Minimising Funds Committed to Cash Balances

Minimising Funds Committed to Cash Balances The second objective of cash management is to mini misc cash balances. In minimizing the cash balances, two conflicting ‘aspects have to be reconciled. A high level of cash balances will, as shown above, ensure prompt payment together with all the advantages. But it also implies that large funds will remain idle, as cash is a non-earning asset and the firm will h


OBJECTIVES OF CASH MANAGEMENT The basic objectives of cash management are two-fold: (a) to meet the cash disbursement needs (payment schedule); and (b) to minimize funds committed to cash balances. These are con/tiding and mutually contradictory and the task of cash management is to reconcile them. Meeting Payments Schedule In the’ normal course of business, firms have to make payments of cash on a continu

Compensating Motive

Compensating Motive Yet another motive to hold cash balances is to compensate banks for. providing certain services and loans. Banks provide a variety of services to business firms, such as clearance of cheque, supply of credit information, transfer of funds. and So on. While for some -of these services banks charge a commission or fee, for others they seek indirect compensation. Usually clients are required to

Speculative Motive

Speculative Motive It refers to the desire’ of a firm to take advantage of opportunities which present them selves at unexpected moments and which are typically outside the normal course of business. While the precautionary motive is defensive in nature in that must make provisions to tide over unexpected contingencies, the speculative motive represents a positive and aggressive approach. Finns aim to

Precautionary Motive

Precautionary Motive In addition to the non synchronization of anticipated cash inflows and outflows in the ordinary course of business, a firm may have to pay cash for purposes which cannot he predicted or anticipated. The unexpected cash needs at short notice may be the result of • Floods, strikes and failure of important customers • Bills may be presented for settlement earlier than expected, • Unexpecte

Transaction Motive

Transaction Motive An important reason for maintaining cash balances is the transaction motive. This refers to the of cash to meet routine cash requirements to finance the transactions which a firm carries III the ordinary course of business. A firm enters into a variety of transactions to accomplish its ives which have to be paid for in the form of cash. For example, cash payments have to be for purchases, wag


MOTIVES FOR HOLDING CASH The term ‘cash’ with reference to cash management is used in two senses. In a narrow sense, it is broadly to cover currency and generally accepted equivalents of cash, such as cheques, drafts demand deposits in banks. The broad view of cash also includes near-cash assets, such as cash securities and time deposits in banks. The main characteristics of these is that they be r