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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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