Page 111 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes Managing the Cash

Cash management has assumed importance because it is the most significant of all current
assets. It is required to meet business obligations and it is unproductive when not used.
Cash management deals with the following:

1. Cash inflows and outflows
2. Cash flows within the firm
3. Cash balances held by the firm at a point of time.

Managing Cash Flows

After estimating the cash flows, efforts should be made to adhere to the estimates of receipts and
payments of cash. Cash management will be successful only if cash collections are accelerated
and cash disbursement, as far as possible, are delayed. The following methods of cash
management will help:

Methods of Accelerating Cash Inflows

1. Prompt Payment by Customer.
2. Quick Conversion of Payment into Cash.
3. Decentralized Collection.
4. Lock Box System.

Methods of Slowing Cash Outflows

1. Paying on Last Date.

2. Payment through Drafts.
3. Adjusting Payroll Funds.
4. Centralization of Payments.
5. Interbank Transfer.

6. Making use of Float.

Self Assessment

Fill in the blanks:
1. As long as the firm has the ............................, financial failure is improbable.
2. Business analysts report that poor ............................ is the main reason for business failure.
3. Profit is the amount of money you ............................ to make over a given period of time,
while cash is what you ............................ to keep your business running.

7.2 Motives for Holding Cash and Marketable Securities

Cash and short-term, interest-bearing investments, (marketable securities) are the firm’s least
productive assets. They are not required in producing goods or services, unlike the firm’s fixed

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