Business concern needs cash to make payments for acquisition of resources and services
for the normal conduct of business. Cash is one of the important and key parts of the
Cash is the money which a business concern can disburse immediately without any
restriction. The term cash includes coins, currency, cheques held by the business concern
and balance in its bank accounts. Management of cash consists of cash inflow and outflows,
cash flow within the concern and cash balance held by the concern etc.
Motives for Holding Cash
1. Transaction motive
It is a motive for holding cash or near cash to meet routine cash requirements
to finance transaction in the normal course of business. Cash is needed to make
purchases of raw materials, pay expenses, taxes, dividends etc.
2. Precautionary motive
It is the motive for holding cash or near cash as a cushion to meet unexpected
contingencies. Cash is needed to meet the unexpected situation like, floods
It is the motive for holding cash to quickly take advantage of opportunities
typically outside the normal course of business. Certain amount of cash is needed
to meet an opportunity to purchase raw materials at a reduced price or make
purchase at favorable prices.
4. Compensating motive
It is a motive for holding cash to compensate banks for providing certain services
or loans. Banks provide variety of services to the business concern, such as
clearance of cheque, transfer of funds etc.
Cash Management Techniques
Managing cash flow constitutes two important parts:
A. Speedy Cash Collections.
B. Slowing Disbursements.
Speedy Cash Collections
Business concern must concentrate in the field of Speedy Cash Collections from customers.
For that, the concern prepares systematic plan and refined techniques. These techniques
aim at, the customer who should be encouraged to pay as quickly as possible and the
payment from customer without delay. Speedy Cash Collection business concern applies
some of the important techniques as follows:
Prompt Payment by Customers
Business concern should encourage the customer to pay promptly with the help of
offering discounts, special offer etc. It helps to reduce the delaying payment of customers
and the firm can avoid delays from the customers. The firms may use some of the techniques
for prompt payments like billing devices, self address cover with stamp etc.
Early Conversion of Payments into Cash
Business concern should take careful action regarding the quick conversion of the
payment into cash. For this purpose, the firms may use some of the techniques like postal
float, processing float, bank float and deposit float.
It is a collection procedure in which payments are made to regionally dispersed collection
centers, and deposited in local banks for quick clearing. It is a system of decentralized
billing and multiple collection points.
Lock Box System
It is a collection procedure in which payers send their payment or cheques to a nearby
post box that is cleared by the firm’s bank. Several times that the bank deposit the cheque
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in the firms account. Under the lock box system, business concerns hire a post office lock
box at important collection centers where the customers remit payments. The local banks
are authorized to open the box and pick up the remittances received from the customers.
As a result, there is some extra savings in mailing time compared to concentration bank.
An effective cash management is not only in the part of speedy collection of its cash and
receivables but also it should concentrate to slowing their disbursement of cash to the
customers or suppliers. Slowing disbursement of cash is not the meaning of delaying the
payment or avoiding the payment. Slowing disbursement of cash is possible with the help
of the following methods:
1. Avoiding the early payment of cash
The firm should pay its payable only on the last day of the payment. If the firm
avoids early payment of cash, the firm can retain the cash with it and that can
be used for other purpose.
2. Centralised disbursement system
Decentralized collection system will provide the speedy cash collections. Hence
centralized disbursement of cash system takes time for collection from our accounts
as well as we can pay on the date.
Cash Management Models
Cash management models analyse methods which provide certain framework as to how
the cash management is conducted in the firm. Cash management models are the
development of the theoretical concepts into analytical approaches with the mathematical
applications. There are three cash management models which are very popular in the field