Cashflow management importanc11/7/2023 ![]() Scope of Cash ManagementĬash management refers to a systematic way of handling cash inflows and outflows resulting from business operations. This is why in recent years a number of new techniques have been evolved to minimize cash holding of the firm. It is interesting to observe that in real life a finance manager spends considerable time managing cash which constitutes relatively a small proportion of a firm’s current assets. In view of the above, at one time a firm may experience dearth of cash because payments of taxes, dividends, seasonal inventory, etc., build up while at other times, it may have surfeit of cash stemming out of large cash sales and quick collections of receivables. Problem of prognosticating cash flows accurately and absence of perfect coincidence between the inflows and outflows of cash add to the significance of cash management. Therefore, the finance manager has to manage cash so that the firm maintains its liquidity position without jeopardizing profitability. Importance of Cash ManagementĬash management is one of the critical areas of working capital management and assumes greater significance because it is the most liquid asset used to satisfy the firm’s obligations but it is a sterile asset as it does not yield anything. ![]() The marketable securities are highly liquid in nature and can be easily converted into cash at a short notice. An organization can invest the idle cash in marketable securities for a short duration to earn a reasonable rate of return. Investing Idle Cash – Refers to utilizing the idle cash kept in the business for short-term investment purposes. It is the duty of the finance manager to decide the optimal cash holding to avoid any excess or deficit of cash. ![]() Optimizing Cash Holding – Refers to determining the appropriate amount of cash to be kept in the business to meet the contingency needs. If the amount of cash receipts (inflow) is equal to the cash payment (outflow) then there would be no requirement of holding extra cash. Synchronizing Cash Flows – Refers to developing equilibrium between inflow and outflow of cash in the business. The planning of cash flow helps in maintaining an adequate amount of capital to finance day-to-day- functions of the organization. Planning of Cash Flows – Refers to scheduling the cash inflow and outflow of an organization over a period of time. ![]()
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