Cash Management

The basic objective of cash management is to keep the investment in cash as low as possible while still keeping the firm operating efficiently and effectively. Cash management comprises of a series of activities aimed at efficiently handling the inflow and outflow of cash. This mainly involves diverting cash from where it is to where it is needed. In other words, cash management is the optimization of cash flows, balances and short-term investments.

According to the definition cash is the legal tender or coins (currency) that can be used in exchange goods, debt, or services. Sometimes also including the value of assets that can be converted into cash immediately, as reported by a company. So management of cash should be done in such a way as to achieve the generally accepted objectives of the firm – maximum profitability with maximum liquidity of the firm. It is the management’s ability to recognize cash problems before they arise, to solve them when arise and having made solution available to delegate someone carry them out.

Cash management is crucial to organizations for three main reasons:

Transaction: Ready cash balances are vital for routine transactions including purchases, operating expenses, wages, and other payments such as dividends, taxes and so on.
Precaution: There may be unanticipated cash requirements as a result of sudden increase in inventory costs, delay in collection of receivables, among others. And maintaining ready cash balances is essential to deal with such unforeseen expenses.
Speculation: Reserving cash balances is also crucial when firms anticipate decline in prices of raw materials, reduction in interest rates for buying securities, availing early payment discounts, among others.

Organization’s cash position is said to be a better indicator of the health of its business, rather than its profit and loss statement. Cash management services comprise the following: Account Reconciliation, Cash Concentration, Financial Risk Management, and Liquidity Management.

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