Cash and Liquidity Management


Overview of Cash and Liquidity Management
Cash and liquidity management are important parts of modern day business operation. They are extremely crucial for the proper running of any business concern. Cash and liquidity management is especially applicable in the context of everyday business operations of a company.

Importance of Cash and Liquidity Management
Cash and liquidity management have immense significance in the context of the solvency of a particular business enterprise.

Nature and Importance of Cash Management
The most liquid asset of a company is its cash. Normally it has been observed that the amount of corporate assets held by a particular company is only one to three percent of the amount of cash the company has in its possession.
By virtue of being the most liquid asset, cash is extremely suitable for business purposes. The basic reason behind the need for cash is the same as well. The need of cash has often been compared to that of blood or oxygen in a human body.

Motives behind Cash Management
There are certain motives that are there behind the immense demand of cash, as well as proper cash management:

  • Transaction Motive
  • Speculative Motive
  • Precautionary Motive

The transaction motive behind the need of cash could be explained as the purpose of operating the particular company. It has been seen that the income of funds from various sources and disbursement of funds into various avenues do not match. Hence the companies need to have a certain amount of cash that could be used as a buffer to run the company.

The various companies often want to make profits from the movements in market prices of investment options like securities for example. Enough reserves of funds allow the companies the flexibility to try out these opportunities.

The business entities can use cash reserves to protect themselves from the various risks that could be associated with cash flows. Both the cash inflows as well as cash outflows could be considered in this case.

Aspects of Cash Management
Following are the main aspects of cash management:
Cash Budgeting
Optimal Cash Balance
Long Term Cash Forecasting
Investment of Surplus Funds
Reports for Control
Cash Management Models
Cash Collection and Disbursement

For more information please refer to the following links:

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Last Updated on : 27th June 2013

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