2. INTRODUCTION
Cash is the most liquid asset. Cash is common
denominator to which all other current assets can be
reduced because receivables and inventories get
converted into cash.
Cash is lifeblood of any firm needed to acquire supply
resources, equipment and other assets used in generating
the products and services. Marketable securities also
come under near cash, serve as back pool of liquidity
which provide quick cash when needed.
3. MANAGEMENT OF CASH
Although cash is only 1-3% of total current assets but
its management is very important.
Management of cash includes:
Determination of optimum amount of cash required
in the business.
To keep the cash balance at optimum level and
investment of surplus cash in profitable manner.
Prompt collection of cash from receivables and
efficient disbursement of cash.
4. MEANING OF CASH
For the purpose of cash
management, the term
cash not only includes
coins, currency notes,
cheques, bank draft,
demand deposits with
banks but also the near
cash assets like
marketable securities and
time deposits with bank
because they can readily
converted into cash.
CASH
Narrow Sense
Cash in Hand i.e.
currency notes &
coins
Broader Sense
Cash & its
equipment i.e. cash
at Bank, short term
investment
5.
6. MOTIVES FOR HOLDING CASH
In business cash is needed for the following motives:
Transaction Motive
Precautionary Motive
Speculative Motive
Compensation Motive
7. Transaction Motive :
– For meeting demand for cash flow arising out of
day to day transaction
– For purchase of goods and services
– Payment to supplier, employees , interest on
borrowing, taxes to government, dividend to
shareholders done in cash.
8. – Cash outflows are met out of cash inflows
– Cash outflows > Cash inflows then deficiency +
cash margin must be arranged
– Cash outflows and Cash inflows are not fully and
exactly synchronized
– Always require minimum cash
9. Q. Management of cash means management of
cash inflows.
True
False
13. Precautionary Motive :
• It is based on the need to maintain
sufficient cash to act as a cushion or
buffer against unexpected events.
• to meet the future contingencies such
as :
- Floods, strikes and failures of important customers
- Bills may be presented for settlement earlier than
expected
14. o Unexpected slow down in collection of
accounts receivables
o Cancellation of some order for goods as
the customer is not satisfied
o Sharp increase in cost of raw materials
15. Q. Which of the following is not a motive to hold
cash?
A. Precautionary motive
B. Transaction motive
C. Capital investment
D. None of these
19. • Cash for Transaction and Precautionary
Motives depends upon:
– Degree of predictability of its cash flows,
– Its willingness and capacity to take risk of running
short of cash, and
– Available immediate borrowing powers
20.
Speculative Motive :
Thespeculative motive helps to take advantages of:
An opportunity to purchase raw materials at a
reduced price on payment of immediate cash.
A change to speculate on interest rate movements by
buying securities when interest rates are expected to
decline.
Delay purchase of raw materials on the
anticipation of decline in prices.
Make purchase at favorable prices.
21. Q. Basic characteristics of short term marketable
securities:
A. High return
B. High risk
C. High marketability
D. High safety
23. Compensating Motive :
-Yet another motive to hold cash balances is to
compensate banks for providing certain services
and loans.
- Minimum cash balance may vary from 5000 to
10000.
-This amount remains as permanent balance with
bank
24. Q. Which term refers to how quickly and
easily an asset can be converted to cash?
A. Speculation
B. Precaution
C. Sales forecasting
D. Liquidity
26. Q. If management holds cash to protect against a
potential future demand on the business, this is an
example of which of the following?
A. Transactional motive
B. Compensating balance
C. Opportunity cost
D. Precautionary motive
28. FACTORS TO BE CONSIDERED WHILE DETERMINING
THE OPTIMUM CASH BALANCE
Synchronization of cash flows.
Cash shortage costs.
Excess cash balance costs.
Procurement and management costs.
30. Q. What is a minimum amount of cash a
lender requires a business to hold as a term
of a loan or line of credit?
A. Liquidity
B. Asset management
C. Collateral
D. Compensating balance
32. Cash Management:
Cash inflows balance cash outflows ?
Cash inflows > Cash outflows ?
Cash inflows < Cash outflows ?
Firm may not face any problem if it is having
adequate and sufficient cash balance
For this purpose financial manager should
ensure that the firm having Right quantity and
Right quality of liquidity from Right source at
Right price and at Right time
33. Q. Speculative motive of holding cash refers to:
A. Holding cash to utilize in internal projects
B. Holding cash for any future loss the
company is expecting
C. Holding cash to avail any future investment
opportunity
D. None of these
35. Q. The tools of treasury management
does not include:
a. Foreign Exchange Management
b. Cash Management
c. Receivable Management
d. Risk Management
37. Objectives of Cash Management
Financial manager must know as to why the
cash management is a necessity.
Cash management strategies are generally
built around two goals:
-To provide cash needed to meet
obligations
-To minimize the idle cash held by the
firm.
38. A large cash investment minimizes the chances
of default but penalizes the profitability of the
firm.
Risk return trade-off of any firm can be reduced
to two prime objectives for the firm’s cash
management system:
-Meeting the cash outflows:
i. Avoiding the chance of default
ii. Cash discount by early payments
iii. Meeting unexpected cash outflows
39. Optimizing the Cash Balance
- Investment in idle cash balance must be
reduced to a minimum.
- Financial manager has to ensure that
the minimum cash balance being
maintained by the firm is not affecting
payment schedule, all disbursement
needs
40. Q. Payment to creditors is a manifestation
of cash held for:
(a)Transactionary Motive,
(b)Precautionary Motive,
(c)Speculative Motive,
(d)All of the above.
42. Q. Cash Discount term 3/15, net 40
means
(a) 3% Discount if payment in 15 days, otherwise
full payment in 40 days,
(b) 15% Discount if payment in 3 days, otherwise
full payment 40 days,
(c) 3% Interest if payment made in 40 days and
15%,interest thereafter,
(d) None of the above.
