What is the cash system in cash management?

A lack of effective cash management systems is seen in business enterprises. Generally, there are excess cash balances in bank accounts that systems are not utilized optimally. Different units of a business concern keep cash in different banks. Due to this, there is an unnecessary need for more cash. Proper management of cash is the biggest headache of business managers and for the successful operation of any business enterprise, it is necessary to arrange adequate assets. If there is a lack of liquid assets in sufficient quantity to meet current liabilities, then in such a situation, the company may fall into a financial crisis. The presence of a profit-making, adequate amount of liquid assets is a symbol of the financial strength of an enterprise. Lack of liquid assets reduces the morale and confidence of the company's managers, officers, and employees. Lenders and shareholders start doubting the financial condition of the company. Obstacles may arise in the functioning of the organization, due to which its profit-making capacity may be adversely affected and its reputation may also decrease. Therefore, it is very important to maintain the liquid position of an enterprise. Liquid assets include cash balances, bank balances, and other securities which can be immediately converted into cash when required.

What are cash management objectives?

What is the main objective of managing cash management ?

The main purposes or objectives of holding cash and cash equivalent assets by a business organization can be explained as follows-

(1) Payment-related arrangements: In the normal operation of the business, every organization has to make continuous cash payments to the suppliers of goods, employees, etc. If payments are not made on time, then there is disruption in the business cycle, hence the main objective of cash management is to obtain the necessary cash amount to make various payments related to the business. By maintaining a proper cash balance the organization can get further benefits-

(2) Benefit of trade discount – An organization maintaining a proper cash balance can avail of the benefit of trade discount after making a timely payment, which increases the profits of the organization.

(3) Take advantage of business opportunities: Institutions maintaining proper cash balance take advantage of favorable business opportunities – such as stocking large quantities of goods in case of sudden decline in the prices of raw materials in the market, and expanding business in prosperous times. Etcetera.

Facing unexpected contingencies - One of the purposes of holding cash and cash equivalent assets by a business organization can also be to face unexpected contingencies. Often some organizations may have to face such contingencies for which no thought has been given. In case of unexpected events like strikes, fires, etc., institutions having adequate cash balance can easily face these unexpected events.

what factors determine cash level?

It is very difficult to tell how much cash should be kept in a firm. The following elements come to the fore in this regard-

(1) Availability of business credit - If a business firm has been working in a field for a long time and has a good reputation in the market, then business credit is easily available to it. Easy availability of trade credit entails less need for cash. On the contrary, those institutions which do not get credit facilities have to maintain more cash reserves. For this reason, more cash funds are required in the initial years of business establishment.

(2) Production Policy - If the production policy of the firm is to produce as per the demand, then that quantity of raw material will be purchased by the firm, which is necessary for production as per the current demand, the firm will have to keep less cash. May need it.

Duration of production cycle – If the duration of the production cycle is longer then more cash is required. Conversely, if the production cycle is short

So work can be done even with less cash.

(4) Nature of demand for goods - If a firm sells such goods which are needed by a man every day and he keeps buying frequently, then in such a situation there is no need for much cash funds because cash is not involved in its buying and selling. The flow continues regularly. On the contrary, producers of capital goods will have to make do with higher cash balances.

(5) Terms of purchase and sale – If a firm receives raw materials on reasonable terms and finished goods are sold in cash. So less cash will be required, otherwise more cash will be required.

(6) Collection Policy - If the collection or recovery policy of the institution is efficient and effective, then the institution will continue to receive cash on time and bad debts will also be reduced. Therefore the organization will need to keep less cash. In the opposite situation, the organization will need to keep more cash.

(7) Relations with banks – If the firm has good transaction relations with banks and an overdraft facility is available, then there will be a need to keep less cash.

(8) Managerial Policy – The amount of cash maintained by the firm depends on the management's liquidity preference, risk tolerance, stock and investment policy, etc.

what is working capital?