Cash Management Overview

Definition and Purpose

• Cash is the most liquid form of asset, readily usable for transactions.
• It represents readily available funds in various forms, including physical currency and demand deposits in bank accounts.
• The primary purpose of cash is to facilitate transactions and meet immediate obligations.

Types of Cash

• Physical Currency: Paper bills and coins in circulation. Physical cash is often vulnerable to theft, loss, and damage.
• Demand Deposits: Funds held in checking accounts, savings accounts that offer easy access and immediate use. These accounts are generally insured by the relevant banking authorities.

Importance of Cash Management

• Liquidity: Helps businesses and individuals meet short-term obligations and seize investment opportunities.
• Cost Control: Optimizing cash flow and minimizing the need for external finance.
• Profitability: Efficient management can increase the value of a business and enhance profit margins.
• Financial Stability: Robust cash management ensures stability in adverse economic conditions.

Cash Flow Statement

• A financial statement that specifically details the inflow and outflow of cash during a specified period.
• Shows the movement of cash from operating activities, investing activities, and financing activities.
• Helps assess liquidity and solvency of an organization, including if it's earning enough from operations to continually reinvest.

Cash Equivalents

• Highly liquid short-term investments that can be quickly converted into cash with minimal risk of loss in value.
• Examples include money market accounts, certificates of deposit (CDs) with short maturities, and treasury bills.
• Generally, cash equivalents are considered to be virtually risk-free because the time to get the money is so quick.

Cash Conversion Cycle

• The time lag between paying for raw materials and receiving payment from customers.
• A critical metric for businesses.
• A short cash conversion cycle is desirable because it improves profitability.

Cash Forecasting

• The process of predicting future cash inflows and outflows.
• Helps anticipate cash needs and plan for potential shortfalls or surpluses.
• A good cash forecast takes into account several factors, including accounts receivable.

Cash Management Techniques

• Cash budgeting: Create a plan showing expected cash on hand for a future period.
• Cash pooling: Consolidating cash balances from various accounts into a single account to improve liquidity and reduce losses.
• Lock box: A system for collecting payments from customers in a secure location.
• Overdraft protection: An agreement with a bank to automatically cover checks or withdrawals if the account runs low.

Internal Controls for Cash

• Separation of duties: Different individuals responsible for handling cash receipts, disbursing funds and reconciling accounts.
• Physical security: Protecting cash assets from theft, unauthorized access, or damage.
• Reconciliations: Comparing bank statements against internal records to detect and prevent errors or fraud.
• Inventory control: Systems to help ensure that enough cash is available in times of high activity or demand.

Factors Affecting Cash Management

• Business cycle: Economy and industry levels of activity.
• Inflation: Changes in the purchasing power of money.
• Seasonality: Predictable fluctuations in cash inflow or outflow due to business patterns associated with a particular season.
• Competition: Rival businesses or competitors can affect the market and level of profitability for a company, or influence how much cash a company can hold.
• Interest rate changes: Influence the cost of borrowing or profitability.