Management of Cash

Management of Cash: Many individuals earns hefty amount of cash on a regular basis, but only few of them knows how to actually manage it in a proper way which will minimize risk while providing higher yield. There are four major issues when it comes to manage the cash effectively. They are discussed as below:

1. Controlling the level of cash: The amount of cash locked should be the amount which is required, not extra or less. This can be done by preparing a good Cash Budget. Cash budget can be defined as forecasting of cash receipts and cash disbursement. It also take into account the timing and the amount of cash in and cash out. It can be estimated by studying the past transaction of business.

Cash In

a. Capital Receipts

Whatever money comes in by a way of raising funds such as- issuing shares, bonds, debentures are counted as capital receipts.

b. Revenue Receipts

When cash is received by selling products or services it can be considered as revenue.

Cash Out

a. Capital Payment

Principal payments, repayment of long-term loans included into this.

b. Revenue Payment

Payment of raw materials procurement, wages, bills, rentals, interest, coupon payments and dividends.

2. Controlling the level of inflow of cash: After preparing the cash budget accurately the finance managers need to ensure that all the cash collection are being done in a timely manner. There are multiple types of collection systems which are popular into this, such as- over the counter (OTC) collection, mailed payment collection system, pre-authorized payments, cash concentration and a lock box system.

3. Controlling the level of outflow of cash: It is also known as disbursement system. This take into account the cash payment which need to be given to the creditors. The direction of this outflow should be totally opposite inflow, which means making the payment delay as much as possible.

4. Optimum investment of surplus cash: This is responsible for investment of any surplus amount of cash, for instance, investment in markatable securities after analyzing which type of security, period of investment, liquidity, etc. Finance manager need to determine the safety level of cash first before investing. There are two popular models which can be used for determining the optimum level of cash. One is called Baumol Model and another one is Miller-Orr Model.

I will be explaining about these two models in my next post. Please stay tune. Thank you.