Chapter 16
16. Cash Management
OBJECTIVES
To know the determinants of corporate cash holdings.
To be able to measure cash flow time line.
To be aware of cash management techniques.
To be able to prepare cash forecasts and budgets.
To be aware of cash management services available in India.Executives worry about the cash balances they hold. This is not without reason. Holding an excess cash
balance of Rs 10 lac is tantamount to not investing in other available profitable outlays. Add the implicit cost
of capital. To illustrate, a company would be incurring a cost of Rs 1.5 lac at a cost of capital of 15 percent
on Rs 10 lac. Cash is an asset only when used; idle cash is a liability. To borrow Rs 10 lac for a day at
12 percent costs Rs 333. In addition, the borrower will have to maintain a compensatory balance of, say,
10 percent. So the cost of holding cash is higher. Cash management involves control and analysis of cash
flows during a particular period. Corporate cash management aims to:- Track and control cash flows,
- Provide adequate liquidity, and
- Optimize usage of cash, and manage short-term borrowing and investment activities.
This chapter has three parts:- Measuring and managing cash flow timeline.
- Strategies for accelerating cash receipts and decelerating disbursements.
- Cash forecasting and cash budgeting.
Cash management can be viewed as a system with interrelationships between a company and its banks, as
well as the headquarters (treasury function) and different operating units.