Cash Management Objectives

It is the duty of the finance manager to provide adequate cash to all segments of the organization. He also has to ensure that no funds are blocked in idle cash since this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost.

Meaning of cash

The term “cash” with reference to cash management is used in two senses. In a narrower sense it includes coins, currency notes, cheques, bank drafts held by a firm with it and the demand deposits held by it in banks.

In a broader sense it also includes “near-cash assets” such as, marketable securities and time deposits with banks. Such securities or deposits can immediately be sold

This objective is sought to be achieved by means of the following: -

(i) Preparing cash budget:

Cash budget or cash forecasting is the most significant device for planning and controlling the use of cash. It involves a projection of future cash receipts and cash disbursements of the firm over various intervals of time. It reveals to the finance manager the timings and amount of expected cash inflows and outflows over a period studied. With this information, he is better able to determine the future cash needs of the firm, plan for the financing of these needs and exercise control over the cash and liquidity of the firm.

Thus in case a cash budget is properly prepared it correctly reveals the timings and size of net cash flows as well as the periods during which the excess cash may be available for temporary investment. In a small company, the preparation of cash budget or a cash forecast does not involve much of complications and, therefore, relatively a minor job. However, in case of big companies, it is almost a full time job handled by a senior person, namely, the budget controller or the treasurer.

(ii) Providing for unpredictable

In case of concentration banking cheques are received by collection centres who, after processing, deposit them in the local bank accounts. Thus, there is time gap between actual receipt of cheques by a collection centre and its actual depositing in the local bank account. Lock-box system has been devised to eliminate delay on account of this time gap.

According to this system, the firm hires a post-office box and instructs its customers to mail their remittances to the box. The firm’s local bank is given the authority to pick the remittances directly from the post-office box. The bank picks up the mail several times a day and deposits the cheques in the firm’s account. Standing instructions are given to the local bank to transfer funds to the head office bank when they exceed a particular limit.

The Lock-Box system offers the following advantages:

(a) All remittances are handled by the banks even prior to their de3posits with them at a very low cost;

(b) The cheques are deposited immediately upon receipt of remittances and the collecting process starts much earlier than that under the system of concentration