Cash is the lifeblood of every business. Cash is the most liquid current asset a firm can hold Efficient cash management helps the company to remain healthy and strong. Poor cash management, may end up pushing the company to a crisis.

1. Ms. Deepika Saxena
Faculty, PGDM-RM
CASH MANAGEMENT

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AGENDA
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01 02 03 04
Cash
Cash
Managemen
t
Objectives
of Cash
Managemen
t
Baumol’s
Model

3. OVERVIEW

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Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
Cash is the lifeblood of every business.
Efficient cash management helps the company to remain healthy and strong.
Cash is the most liquid current asset a firm can hold
CASH
Poor cash management, may end up pushing the company to a crisis.

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Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
Cash management aims at reducing the amount of free cash that is being held by the firm.
Firms that avail cash discount can account for the benefit arising out of the discount.
This tends to enhance the firm’s profitability as idle cash reduces and cash for investment
increases.
If the firm does not avail of such discounts it bears a cost, the cost of avoiding cash discount
being offered by supplier.
RATIONAL FOR CASH MANAGEMENT

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Good cash management helps the finance manager to take advantage of favourable investment
opportunities in the external environment that may come along suddenly from time to time .
If it does not have ample amount of cash, it may miss such profitable opportunities and
hamper its growth.
If the firm has adequate amount of cash, it can take advantage of these favourable
investment opportunities and earn good return.
GOOD CASH MANAGEMENT

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Transaction motive
Precautionary motive
Speculative motive
MOTIVES FOR HOLDING CASH

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Meeting Payments Schedule
Minimizing cash balances to avoid idle funds
OBJECTIVES OF CASH MANAGEMENT

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Cash inflows and outflows
Cash Cycle
Cost of cash balance
FACTORS DETERMINING CASH REQUIRMENT

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Companies speed up their collections and they also slow down their disbursements.
The disbursements should be delayed as long as they do not affect the goodwill and
credibility of the firm.
Companies slow down their payments by making payments only when they are due and not
before and centralize disbursements.
EFFICIENT DISBURSEMENT AND DELAYING THE PAYMENTS
For delaying cash payments, the firm should make payments at the last possible moment.

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The time that lags between the point when the firm issues a cheque and the time the payment
is actually made and is debited in the bank account is known as float.
Thus, float is the time period between the payment and actually receiving the cheque
amount (see figure).
PLAYING THE FLOAT

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Cash Budget is the forecasted cash needs of the firm. Cash budget is used in cash forecasting,
i.e., determining the amount of cash needed for the firm to meet out its payments, obligations
and running expenses.
TOOLS OF EFFICIENT CASH MANAGEMENT

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Two important cash management models are:
CASH MANAGEMENT MODELS
1 Baumol’s Model
2 Miller–Orr Model

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Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
ECM aims at maintaining an optimum level of cash (cash pool) where there is a trade-off
between the cost of maintaining the cash surplus and the cost of deficit financing (see figure).
BAUMOL’S MODEL

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This model expands Baumol’s Model and projects that the cash balance fluctuates and when
the balance is high, it should be transferred into marketable securities. On the other hand,
when cash is low marketable securities should be sold.
They explain the model through two control limits, the upper limit and the lower limit.
MILLER–ORR MODEL

16. Jagan Institute of Management Studies

17. 17
Jagan Institute of Management Studies (JIMS) www.JimsIndia.org
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