CASH MANAGEMENT

INTRODUCTION
Business analysts report that poor management is the main reason for business failure. Poor cash management is the most frequent stumbling block for all size businesses, no matter whether its small business by a sole proprietor, medium like partnership or its a large company like Nestle, Coca Cola, Dell, IBM and GM Motors etc. Good cash management not only helps the business to capitalize the funds available within the business but it also finds thousands of ways to get funds from outside the business (For instance borrowing from banks and different financial companies at cheaper interest rates).

DEFINITION
Cash management is the management of the cash balances of a concern in such a manner as to maximize the availability of cash not invested in fixed assets inventories. It also helps to avoid the risk of insolvency. According to Keynes there are three motives for holding cash: the transactions motive, the precautionary motive, and the speculative motive.

WHAT IS CASH MANAGEMENT?

Cash management is a broad term that covers a number of functions that help individuals and businesses process receipts and payments in an organized and efficient manner. Its a management tool to ensure that sufficient cash is available to meet current and future liabilities, with any surplus being safely invested to generate the maximum income. Cash is money that is easily accessible either in the bank or in the business. It is not inventory, it is not accounts receivable, and it is not property. These might be converted to cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll. Profit growth does not always mean more cash.

Motives for holding cash

A distinguishing feature of cash as an asset, irrespective of the firm in which it is held, is that it does not earn any substantial return for the

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business. In spite of this fact cash is held by the firm with following motives.

1. Transaction motive
Every business enters into a variety of business transactions resulting in both inflows and outflows. In order to meet the business obligation in such a situation, it is necessary to maintain adequate cash balance. Thus, cash balance is kept by the firms with the motive of meeting routine business payments.

2. Precautionary motive
A business keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies such as floods, strikes, presentment of bills for payment earlier than the expected date, unexpected slowing down of collection of accounts receivable, sharp increase in prices of raw materials, etc. The more is the possibility of such contingencies more is the cash kept by the firm for meeting them.

3. Speculative motive
A firm also keeps cash balance to take advantage of unexpected opportunities, typically outside the normal course of the business. Such motive is, therefore, of purely a speculative nature. For example; a firm may like to take advantage of an opportunity of purchasing raw materials at the reduced price on payment of immediate cash or delay purchase of raw materials in anticipation of decline in prices.

4. Compensation motive
Banks provide certain services to their clients free of charge. They, therefore, usually require clients to keep minimum cash balance with them, which help them to earn interest and thus compensate them for the free services so provided. Business firms normally do not enter into speculative activities and, therefore, out of the four motives of holding cash balances, the two most important motives are the compensation motive.

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Cash Conversion Cycle (Operating Cycle)

Cash conversion cycle can be divided into four phases 1) The number of days it takes a business to purchase inventory from their suppliers. 2) Pay the due payment to suppliers. 3) The number of days it takes to convert it into finished goods (if it is a manufacturing business, otherwise if its a trading business then obviously it just sells goods as it receives from supplier without any modification). 4) Sell the finished goods to the customer and the number of days it takes to receive payment from the customer (i.e. credit sales).

We can make our business conversion cycle smoother by following these tips: Not only look for the supplier who offers better prices. We should go to those who offer better payment plans with better prices.

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 Make credit sales to only those customers who have good credit history with us. It helps to avoid risk of bad debts (customers who doesnt pay their payments). To collect payments quickly from our customers offer them special discounts on early payments.

REQUIREMENTS OF CASH MANAGEMENT

Cash management is an internal business function where companies outline their cash inflows and outflows. While generating a profit is important for a business, cash management is also important because companies must have a sufficient balance on hand to pay for the goods and services needed to operate the company. Business owners and managers often create policies and procedures to help them manage their cash operations. Here is we are going to explain one of the important cash management requirements:

Accounting Procedures
Accounting procedures are a primary requirement for cash management. Owners and managers create functions like accounts payable, accounts receivable, reconciliations and purchase orders to ensure sufficient processes are in place to manage cash at various points in the business. Each process plays a role in managing how money is spent, collected and compared to the company's bank statements. The chief financial officer, controller or accounting manager is typically responsible for developing these processes and ensuring they accurately process cash transactions.

