CASH MANAGEMENT

Cash is often called liquid assets or nonearning assets. It is needed to pay salaries, raw materials, repayment of loan and others. Specifically there are 3 major motives of holding cash which are:

|Transaction motives |The level of funds required due to the ordinary course of business |
| |It is needed to meet ordinary payment such as paying bills, employees’ salaries, creditors and etc |
|Precautionary motives |The funds needed to meet contingency requirement |
| |Funds needed to reserve for emergency needs, unforeseen fluctuation in cash flows or unexpected seasonal |
| |needs |
| |It serves as a safety cushion against the unexpected cash drain that may arise because of risk and |
| |uncertainty regarding the future |
|Speculative motives |To hold sufficient cash to enable the firm to take advantage of any unexpected bargain or opportunities |
| |which may arise from time to time such as trade discounts or some short term investments |

Cash Management Techniques

• It involves having the optimum amount of cash in hand at the right time

• It will also help the firm hold its cash longer and collect cash more quickly

• Reasons to have an efficient cash management techniques are:

i) To establish proper procedures for collection from debtors and payment to creditors

ii) To establish adequate cash floats and minimum cash balances

iii) To synchronize cash inflows and outflows

Cash Cycle, Cash Turnover and Minimum Operating Cash

Cash Cycle (Cash Conversion Cycle)

• It is the amount of time a firm’s resources are tied up or it is the period between cash outflow and cash inflow

CC = OC - APP

= AAI + ACP - APP

Where AAI = Average Age of Inventory

ACP = Average Collection Period

APP = Average Payment Period

Cash Turnover

• The number of times each year the firm’s cash is actually being turned over

CTO = 360 / CC

Minimum Operating Cash

• It is the minimum amount of money needed by the company per cycle

MOC = Total annual cash outlay / CTO

Relationship between Cash Cycle, Cash Turnover and Minimum Operating Cash:

As the firm increases its CC (through reducing the AAI and/or ACP and/or increasing the APP) , the CTO will decrease and MOC cash will increase.