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 have to forego profits. A low level of cash balances, on the other hand, may mean failure to meet the payment schedule. The aim of cash management, therefore, should be to have an optimal amount of cash balances.
Keeping in view these conflicting aspects of cash management, we propose to discuss the planning/determination of the need for cash balances. There are two aspects involved in cash planning: first, an examination of those factors which have a bearing on the firm’s required cash balances; second, a review of-the approaches to achieve optimum cash balances.