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 continuous and regular basis to suppliers of goods, employees and so on. At the same time, there is a constant inflow of cash through collections from debtors. Cash is, therefore, aptly described as the ‘oil to lubricate the ever-turning wheels of business without it the’ process grinds to a stop A basic objective of cash management is to meet the payment schedule that is, to have sufficient cash to meet the cash disbursement needs of a firm. The importance of sufficient cash to meet the payment schedule can hardly be over emphasized. The advantages of adequate cash are: (i) it prevents insolvency or bankruptcy arising out of the inability of a firm to meet its obligations (ii) the relationship with the bank is not strained; (iii) it helps in fostering good relations with trade creditors and suppliers of raw materials, as prompt payment may help their own cash management) a cash discount can be availed of if payment is made within the due date. For example, a firm is entitled ‘to a 2 per cent discount for a payment made within 10 days when the entire payment is to be made within 30 days. Since the net amount is due in 30 days, failure to take the discount means paying an extra 2 per cent for using the money for a additional 20 days. If a firm were to pay 2 per cent for every 20-day period over a year, there would be 18 such periods (360 days + 20 days). This represents an annual interest rate of 36 percent) it leads to a strong credit rating which enables the firm to purchase goods on favorable terms and to maintain its line of credit with banks and other sources of credit; (vi) to take advantage of favorable business opportunities that may be available periodically and finally, (vii) the firm can meet unanticipated cash expenditure with a minimum of strain during. emergencies, such as strikes, fires or a new marketing campaign by competitors. Keeping large cash balances, however, implies a high cost. The advantage of prompt payment of cash can well be realized by suffocate and not excessive cash.

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