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Unit 11: Cash Management





                 of cash to meet anticipated obligations whose timing is not perfectly synchronized   Notes
                 with cash receipts.
             2.   The Precautionary Motive: Apart from the non-synchronization of anticipated cash
                 fl ows in the ordinary course of business, fi rm may require cash for the payment of
                 unexpected disbursements. The unexpected cash needs at short-notice may be the

                 result of floods, strikes and failure of important customers, bills may be presented
                 for settlement earlier than expected, slow down in collection of accounts receivables,
                 sharp increase in cost of raw materials.  It provides a cushion or buffer to withstand
                 some unexpected emergency.  The precautionary balance may be held in near-money
                 assets like marketable securities.  The amount set aside for precautionary motive is
                 not expected to earn anything.  As matter of abundant caution, many companies had
                 learnt the art of ‘cultivating the rich uncle’, by establishing and maintaining good
                 lasting link with progressive banking institutions.  Ready borrowing power is the
                 best antidote to emergency cash drains and facilities release available cash resources
                 for remunerative applications.
             3.   The Speculative Motive: It refers to the desire of a  firm to take advantage of

                 opportunities, which present themselves at unexpected moments and that are
                 typically outside the normal course of business.  In simple words, it is a motive of
                 holding cash relates for investing in profitable opportunities as and when they arise.

                 In other words, this motive comes from a desire of holding cash to gain in speculative
                 transactions such as, purchase of raw materials at reduced price on payment of
                 immediate cash, dealing in commodities in bulk purchasing and selling when rates
                 are considered favourable.  Hence firms, which have such speculative dealings, may

                 carry additional liquidity.

          11.3 Aspects of Cash Management

          The aspects or problems of cash management can be examined under three heads, such as:
          1.   Cash inflows and outfl ows,


          2.   Cash flow within the fi rm, and
          3.   Cash balances held at the point of time.


          Cash inflows (receipts) and outflows (payments) may not match, they may be excess or less


          over cash outflows. Surplus cash arise when the cash inflows are excess over cash outfl ows and


          deficit will arise when the cash inflows are less than the cash outflows.  The balance known

          as synchronisation  firm should develop appropriate strategies for resolving the uncertainty


          involved in cash flow prediction and in balance between cash receipts and payments.  Firm has
          to come up with some cash management strategies regarding the following four facets of cash
          management.
          1.   Cash Planning: Cash planning is required to estimate the cash surplus or defi cit for each
               planning period. Estimation of cash surplus or deficit can be arrived by preparation of cash

               budget.

          2.   Cash Flows Management: Cash flows means cash inflows and cash outflows. The cash


               fl ows should be properly managed that the cash infl ows should be accelerated (collected
               as early as possible) and cash outflows should be decelerated (cash payments should be

               delayed without affecting fi rm name).
          3.   Determination of Optimum Cash Balance: Optimum cash balance is that balance at which
               the cost of excess cash and danger of cash deficiency will match.  In other words, it is the

               cash balance at that the total cost (total cost equals to transaction cost and opportunity cost)
               is minimum.  Firm has to determine optimum cash balance.
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