The management of cash resources should not be only in a position to afford liquidity but also it should not require the firm to keep the cash resources simply idle; which should be invested in the marketable securities to earn some rate of return whenever the firm feel excessive holding of cash resources.
Motives of holding cash
Transaction Motive: If the cash outflows are more than that of the cash inflows, the
firms are expected to maintain the cash resources.
Precautionary Motive: Some times the firm may be required to meet out the contingent
needs which could not be foreseen during its life span; warrants the adequate maintenance
of working capital.
Speculative Motive: It is a motive holding the cash resources by the firm to exploit the
opportunities available in the market. If the vendor of raw materials announces that
there is a greater discount towards the bulky purchase of raw materials, may lead the
firm to bring down the cost of purchase. For which, the cash resources are required and
made use of to the tune of announcements.
Compensation motive: Banks provide certain services to the firms only on the basis of
the certain amount of balances in the accounts. That is the motive holding cash resources
to avail services from the banker viz compensation motive.
Objectives of Cash Management
(I)Meeting the cash requirement: Meeting of cash requirements on time which
normally involves in the maintenance of the goodwill of the firm. The firm should
keep the adequate cash balances to meet the requirement which are greater in
(ii) Minimising the funds locked up in the cash balances: The funds locked up in the
form of cash resources should be more, but it should only to the tune of the requirement
Basic Problems of Cash Management
(i) Controlling level of cash
(a) Preparing the cash budget: Through the preparation of the budget, the
cash requirement could be identified which would normally facilitate the firm
to trim off the excessive cash in holding.
(b) Providing room for unpredictable discrepancies: The separate amount
should be maintained for the purpose to meet out the discrepancies which are
not easily foreseen.
(ii) Controlling of inflows of cash
(a) Concentration banking: The amount of collection from the local branches
are normally deposited in a particular account of the firm, as soon as the
deposit has reached the certain limit , the amount in the respective branch
account will be transferred to the account at where the firm maintains in the
head office. This process of transfer is normally taking place only through
telegraphic transfer during the early days but on now a days the anywhere
banking is facilitated to transfer the amount of deposit instantaneously.
(b) Lock box system: The process of collection is carried out with the help of
local post offices only in order to avoid the postal delays in the transit . This
system enhances the speed of the collection at rapid and finally the local
branch messenger collects the cheques from the parties through specified
post box allocated for the process of collection.
(iii) Controlling of cash outflows
(a) Centralizing of disbursing the payments: The centralizing the process of
payment may facilitate the enterprise to take advantage of time in settling the
payments i.e., reduces the need of immediate cash requirements.
(b) Stretching payment schedule: It is another methodology to avail the
maximum possible credit period to postpone the payment by making use of
the cash resources most effectively.
(iv) Investing the excessive cash surplus
(a) Determine the need of the surplus cash: Identify the excessive cash
resources which are kept simply idle more than the requirement.
(b) Determination of the various avenues of investment: After identifying
the various investment opportunities , the excessive cash resources should be
invested to earn appropriate rate of return during the slack season at when
the firm does not require greater volume of working capital and vice versa.
The inventory includes the following :
Stock of raw materials: It means that the value of the raw materials stored for the purpose of production in the storage yard. The stock of raw materials can be classified normally into two categories viz opening stock and closing stock of raw Working Capital Management materials.
Stock of work in progress: During the production process, the firm usually stores
the semi finished goods which are neither a raw materials nor finished goods. The purpose of the storage of work in progress in order to shorten the time duration to manufacture the finished goods. The value of the semi finished / work in progress stored in the storage house may be classified into two categories viz opening stock and closing stock. The finalizing the value of the stock of the work in progress is inevitable process in transfer pricing. The value of the work in progress normally expressed in two different ways viz on the basis of prime cost and works cost.
Stock of finished goods: This is the stage at which the goods are readily available
for selling in the market. The value of the stock of the goods is computed on the basis of cost of production.

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