Cash management involves efficiently managing a company's cash flows, including collecting revenues, paying expenses, and investing excess cash. It aims to maintain sufficient liquidity while maximizing returns. Key aspects of cash management include shortening collection periods, negotiating payment terms with suppliers, forecasting cash flows, and using technology to speed collections. Proper cash management allows companies to take advantage of investment opportunities while meeting operational needs.

2. What is Cash Management?
Cash management is the efficient collection, disbursement, and
investment of cash in an organization while maintaining the
company’s liquidity. In other words, it is the way in which a particular
organization manages its financial operations such as investing cash in
different short-term projects, collection of revenues, payment
of expenses, and liabilities while ensuring it has sufficient cash
available for future use.

3. What is the definition of cash management?
In the real world, organizations have strict cash management controls to monitor
its inflows and outflows while retaining a sufficient amount in order to take
advantage of attractive investments or handle unforeseen liabilities. Efficient
management of cash prevents loss of money due to theft or error in processing
transactions. Numerous best practices are adopted to enhance management of
company’s funds.
This involves shortening of cash collection periods, regular follow ups for
collections, negotiation of favorable terms with suppliers allowing delay in
payment periods, and preparation of cash flow forecasts. Businesses also use of
technology to speed up cash collection process. They must do all of this while
maintaining adequate amount of funds to meet daily operations.

4. Example of cash management :
A computer manufacturing company, Techno Ltd., uses supplier Beta &
Co. to purchase its core materials. Beta & Co. has the policy of allowing
its customers who buy on credit to pay within 30-days period.
At the moment Techno Ltd. has $20 million cash resources available and
has to pay $5 million to Beta & Co. after 30-day period for the purchases.
However, after 30-day period Techno Ltd. has an investment opportunity
requiring use of the full $20 million cash resources.
If the company is able to renegotiate its terms with suppliers allowing 60-
day period, the delay in payment will allow the company to benefit by
using current funds for the investment and paying suppliers with cash
generated next month from other projects. Thus, by properly managing
its funds, Techno can take advantage of investment opportunities while
maintaining its operations.

5. Motives for holding cash
 Transaction motive
 Precautionary motive
 Speculative motive
 Compensating motive

6. Transaction motive
 Holding of cash to meet routine cash requirements to
finance the transactions which a firm carries on in the
ordinary course of business

7. Precautionary motive
 The cash balances held in reserve for random and
unforeseen fluctuations in cash flows.
 cushion to meet unexpected contingencies.
 Floods, strikes and failure of customers
in nature

8. Speculative motive
 Is a motive for holding cash/near-cash to quickly take
advantage of opportunities typically outside the normal
course of business.
 Positive and aggressive approach

9. Compensating motive
 Is a motive for holding cash/near-cash to compensate
banks for providing certain services or loans.
 Clients are supposed to maintain a minimum balance of
cash at the bank which they cannot use themselves.

10. Cash Management process
 Cash management process has five steps
 Cash Planning
 Receiving income cash
 Paying outgoing cash
 Maintaining minimum operating cash
 Investing surplus cash or financing for deficit cash

11. Cash cycle

12. CASH MANAGEMENT STRATEGIES
 BASIC STRATEGIES
 Stretching Accounts payable
 Efficient Inventory-Production Management
 Speedy Collection of Accounts receivables

13. CASH MANAGEMENT STRATEGIES
 Stretching accounts payable: Postponing payment of the amount due
to suppliers beyond the end of the net (credit) period; also called
leaning on the trade. Paying bills as late as possible without damaging
the firm’s credit rating.
 Efficient inventory management: Efficient inventory management is
achieved through inventory control and inventory management.
Inventory control involves managing the inventory that is already in
the warehouse, stockroom, or store.
 Speedy cash collection: In Managing cash efficiently the cash in flow
process can be accelerated through systematic planning and refined
techniques.

14. Formula of cash
management :
1. COC/CCC= AAI+ARCP-APP COC= Cash on operating cycle
2. CTO= 360/COC CCC= Cash conversion cycle
3. MOC =TACO/CTO AAI= Average age of inventor
ARCP= Account receivable
collection period
APP= Account payable
payment

15. Example 1:
Prime Textile Ltd. has an inventory turnover of 10 times, an average collection period of 45
days, and an average payment period of 40 days. The firm Spends TK. 10 lakh per year.
Given that,
ACP= 45 days
AAI= 360/10 = 36 days
APP= 40 days
a)COC = (45+36) – 40 days
= 41 days
b)CTO = 360/ 41 days
= 8.78 Times
C) MOC = 10, 00,000 / 8.78
= 1, 13, 895 TK.

16. Example 2
The Baumol Model
 Jamuna Chemical Limited estimates its total cash requirement as Tk4
crore next year. The company’s opportunity cost of funds is 15% per
annum. The company will have to incur Tk300 per transaction when it
converts its short-term securities to cash. Determine the optimum
cash balance. How much is the total annual cost of the demand for
the optimum cash balance? How many deposits will have to be made
during the year?
 Optimum cash balance,
Q=
2𝐵𝑇
𝑖
=
2 × 300 × 40000000
0.15
= 𝑇𝑘 400000
B= Transaction cost =Tk 300
T= Annual Total Cash Flow =Tk 40000000
i= Interest cost =15% or 0.15

17. Example
The Baumol Model
 Average Cash Balance =
𝑄
2
=
400000
2
= Tk 200000
 Number of Deposit to be Made in a Year =
40000000
400000
= 100Times

18. Conclusion
 A firm holds cash to conduct transactions and to compensate banks for
the various services they render.
 The optimal amount of cash for a firm to hold depends on the
opportunity cost of holding cash and the uncertainty of future cash
inflows and outflows.
 Two transactions models that provide rough guidelines for determining
the optimal cash position are:
 The Miller-Orr model
 The Baumol model
 If you are borrowing the bank’s money without their knowledge,
you are raising serious ethical and legal questions.