FACTORS AFFECTING THE CASH NEEDS

1.Cash Cycles:

It refers to the length of the time between the payment for purchase of raw material & receipt of sales revenue. So, the cash cycles refer to the time  that elapsed from the point when the firm makes an outlay to purchase raw material to the point when cash is collected from the sale of finished goods produced using that raw material.

 
                                              FIG. CASH CYCLES

2. Cash inflows & cash outflows:

Every firm has to maintain cash balance  because its expected inflows & outflows rates are not always synchronized. The timings of cash inflows may not always match the timings of the outflows. Therefore a cash balance is required to fill up the gap arising out of difference in timings & quantum of inflows and outflows. If the inflows are appearing just at the time when cash is required for payment, then no cash balance will be required to be maintained by the firm.

3.Cost of Cash Balance:

Another factor to be considered while determining the minimum cash balance is the cost of maintaining excess cash or of meeting shortage of cash. If the firm is maintaining excess cash then it is missing the opportunities of investing these funds in a profitable way. Similarly, if the firm is maintaining inadequate cash balance then it may be required to arrange funds on an emergency basis to meet any unexpected shortage. Even if  the shortage is expected to continue only for a short period, yet the funds are to be arranged & there will always be a cost(may be more than normal cost) of raising fund.

4.Other considerations:

In addition to the above factors, there may be some other considerations also affecting the need for cash balance. There may be several subjective consideration such as uncertainties of a particular trade, staff required for cash management etc., which will have a bearing on determining the cash balance required by a firm.

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