cash management

cash is the most important current assets for the operations of the business. it is and idle and non-earning assets. therefore, the firm should keep sufficient, cash, neither more, nor less more cash balance reduce the rate of return in equity and hence the value of the firms stock the term cash includes coins, currency and cheques held by the firm and balance in its bank accounts. some times near-cash items, such as marketable securities or bank deposits, are also included in cash.

managing cash flows is an extremely important risks for a financial manager, because the primary goal of a financial manager is to maximize a firms value and is based on cash flows. the financial manager's task is determining how much cash a firm should have on hand at any fume to ensure normal business operations continue without interruptions. if a firm holds more cash than it needs shareholder's returns will not be maximized.

function of cash management

there are various functions of cash management they are as follows:

1. to cash planing: cash flows should be planned to project cash surplus or deficit for the period. cash budget is prepared for this purpose.

2. to design and managing cash flows: the cash flows should be properly managed. the inflows of cash should be accelerated and the outflows of cash should be decelerated as possible.

3. to maintain cash and marketable securities in amounts close to optimal level: the firm should try to maintain the appropriate level of cash balance. the cost of excess cash and the danger of cash deficient should be matched to maintain the optimal level of cash balance.

4.to place the cash and marketable securities in the proper institutions and in the proper forms: the idle cash or precautionary cash balance should be properly invested to earn profits. the firm should take the appropriate decision about the division of such balance between bank deposits and marketable securities.

motives for holding cash

the firm holds cash for various motives. they are:

1. transaction motive: the principle motive for holding cash is to conduct day to day operations a cash balance associated with routine payments and collections like purchase of raw material, payment of wages, salaries, interest, dividends, taxed etc.

2. compensating balance: a cash balance that a firm must maintain with a bank to compensate the bank for services rendered or for granting a loan. firm often maintains bank balance in excess of transactions. needs as a means of compensating for the various serious. these balance are called compensating balance, bank provide various services to the firm like payment of check, information of credit, loan etc. so, firm should maintain the compensating balance.

3. precautionary motive: as cash balance held in reserve for random, unforeseen fluctuation in cash inflows and outflows for example, strike, in efficiency in collection of debtors cancellation of order failure of important customers, sharp increase in cost of raw materials etc.

4. speculative motive: a cash balance that is held to enable the firm to purchase that might arise. for example,- purchasing of raw material at a reduced price on payment of immediate cash, falls in price of share and securities, purchasing at favorable price.