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15-02-2009, 12:09 AM
Cash Management Basics
Cash is your business's lifeblood. Managed well, your company remains healthy and strong. Managed poorly, your company goes into cardiac arrest.
If you haven't considered cash management an important issue, then you're probably undermining your business's short-term stability and its long-term survival. But how can you manage business cash better?
v How Do You Define "Cash Flow"?
The answer lies in the fact that the accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss -- not cash flow.
The "bottom line" of the P&L is net income. And net income does not tell you what happened to your cash balance during the period. It merely defines net income based on the accounting rules used to create the income statement.
It's an important measurement, but it is only one component of understanding and managing your cash flow.
Cash flow is made up of more than just profit and loss.
It also is affected by:
* Accounts receivable
* Accounts payable
* Capital expenditures
* Borrowings and debt service
* Other "timing" differences
* Operating decisions
* Customer credit policies
* Financial obligations
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24-08-2012, 05:14 PM
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Nature of Cash
Cash is the medium of exchange for purchase of goods and services and for discharging liabilities. In cash management the term cash has used in two senses.
Narrow Sense: Under this, cash covers currency and generally accepted equivalents of cash, viz., cheques , demand drafts .
Broad Sense: Here, cash includes not only the above stated but also near cash assets. They are marketable securities. The marketable security can easily sold and converted into cash.
Why does a firm need cash ?
There are three primary reasons for a firm to hold cash:
To meet the needs of daily transactions
To protect the firm against uncertainties of its cash flows
To take advantage of unexpected investment opportunities
Transaction motive for holding cash or near-cash balances is driven by the need to make planned payments for items, such as materials, wages, tax, rent etc.
It is driven by the need to protect the firm against being unable to satisfy unexpected demands for cash.
For ex-floods, strikes ,slow down in collection of debtors, increase in cost of raw materials etc.
It refers to the desire of a firm to take advantage of oppertunities.
Ex: Purchase of material at reduced price, dealing in commodities in bulk purchasing and selling when rates are considered favourable.
INVESTMENMT OF SURPLUS FUNDS
Companies often have surplus funds for short period of time, before they are required for capital expenditures, loan repayment, or some other purpose.
These funds may be deployed in a variety of ways, like money market instruments, public sector bonds, Short term deposit etc.
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