Cash Management (Business or industry)

Meaning of Cash:

The term ‘cash’ can be viewed in two senses. In a narrow sense cash includes actual cash in the form if notes, coins, bank drafts held by a firm and the deposits withdrawals on demand held in commercial banks. But in a broader sense, it also includes what are called marketable securities. These are those securities which can be immediately sold or converted into cash whenever needed.

Reasons for Holding Cash:

The need for holding the cash arises from a variety of reasons which are briefly summarized as

1. Transaction Motive: The transaction motive refers to holding cash to meet the routine cash requirements. As the company makes routine transactions, out of non-synchronization of inflows and outflows of cash in the ordinary course of business arises the need for holding cash.
2. Precautionary Motive: Contingencies have a habit of cropping up when least expected. A sudden fire may break out, employees may go on strike and these generally do not arise in the ordinary course of business. The company has to be prepared to meet these contingencies to minimize its losses. For this purpose companies generally maintain some amount in the form of cash.
3. Speculative Motive: Firms also maintain cash balances in order to take advantage of opportunities that do not take place in the course of routine business activities, for example, opportunities like, a sudden decrease in the price of raw materials which is not expected to continue for a long period. These transactions are of purely speculative nature for which the firms need cash.

The basic objective of cash management is to reconcile two mutually contradictory and conflicting tasks:

1. To meet payment schedule
2. To minimize the funds committed to the cash balance

When the firm is unable to meet the payment schedule it will affect the credit worthiness of the firm if a firm committed more funds as cash balances as cash is non-earning asset, the firm has to forego profits.

Cash Budgets

Cash Budget is a statement showing the forecast of cash receipts, cash disbursements and net cash balances over a period of time. Cash budgets help a firm to plan and control the use of cash. Cash budgets highlight the cash position of a firm when it moves from one period to another period. The time horizon chosen for making the cash budgets is based on the variations of flow of cash. The greater the variation lesser is the time horizon. In order to make cash budgets one has to decide two factors (1) Time horizon (2) Selection of factors that have a bearing on cash flow. Here only cash items are to be selected non-cash items like amortization, depreciation are to be excluded.

Preparation of a Cash Budgets:

A cash budget may be prepared by following either of two generally accepted procedures:

1. The receipts and disbursements method
2. The adjusted profit and loss or adjusted net income method.

In the first method, all anticipated cash receipts are carefully forecasted such as cash sales, cash collections from debtors, dividends, interest on investments, proceeds from sale of assets, royalties, bank loans, etc. Likewise, cash disbursements for materials purchases, supplies, salaries, repayment of loans, dividends, taxes expenses, purchase of plant or equipment are also determined.

Inflows/Cash Receipts

1. Cash sales
2. Collection of accounts receivables
3. Disposal of fixed assets


1. Accounts payable/Payable payments
2. Purchase of raw materials
3. Wages and salary (Payroll)
4. Factory expenses
5. Administrative and selling expenses
6. Maintenance expenses
7. Purchases of fixed assets.

This method is useful for short range cash projection but is not appropriate for long term budgeting. This method is in accord with the annual profit plan.

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