Page 109 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management Tanima Dutta, Lovely Professional University

Notes Unit 7: Cash Management

CONTENTS
Objectives
Introduction

7.1 Aspects of Cash Management
7.2 Motives for Holding Cash and Marketable Securities
7.3 Factors Determining the Optimum Cash Balance

7.4 Approaches to Determine an Optimal Cash Balance
7.4.1 Cash Budget
7.4.2 Models
7.5 Summary
7.6 Keywords

7.7 Review Questions
7.8 Further Readings

Objectives

After studying this unit, you will be able to:

Know the aspects of cash management
Discuss the motives for holding cash and marketable securities
Identify the factors determining optimum cash balance

Explain the cash management models of Baumol, Miller-Orr, Stone and Beranek
Introduction

Cash is the lifeblood of a business firm; it is needed to acquire supplies, resources, equipment,
and other assets used in generating the products and services provided by the firm. It is also
needed to pay wages and salaries to workers and managers, taxes to governments, interest and
principal to creditors, and dividends to shareholders. More fundamentally, cash is the medium
of exchange, which allows management to carry on the various activities of the business firm
from day to day. As long as the firm has the cash to meet these obligations, financial failure is
improbable. Without cash, or at least access to it, bankruptcy becomes a grim possibility. Such
is the emerging view of modern corporate cash management. On the other hand, marketable
securities come in many forms and will be discussed later, but their main characteristic is that
they represent “near cash” in that they may be readily sold. Hence marketable securities serve
as a back up pool of liquidity that provides cash quickly when needed. Marketable security also
provides a short-term investment outlet for excess cash and is also useful for meeting planned
outflows of funds.
In the previous units we introduced the general concepts associated with managing the firm’s
current assets and liability positions. In this unit, we look in more detail at the problem involved
with managing two very important components of current assets; cash and marketable securities.

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