Cash Management

Puno, Erika P.
Cash Management
Cash Management is the collection, handling, control and investment of the organizational cash
and cash equivalents, to ensure optimum utilization of the firm’s liquid resources. Money
is the lifeline of the business, and therefore it is essential to maintain a sound cash flow
position in the organization.
Receivable Cash Management

Any amount which the company has earned however not yet received, example its outstanding
and is expected to be received in future, is known as receivables. An organization must manage
its receivable to maintain the surplus cash inflow. It helps the firm to fulfil its immediate cash
requirements. The cash receivables must be planned in such a way that the organization can
realize its debts quickly and should allow a short credit period to the debtors.
Payables Cash Management
The payables refer to the payment which is unpaid by the organization and is to be paid off
shortly. The organization should plan its cash outflow in such manner that it can acquire an
extended credit period from the creditors. This helps the firm to retain its cash resources for a
longer duration to meet the short-term requirements and sudden expenses. Even the organization
can invest this cash in a profitable opportunity for that particular credit period to generate
additional income.
Objective of Cash Management
 Fulfil Working Capital Requirements
 Planning Capital Expenditure
 Handling Unorganized Costs
 Initiates Investments
 Better Utilization of Funds
 Avoiding Insolvency
Cash Management Models
Cash management requires a practical approach and a strong base to determine the requirement
of cash by the organization to meet its daily expenses.
1. The Baumol’s EOQ Model
Based on the Economic Order Quantity (EOQ), in the year 1952, William J. Baumol gave the
Baumol’s EOQ model, which influences the cash management of the company.
This model emphasizes on maintaining the optimum cash balance in a year to meet the business
expenses on the one hand and grab the profitable investment opportunities on the other side.
The following formula of the Baumol’s EOQ Model determines the level of cash which is to be
maintained by the organization:
Where,
‘C’ is the optimum cash balance;
‘F’ is the fixed transaction cost;
‘T’ is the total cash requirement for that period;
‘i’ is the rate of interest during the period
2. The Miller – Orr’ Model

According to Merton H. Miller and Daniel Orr, Baumol’s model only determines the cash
withdrawal; however, cash is the most uncertain element of the business.
There may be times when the organization will have surplus cash, thus discouraging
withdrawals; instead, it may require to make investments. Therefore, the company needs to
decide the return point or the level of money to be maintained, instead of determining the
withdrawal amount.
The formula of the Miller – Orr’ model to find out the return point of cash and the spread across
the minimum level and the maximum level:
Where,
‘Return Point’ is the point at which money is to be invested or withdrawn;
‘Minimum Level’ is the minimum cash required for business sustainability;
‘Z’ is the spread across the minimum level and the maximum level;
‘T’ is the transaction cost per transfer;
‘V’ is the variance of daily cash flow per annum;
‘i’ is the daily interest rate
Functions of Cash Management

 Investing of Idle Cash
 Controlling Cash Flows
 Planning of Cash
 Managing Cash Flows
 Optimizing Cash Levels
Cash Management Strategies
 Business Line of Credits
 Money Market Fund
 Lockbox Account
 Sweep Account
 Cash Deposits (CDs)
Cash Flow Management Techniques
 Accelerating Collection of Accounts Receivable
 Stretching of Accounts Payable
 Cost Cutting
 Regular Cash Flow Monitoring
 Wisely using Banking Service
 Upgrading with Technology
Limitations of Cash Management
Cash management is an inevitable part of business organizations. However, it has a few
shortcomings which make it unsuitable for small organizations; these are as follows:
Cash management is a very time consuming and skillful activity which is required to be

performed regularly.
As it requires financial expertise, the company may need to hire consultants or other experts to
perform the task by paying administrative and consultation charges.
Small business entities which are managed solely, face problems such as lack of skills,

knowledge, time and risk-taking ability to practice cash management.

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Puno, Erika P.

Receivable Cash Management

2. The Miller – Orr’ Model

Functions of Cash Management

Cash management is a very time consuming and skillful activity which is required to be

Small business entities which are managed solely, face problems such as lack of skills,

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