Page 124 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 7: Cash Management

when a surplus arises. These models assume some cash flow pattern as a given, leaving the task Notes
of cash collection, concentration, and disbursement to other methods.

Self Assessment

Fill in the blanks:

12. A ............................ is an estimate of cash receipt and disbursements of cash during a future
period of time.
13. A firm has to maintain a ............................ of cash for settling the dues in time.

14. The test of ............................ of the firm is that it is able to meet various obligations in time.
15. ............................ Model provides two control limits and a return point.

7.5 Summary

 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.
 A firm has to maintain a minimum amount of cash for settling the dues in time.
 The cash is needed to purchase raw materials, a creditors, day to day expenses, dividend,
etc.
 The test of liquidity of the firm is that it is able to meet various obligations in time.
 There are various models to determine the optimum cash balance with a firm.

 The goals of these models are to ensure adequate amounts of cash on hand for bill payments,
to minimize transaction costs in acquiring cash when deficiencies exist, and to dispose of
cash when a surplus arises.

7.6 Keywords

Current Ratio: A liquidity measure defined as current assets divided by current liabilities.
EPS: Earning Per Share.
Financial Risk: The risk which arises from the use of debt capital.
Investing Cash Flow: Investing cash flow is generated internally from non-operating activities.
This includes investments in plant and equipment or other fixed assets, nonrecurring gains or
losses, or other sources and uses of cash outside of normal operations.

Operating Cash Flow: Operating cash flow, often referred to as working capital, is the cash flow
generated from internal operations. It comes from sales of the product or service of your business,
and because it is generated internally, it is under your control.

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