Corporate Finance

Cash Management 
 307

Geographical Scope A global company would have a different set of reporting needs vis-a-vis a domestic
company. Due to its dispersion of activities beyond national boundaries, it is affected by economic and
political risks as local regulations on repatriation of income, exchange rate risk, etc. change. So a cash
manager needs to have a global view of cash management function, the reporting relationships among different
operating units, the choice of currency, etc.

Motives for Holding Cash

Transaction Motive It refers to the requirement of cash for day-to-day running of the business.

Precautionary Motive Companies may also hold cash to meet contingencies. This is known as pre-
cautionary motive.

Speculative Motive Companies may also hold cash to speculate in business opportunities.

State of the Art of Banking System

Cash managers can reduce time involved in transferring funds only if the banking system is developed and
if bankers are willing to extend cash management services. The check clearing system exerts considerable
influence on the controllability of cash. Without technological upgradation, there is little a cash manager
can do. Innovations such as electronic fund transfer, automated payment system, are possible due to tech-
nological advances. The corporate cash management process (Exhibit 16.2) essentially involves policy
decisions regarding disbursement of funds and use of bank services. The corporate philosophy regarding
disbursements has the most significant impact on cash management. Centralized handling of payables would
provide greater control on outflow as opposed to a decentralized system.

Exhibit 16.2 Cash management process

Inflow

Cash and accounts receivable

Contingency funds

Bank loan

Policy on dividends

Corporate cash management and payables

Outflow

Payment of current liability

Dividends

Payment of liabilities—Short-term and long-term

Investing surplus funds