Page 182 - DMGT409Basic Financial Management

Mahesh Kumar Sarva, Lovely Professional University Unit 11: Cash Management

Unit 11: Cash Management Notes

CONTENTS

Objectives
Introduction
11.1 Concept of Cash Management
11.2 Objectives of Cash Management
11.3 Aspects of Cash Management

11.4 Cash Planning or Cash Budget
11.5 Managing Cash Flows
11.6 Computation of Optimum Cash Balance
11.6.1 Baumol Model

11.6.2 Miller and Orr Model
11.7 Summary
11.8 Keywords
11.9 Self Assessment
11.10 Review Questions

11.11 Further Readings

Objectives

After studying this unit, you will be able to:

Define meaning and objectives of cash management
Discuss important aspects of cash management
Introduction

Cash is one of the components of current assets. It is a medium of exchange for purpose of
goods and services and for discharging liabilities. Cash management is one of the key areas of
working capital management as cash is both beginning and the end of working capital cycle-
cash, inventories, receivables and cash. It is the most liquid asset and the basic input required to
keep the business running on a continuous basis.

11.1 Concept of Cash Management

Efficient management of the inflow and outflow of cash plays a crucial role in the overall

performance of a firm. Shortage of cash will disrupt the firm’s manufacturing process while
excess cash will remain idle without any contribution towards profit. Cash is not an end itself,

but is a means to achieve the end. To quote Brigham, “Cash is a non-earning asset, so excessive
cash balance simply lowers the total assets turnover, thereby reducing both the rate of return on
net worth and the value of the stock.” The steady and healthy circulation of cash throughout the
entire business operation is the business solvency.

LOVELY PROFESSIONAL UNIVERSITY 175