Cash Management

Cash, the most liquid asset, is of vital importance to the daily operations of business firms. While a proportion of corporate assets are held in the form of cash is very small, often between 1 and 3 per cent its efficient management is crucial to the solvency of the business. In a very important sense, cash is the focal point of fund flows in a business and is generally referred to as the life blood of a business enterprise.

Why does a firm need cash? There are three primary motives for a firms to hold cash: (1) to meet the needs of day-to-day transactions (transactions motive); (2) to protect the firm against uncertainties characterizing some of its cash flows (precautionary motive) and (3) to take advantage of unexpected investment opportunities (speculative motive).

While cash serves these functions, it is an idle resource with an opportunity cost. The liquidity by holding cash is at the expense of profits that could accrue from alternatives investment opportunities. Hence, the firm should plan and control cash carefully.

Cash Budgeting:

Cash forecasts or budgets are the principle tools of cash management. They are routinely prepared by business firms. They are helpful in: (1) estimating cash requirements, (2) planning short term financing, (3) scheduling payments in connection with capital expenditure projects, (4) planning purchase of materials, (5) developing credit policies, and (6) checking the accuracy of long term forecast.

A firm can use multiple short term forecasts of varying length and detail, suited to meet different needs. The commonly used designs for short terms cash forecasts are: (i) on year divided into quarters or months, (ii) one quarter divided into months, (iii) or month divided into weeks and (iv) a week divided into days The point to be emphasized here is that the multiple formats serve different purposes and should not be regarded as mutually exclusive.

Receipts and Disbursement methods:

The principal method of cash forecasting is the receipts and disbursement method. Under this method, the cash forecast shows to the timing and magnitude of expected cash receipts and disbursements over the forecast period. It includes all expected receipts and disbursements over the forecast period. It includes all expected receipts and disbursements, irrespective of how they are classified in accounting. The items of cash receipts are shown below:

From the exhibit it is clear that the receipts and payments method of cash forecasting calls for information about estimated sales plans for production purchasing and financing, and the capital expenditure budget. The most crucial input in the entire process, of course, is the figure of estimated sales. This is because various business plans are closely related to the estimated sales.


Cash sales
Basis of estimation
Estimated sales and its division between cash and credit sales

Collection of accounts receivables
Basis of Estimation
Estimated sales an its division between cash and credit sales and the collection pattern

Interest and dividend receipts
Basis of Estimation
Firm’s portfolio of securities mad return expected for the portfolio.

Increase in Loans/deposits and issue of securities
Basis of Estimation
Financing plan

Sale of assets
Basis of Estimation
Proposed disposal of assets


Cash purchases
Basis of Estimation
Estimated purchase and its division between cash purchase an credit purchase

Payment of credit purchases
Basis of Estimation
Estimated purchases and its division between cash and credit purchases and the terms of credit purchases

Wages and salaries
Basis of Estimation
Manpower employed and wages and salaries structure

Manufacturing expenses
Basis of Estimation
Production Plan

General administrative and selling expenses
Basis of Estimation
Administrative and sales personnel and proposed sales promotion and distribution expenditure

Capital equipment
Basis of Estimation
Capital expenditure budget and the payment pattern associated with capital equipment purchases.

Repayment of loans and retirement of securities
Basis of Estimation
Financing plan