Internal Controls
Internal controls represent the safeguards a company implements to protect sensitive financial or business information. Cash management is a common focus for internal controls. Owners and managers use internal controls to separate the number of accounting functions one employee completes. For example, companies often separate counting cash, writing deposits and taking them to the bank, posting cash-related

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journal entries and reconciliations. This ensures individuals cannot compromise the company's cash flow process.

Cash Flow Statement

The cash flow statement is an official accounting report that details the total number of cash inflows and outflows from a company's business operations. The statement typically includes three sections: operating, financing and investing. Each section allows business owners and managers to determine how much cash various function make during a specific time period. Companies use this information to provide internal and external business stakeholders with an accurate picture of the company's cash management process. Companies with poor cash flows may be seen as unwise investments.

WHAT ARE CASH MANAGEMENT TECHNIQUES?

It doesn't matter if you already own a large company or you are just starting out, managing your cash flow is essential to the health of your business. It is best to learn cash management techniques before business owners and managers realize that they are in a cash flow problem. There are a number of techniques business can use to maximize cash flow and keep the business running smoothly.

MANAGING CASH SOURCES EFFECTIVELY

One of the most important techniques to manage cash is to manage the sources of the cash effectively in order to keep the smoothness of the business transactions. While managing the sources of cash the very first question that comes in mind is:

Where does cash come from?

Here is the answer to this question: Internally Profits (retained earnings) Selling assets Reducing inventories Reducing receivables Increasing payables Externally 5|Page

Debt Equity

And if we go a little more in detail of the answer to question then here we see the sources of cash where it comes into business: Cash In Cash sales Account receivables received Interest income Sale of assets Fixed Current Loan proceeds Borrowing-debt Stockholders investments

Where does cash go out? Whilst managing the cash smoothly doesnt mean that we stop paying the money to creditors or to whom we owe money from. So here are few examples where does cash go out while running business: Cash out Advertising Bank Service Charges Credit Card Fees Delivery Health Insurance Other Insurance Interest paid Inventory purchases Office expenses Payroll Payroll taxes Professional Fees Rent of Lease Subscriptions & Dues Supplies Taxes & Licenses Utilities & Telephone Capital Purchases Loan Repayment 6|Page

Owners withdrawal Retirement & Other Benefits Suppliers

MANAGING YOUR WORKING CAPITAL

Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits.

COLLECT QUICKLY

The best form of cash management is to collect payments as quickly as possible. Making sure that all payments are processed on time and that customers with credit get their invoices well ahead of the bill due date is always a good idea. Don't wait until the end of the month to send out invoices; it is a fact that the longer you go without contacting a customer, the less chance you have of collecting the debt.

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MONITORING COST AND INVENTORY

Keeping an eye on how much you are paying to suppliers should be at the front of your business mind at all times. It does not hurt if purchase manager (who purchases inventory for the business) shops around for a better deal, even if he knows that he cant get better price than his current supplier but he might get some better payment options by which he will be able to have more cash in hand at the end of the every month. Also monitoring your inventory closely; paying attention to what is selling and what is not. Try to keep your inventory balanced, neither over stocked nor less than the current requirement, as it directly relates to the payments of cash to suppliers. So the more balanced stocks the manager maintains the less chances of payment issues he will face.

OBJECTIVES OF CASH MANAGEMENT FOR BUSINESS

Objectives of cash management
There are two basic objectives of cash management:

To meet the cash disbursement needs as per the payment schedule; To minimize the amount locked up as cash balances. 8|Page

Meeting cash disbursements

The first basic objective of cash management is to meet the payments Schedule. In other words, the firm should have sufficient cash to meet the various requirements of the firm at different periods of times. The business has to make payment for purchase of raw materials, wages, taxes, purchases of plant, etc. The business activity may come to a grinding halt if the payment schedule is not maintained.

Minimizing funds locked up as cash balances

The second basic objective of cash management is to minimize the amount locked up as cash balances. In the process of minimizing the cash balances, the finance manager is confronted with two conflicting aspects. A higher cash balance ensures proper payment with all its advantages. But this will result in a large balance of cash remaining idle. Low level of cash balance may result in failure of the firm to meet the payment schedule. The finance manager should, therefore, try to have an optimum amount of cash balance keeping the above facts in view.

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