in the firm. Cash management models are the development of the theoretical concepts into analytical approaches with the mathematical applications. There are three cash manage me nt models which are very popular in the field of finance.


1. Baumol model

The basic objective of the Baumol model is to determine the minimum cost a mount of cash conversion and the lost opportunity cost.

It is a model that provides for cost efficient transactional balances and assumes that the demand for cash can be predicated with certainty and determines the optimal conversion size.


2. Orgler’s model

Orgler model provides for integration of cash management with production and other aspects of the business concern. Multiple linear programming is used to deter mine the optimal cash management. Orgler‘s model is formulated, based on the set of objectives of the firm and specifing the set of constrains of the firm.

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