Cash management is concerned with the management of cash inflows, outflows and cash flows within the firm. It also includes the matters relating to financing of deficit and investment of surplus cash so as to maintain optimum cash balance. The functions of cash management start when a customer writes cheques to pay the firm on its account receivable. The function ends when a supplier, an employee or the government realizes funds from the firm on an account payable or accruals. The basic issue of cash management is to enable a firm to maintain sufficient liquidity and also at the same time improve its profitability.
If cash flows were accurately predicted, the firm would not have to give much attention on management of cash. Cash outflows to some extent are certain but cash inflows cannot be predicted accurately. There is no perfect synchronization between cash inflows and cash outflows.Sometimes, cash outflows exceeds cash inflows due to unusual payment of obligation and non-seasonal build up in inventories and receivables. And sometimes cash inflows will be more due to excessive sales than expectation and rapid conversion of receivables into cash.
To overcome the uncertainty about cash flow prediction and to maintain coincidence in cash inflow and outflow, the firm's cash management function should consist of following strategies:
1. Turn over inventory as quickly as possible, avoiding stock-out that may result in a loss of sales.
2. Pay accounts payable as late as possible without deteriorating the firm's credibility, but take advantage of any favorable cash discount.
3. Collect account receivables as quickly as possible without loosing future sales due to high-pressure collection techniques. Cash discounts, if any are economically justifiable, may be used to accomplish this objectives.
4. Involve in cash planning to determine deficit or surplus cash in each period.
5. Surplus cash must be invested into marketable securities.
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