Management of Cash

Management of Cash

Cash management is one of the key areas of working capital management. Apart from the fact that it is the most liquid current asset, cash is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e., receivables and inventory get eventually converted into cash. This underlines the significance of cash management.

Motivates for Holding Cash

The term cash with reference to cash management is used in two senses. In a narrow sense it is used broadly to cover currency and generally accepted equivalents of cash such as cheques, drafts and demand deposits in banks. The broader view of cash also includes near-cash assets. such as marketable securities and time deposits in banks. The main characteristics of these is that they can be readily sold and converted into cash. They serve as a reserve pool of liquidity that provides cash quickly when needed. They also provide a short-term investment outlet for excess cash and are also useful for meeting planned outflow of funds. We employ the term cash management in the broader sense. We employ the term cash management in the broader sense. Irrespective of the form in which it is held, a distinguishing feature of cash as an asset, is that it has no earning power. If cash does not earn any return, why is it help by firms ? There are four primary motives for maintaining, cash balances : (i) Transaction motive ; (ii) Precautionary motive ; (iii) Speculative motive and (iv) Compensating motive.