Page 253 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes of costs of idle cash must also be kept in mind by the finance manager. A cash management
scheme, therefore, is a delicate balance between the twin objectives of liquidity and costs.

11.1 Cash Management

Need for Cash

The following are four motives for holding cash:

1. Transaction need: Cash facilitates the meeting of the day-to-day expenses and other
payments on the debts. Normally, inflows of cash from operations should be sufficient for
this purpose. But sometimes this inflow may be temporarily blocked. In such cases, it is
only the reserve cash balance that can enable the firm to make its payments in time.
2. Speculative needs: Cash may be held in order to take advantage of profitable opportunities
that may present themselves and which may be lost for want of ready cash/settlement.
3. Precautionary needs: Cash may be held to act as for providing safety against unexpected
events. Safety as is typified by the saying that a man has only three friends – an old wife,
an old dog and money at bank.
4. Compensation motive: Another motive to hold cash balances is to compensate banks for
providing certain services and loans.

Nature of Cash Management

The exact nature of a cash management system would depend upon the organizational structure
of an enterprise. In a highly centralized organization, the system would be such that the central
or head office controls the inflows and outflows of cash on a routine and daily basis. In a
decentralized form of organization, where the divisions have complete responsibility of
conducting their affairs, it may not be possible and advisable for the central office to exercise a
detailed control over cash inflows and outflows.

Self Assessment

Fill in the blanks:

1. Cash held in order to take advantage of profitable opportunities comes under the motive
of ………………… needs.
2. The exact nature of a cash management system would depend upon the ………………… of
an enterprise.

11.2 Cash Management Planning Aspects

The first step in cash management is to estimate the requirements of cash. For this purpose, cash
flow statements and cash budgets are required to be prepared.

Did u know? What is Cash budget?
Cash budget is the plan of receipts and payments of cash during the budget period.

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