Cash Management: Cash is the lifeblood of any firm needed to acquire supply resources, equipment and other assets used in generating the products and services.
So, Cash management is the efficient collection, disbursement, and investment of cash in an organization while maintaining the company’s liquidity. Marketable securities also come under liquidity which provides quick cash when needed.
Thus Cash Management is all about:
- Collecting Cash
- Managing Cash
- Using Cash for Investment
Cash Management Cycle
Motives of Cash Management
There Are Mainly Three Types of Motive In cash management, which are given below.
Motives for Holding: Cash +Transaction motive: holding of cash by a firm to carry its day to day business transactions.
Precautionary motive: holding of cash to meet the unpredictable obligations of a firm such as floods, strikes etc.
Speculative motive: holding of cash for profit-making opportunities in the course of business.
Objectives of Cash Management
- To ensure sufficient liquidity
- To meet working capital requirements
- To be able to meet short term requirements for administrative activities
Effective Cash Management
- Formulation of cash: in order to measure and manage the liquidity needs.
- investments: in such a way that it will able to generate effective cash regularly.
- Balance in Deposit and Loans: Proper balance between deposit and loan ensure sufficient liquidity which means an increase in cash.
- Monitor Cash Flow regularly: regularly monitoring cash flow to avoid shortage in cash.
- Encourage Faster Payments: encourage customers for faster payment result in strong cash availability.
- Cutting Costs: cutting cost means increasing liquidity
- Availability Line of Credit: increasing credit means to meets short term cash requirements.
- Preparing cash budget: it analysis cash inflow and cash outflows.
Cash Conversion Cycle
Cash Conversion Cycle or CCC is the number of days that a business entity takes to convert its input resources into liquid cash flow. This metric aims to measure how much time a company takes to sell its inventories, collect its receivables and pay off its bills without any delay penalty being charged.
Cash Conversion Cycle Calculation
CCC = DIO + DPO + DSO Days
DIO = Days Inventory Outstanding
DPO = Days Payables Outstanding (Denoted in Negative)
DSO = Sales Outstanding