CASH MANAGEMENT
Cash management refers to the management of cash balance and the bank balance including the short term deposits. The cash is obviously the most important current assets as it is the most liquid and can be used to make immediate payments. Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its other assets immediately. On the other hand extreme liquidity may take the firm to make uneconomic investment. This underlines the significance of cash management. The term may be used in two different ways:
1) It may include currency cheques, drafts, demand deposits held by a firm i.e. pure cash or generally accepted cash equivalence.
2) In a broader sense it also includes near cash assets such as marketable securities and short term deposits with bank. For cash management purposes the term cash is used in this broader sense i.e. it covers cash, cash equivalents and those assets which are immediately convertible into cash.
Cash is a business's lifeblood. Managed well, a company remains healthy and strong. Managed poorly, a company goes into cardiac arrest. Efficient cash management processes are pre-requisites to execute payments, collect receivables and manage liquidity. Managing the channels of collections, payments and accounting information efficiently becomes imperative with growth in business transaction volumes. This includes enabling greater connectivity to internal corporate systems, expanding the scope of cash management services to include “full-cycle” processes (i.e., from purchase order to reconciliation) via ecommerce, or cash management services targeted at the needs of specific customer segments. Cost optimization and value-add services are customer demands that necessitate the creation of a mechanism to service the various customer groups.
Banks are increasingly becoming innovative and anticipating the needs of corporates towards standardization, ERP integration, reconciliation, real-time reporting, providing an end-to-end view of cash management value chain besides offering the ability to reach and be reached by their own customers. The mounting pressure from competitors forces the Banks to look for an Information Technology vendor who can offer better solutions and services in Cash Management and Internet Banking.
ROLE OF A FINANCE MANAGER[/b]
A finance manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the firm. For this, he will have to forecast the cash inflows from sales and outflows for costs, etc. This will enable the finance manager to identify the timings as well as amount of future cash flows. Cash management does not end here and the financial manager may also be required to identify the sources from where cash may be procured on a short term basis or the outlets where excess cash may be invested for a short term.
In most of the firms, the finance manager who is responsible for cash management also controls the transactions that affect the firm’s investment on market in marketable securities. In case of excess cash, marketable securities are purchased; and in case of shortage of cash, a part of the marketable securities is liquidated to procure enough cash. All these issues are important to the financial manager for several reasons. For eg a judicious management of cash near cash assets and marketable securities allows the firm to hold the minimum amount cash necessary to meet the firm’s obligations as and when they arise. As a result the firm is not only to meet its obligations but also is in a position to take the advantage of the opportunity of earning a return and thereby increasing the profitability of the firm.
How Do We Define "Cash Flow"?