The Cash Management is concerned with the collection, disbursement and the management of cash in such a way that firm’s liquidity is maintained. In other words, it is concerned with managing the cash flows within and outside the firm and making decisions with respect to the investment of surplus cash or raising the cash from outside for financing the deficit.
The objective of cash management is to have adequate control over the cash position, so as to avoid the risk of insolvency and use the excessive cash in some profitable way. The cash is the most significant and highly liquid asset the firm holds. It is significant as it is used to pay the firm’s obligations and helps in the expansion of business operations.
The concept of cash management can be further understood in terms of the cash management cycle. The sales generate cash, and this has to be disbursed out. The firm invests the surplus cash or borrows cash in case of deficit. Thus, it tries to achieve this cycle at a minimum cost along with the liquidity and control.
An optimum cash management system is one that not only prevents the insolvency but also reduces the days in account receivables, increases the collection rates, chooses the suitable investment vehicles that improves the overall financial position of the firm.
The importance of the cash management can be understood in terms of the uncertainty involved in the cash flows. Sometimes the cash inflows are more than the outflows, or sometimes the cash outflows are more. Thus, a firm has to manage cash affairs in a way, such that the cash balance is maintained at its minimum level while the surplus cash is invested in the profitable opportunities.
This overall objective can be translated into the following operational goals:
(i) To satisfy day-to-day business requirements;
(ii) To provide for scheduled major payments;
(iii) To face unexpected cash drains;
(iv) To seize potential opportunities for profitable long-term investment;
(v) To meet requirements of bank relationships;
(vi) To build image of creditworthiness;
(vii) To earn on cash balance;
(viii) To build reservoir for net cash inflow till the availability of better use of funds by conscious planning;
(xi) To minimize the operating cost of cash management.