Q. Basic objectives of cash management?

The basic objectives of cash management are two-fold:

1) To meet the cash disbursement needs (payment schedule); and 2) To minimize funds committed to cash balances.

These are conflicting and mutually contradictory and the task of cash management is to reconcile them.

1) Meeting the Payment Schedule: In the normal course of business firms have to make payments of cash on a continuous and regular basis to suppliers of goods, employees and so on. At the same time, there is a constant inflow of cash through collections from debtors. A basic objective of cash management is to meet the payment schedule, Le, to have sufficient cash to meet the cash disbursement needs of Chi firm. The importance of sufficient cash to meet the payment schedule can hardly be over-emphasized. The advantages of adequate cash are:

i) It prevents insolvency or bankruptcy arising out of the inability of a firm to meet its obligations

ii) The relationship with the bank is not strained;

iii) It helps in fostering good relations with trade creditors and suppliers of raw materials, as prompt payment may help their own cash management;

iv) A trade discount can be availed of if payment is made within the due date;

v) It leads to a strong credit rating which enables the firm to purchase goods on favorable terms. and to maintain its line of credit with banks and other resources of credit;

vi) To take advantage of favorable business opportunities that may be available periodically;