Page 268 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 11: Management of Cash

11.9 Summary Notes

 The four motives for holding cash are Transaction need, Speculative needs, Precautionary
needs and Compensation motive.

 The exact nature of a cash management system would depend upon the organizational
structure of an enterprise.

 Cash budget represents cash requirements of business during the budget period.
 Two very important methods to speed up collection process are Concentrating banking
and Lock-box system.

 The financial manager's concern is with the available balance and not with the company's
ledger balance.
 According to William J. Baumol's Economic Order Quantity model, optimum cash level is
that level of cash where the carrying costs and transaction costs are the maximum.
 According to Miller-Orr Cash Management model, the net cash flow is completely
stochastic.
 Treasury management is the efficient management of liquidity and financial risk in business.
 The operating cycle less the average payment period is referred as the Cash Conversion
Cycle. It represents the amount of time the firms' resources are tied up.
 Management of marketable securities is an integral part of investment in cash. The selection
of securities should be guided by three principles which are Safety, Maturity and
Marketability.

11.10 Keywords

Cash: It is one of the components of current assets and a medium of exchange for the purpose of
transactions.

Cash Budget: It is a statement showing the estimated cash inflows and cash outflows over a
planning period.
Conversion Costs: It is the costs that are associated with the sales of marketable security.

Float: It is the amount of the money tied up in cheques that have been written but not yet
collected.
Optimal Cash Balance: It is that cash balance where the firm's opportunity cost equals transactions
cost and the total cost is minimum.

11.11 Review Questions

1. Explain the Baumol's Model of Cash Management.
2. Write short notes on Lock box system and Concentration banking.

3. What is the difference between the firm's operating cycle and its cash conversion cycle?
4. Why it is helpful to divide the funding needs of a seasonal business into its permanent and
seasonal funding requirements when developing a funding strategy?

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