Cash Management means managing the cash in currency form, bank balances and readily marketable securities. Cash is the most important component of working capital of a firm. Cash is the life blood of the business, so managed well means the business remains healthy and strong. Each firm holds cash to some extent at any point of time. Source of this cash may be the working capital operating cycle or capital inflows. Similarly the outflow of cash from the cash reservoir of a firm can be either to the operating cycle or for capital repayment.
Motives for holding cash
This is the most essential motive for holding cash because cash is the medium through which all the transactions of the firm are carried out. Some examples of transactions of a manufacturing firm are given below.
v Purchase of capital goods like plant and machinery
v Purchase of Raw material and components
v Payment of rent and wages
v Payment for utilities like water, power and telephone
Since cash is the most liquid current assets, it has the maximum potential of value addition to a firm’s business.
This motive of holding cash takes into account the element of uncertainty associated with any form of business. The uncertainty can result in prolongation of the working capital operating cycle or even its disruption. This is one of the important motives of cash management.
Level of cash holding for an organization
The level of cash holding of a firm depends upon a number of factors.
If the firm is engaged in cash purchase of raw material from a number of sources, its requirement of cash would be more than that a firm which buys on credit. Also a firm having cash purchase and cash sale would need to maintain more cash balance than a firm which buys on credit and sells on credit. A firm buying in cash and selling on credit is likely to have strained cash flows. On the other hand a firm buying on credit and selling in cash has comfortable cash balances.
- Extent and reach of the business
A multi location firm having a number of large and small branches has more cash requirement than a single location firm.
Cash is the most fundamental part of any organization so effective utilization of cash is very essential to the success of the business. Cash management
is one of the crucial part of an accounting system. Emirates Chartered Accountants Group Dubai
provides different ways of managing the cash in an organization. For a free consultation email to email@example.com