Cash (including overdrafts and short-term deposits)Clearly, cash management is one of the key roles in any organisation of any size or
description. Treasury management, as this role is increasingly being called, requires a
specialism of skills, knowledge and experience. This has led to a tendency for treasury
managers in larger organisations to be specialists whose career path lies exclusively in
that functional area. Not surprisingly, in smaller organisations the role of treasury
manager is likely to be filled by the accountant.
We shall first have a look at the costs involved with holding and with not holding
cash, before we go on to the closely related topics of the use of bank overdrafts to over-
come temporary cash shortages and of how temporary cash surpluses can be used.The costs and risks of holding cash
The costs and risks associated with holding cash are described below.Financing cost
If cash is held in its most liquid form (notes and coins), it will yield no interest at
all. Even if it is in a current account with a bank it will not yield income at a very
high rate. It may be possible for a business to have some, perhaps most, of its cash on
some very short-term deposit from which it can be withdrawn at short notice should
the need arise. Even where this is done there is still a cost, since short-term interest
rates tend to be lower than longer-term ones. One way or another cash is not usually
a self-financing asset; the business will typically have to bear most of the cost of
finance.
For Associated British Foods plcfor 2007, the financing cost of its cash balance,
assuming that none of it generated any interest, was £39 million, an amount equal to
about 7 per cent of the business’s operating profit for that year. This means that, had
the business been able to trade without the need to maintain a positive cash balance,
the shareholders would be £39 million better off. As with inventories and trade receiv-
ables, ABF would, in practice, need to have access to cash, but having that facility is
expensive. See page 355 for an explanation of how the cost of financing ABF’s work-
ing capital is derived.Loss of purchasing power
As with trade receivables, during a period of inflation there is erosion in the value
of money. This is not necessarily compensated for by interest rates, even where it is
possible to generate some interest on the cash.Exchange rate cost
Businesses that hold cash in an overseas currency will incur a cost should that
currency weaken against the home currency. This will be discussed at some length in
Chapter 15.The costs and risks of holding little or no cash
The costs and risks of holding little or no cash are described next.Loss of employee and supplier goodwill
Failure to meet financial obligations on time, owing to cash shortages, may mean
the loss of further supplies from injured parties. This could be extremely damaging,