Basic Issues in Finance & Investment
Details
Details
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Management of Cash.
Cash is the most liquid current asset.
Cash management is concerned primarily with the optimization of the amount of cash available while maximizing the interest earned by spare funds not required immediately. Available cash includes:
- Coins and notes
- Money in current accounts and short-term deposits
- Unused bank overdraft facility
- Foreign currency; and
- Deposits that can quickly be converted into the local currency
- We should note that cash does not include stock; money owed by customers; and long-term deposits (if they cannot be withdrawn)
The need for cash
There are three motives why an organization chooses to hold cash:
- Transaction motive: Organizations need cash reserves to be able to purchase goods and services. They need the cash to balance the short term cash inflows and outflows. It should be noted that cash inflows and outflows are not usually perfectly matched. The optimum size of the cash reserve can be estimated by forecasting cash inflows and outflows, and having prepared a cash budget.
- Precautionary motive: Organizations keep some cash reserves to avoid unexpected demands for cash in the short term. They just take precaution. Reserves for precautionary motives maybe in the form of easily realized short term investments (e.g. near cash items, treasury bills).
- Speculative motive: This is the motive of holding cash reserves so that you can take advantage of any attractive investment opportunities that may arise.
Cash Budget
- Cash budget incorporates estimates of future inflows and outflows of cash over a short term period of time projected (The period may usually be a year, half a year, or quarter year).
- Effective cash management requires that the cash budget be further broken down into month, week, or even on a daily basis. These are two components of the cash budget:
