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- Cash, the most liquid asset and also referred to as the life blood of a business enterprise is of vital importance to the daily operations of business firms.
- There are two ways of viewing the term 'cash' . In a narrow sense it includes actual cash in the form of notes and coins and bank drafts held by a firm and the deposits withdrawable on demand. And in a broader sense, it includes even marketable securities which can be immediately sold or converted into cash.
- There is a general tendency to confuse profits with cash. But there is a difference between profits and cash.
- Profits can be said to be the excess of income over the expenditure of the business entity, for a particular accounting period. It includes both cash incomes (cash sales, interest on investments, etc) and non-cash incomes.
- 'Cash' refers to the cash as well as the bank balances of the company at the end of the accounting period, as reflected in the Balance sheet of the company.
- Transaction Motive: A company is always entering into transactions with other entities. While some of these transactions may not result in an immediate inflow/outflow of cash ( for example, credit purchases and sales), other transactions cause immediate cash inflows and outflows. So firms always keep a certain amount as cash to deal with routine transactions where immediate cash payment is required.
- Precautionary Motive; Contingencies have a habit of cropping up when least expected. A sudden fire may break out, accidents may happen, employees may go on strike, creditors may present bills earlier than expected or debtors may make payments later than warranted. The company has to be prepared to meet these contingencies to minimize its losses. For this purpose companies generally maintain some amount in the form of cash.
- Speculative Motive: Firms also maintain cash balances in order to take advantage of opportunities that do not take place in the course of routine business activities. For example, there may be a sudden decrease in the price of raw materials which is not expected to last long or the firm may want to invest in securities of other companies when the price is just right. These transactions are of a purely speculative nature for which the firms need cash.
- The objective of cash management can be regarded as one of making short-term forecasts of cash position, finding avenues for financing during periods when cash deficits are anticipated and arranging for repayment/investment during periods when cash surpluses are anticipated with a view to minimizing idle cash as far as possible.
- 'Cash forecasting' refers to estimation of cash inflows and outflows for a future or forecasted period. Cash forecasting helps in reaching figures that are likely to be there during and at the end of the forecasted period.
- Cash forecasting is merely a statement showing figures that are likely to be there during and at the end of a future period. Whereas a cash budget shows the results of the remedial actions that are planned to be taken by the management to nullify the future undesired deviations.
- Short-term cash forecasting is prepared under the receipts and payments method, showing the time and magnitude of expected cash receipts and payments.
- Under this method, estimation of future cash requirements is done by extracting relevant information from the already prepared forecasted accounting statements such as forecasted P&L account and balance sheet, and then adjusting the figures in such statements to translate accrual based figures to cash based figures. The resultant statement so derived is called forecasted cash flow statement.
- Cash forecasting is of immense use in the measurement of cash deficits and surpluses, technical insolvency and bankruptcy, long-term cash requirements. It also determines profitability and cash flows of different projects.
- Cash budgets are short-term cash forecasts and their advantages lies in their amenability for monitoring actuals for exercising control.
- Cash reports provide a comparative picture of actual with forecasted figures and help in controlling and revising cash forecasts continuously. Cash reports can be prepared in several types and the important ones are (i) the daily cash report, (ii) the daily treasury report and (iii) the monthly cash report.
- Prompt billing and mailing, collection of cheques and remittance of cash, centralized purchases and payment to suppliers and playing the float are some of the factors that affect the cash management.
- The amount of cheques deposited by a company in the bank awaiting clearance is called 'collection float'.
- The amount of cheques issued by the company awaiting payment by the bank is called 'payment float'.
- The difference between 'payment float' and 'collection float' is called 'net float'. When the net float is positive, the balance in the books of the company is less that in the bank's books; when net float is negative the book balance of the company is more than that in the bank's books.
- The cash in excess of the firm's normal cash requirements is termed as surplus cash. Before determining the amount of surplus cash, the minimum cash balance required by the firm has to be accounted. This minimum level may be termed as 'safety level for cash.'
- Desired days of cash is the number of days for which cash balance should be sufficient to cover payments.
- Average daily cash outflows is the average amount of disbursements to be made daily.
- If future cash flows were known with certainty, the EOQ model (used in inventory management) is one of the simple models for determining the optimal average amount of transaction cash. Here, in this model, the opportunity (carrying) cost of holding cash, is balanced against the fixed costs associated with securities transactions to arrive at an optimal balance.