Objectives Cash Management
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OBJECTIVES OF CASH MANAGEMENT
The cash management strategies are generally built around two goals.
1.To provide cash needed to meet the obligations
2.To minimize the idle cash held by the firm.
The financial manager of a firm has to strike a balance between holding too much cash & too little cash. This is the focal point of the cash risk return trade-off .
This risk-return trade-off of any firm can be reduced to two prime objectives for the firm’s cash management system , as follows:
This risk-return trade-off of any firm can be reduced to two prime objectives for the firm’s cash management system , as follows:
1.Meeting the cash outflows:
This is the primary objectives of cash management. Enough cash must be on hand to meet the disbursal needs that arise in the normal course of business. It means that the firm should have sufficient cash to meet the payment schedules & disbursement needs. It will help the firm in meeting unexpected cash outflows without much problem & availing the opportunities of getting cash discounts by making early or prompt payments
2.Minimizing cash balance:
Investment in idle cash balance must be reduced to a minimum. The funds locked up is a dead investment & has no earning. Therefore ,whatever cash balance is maintained, the firm is foregoing interest income on that balance.
However , the objectives of cash management i.e., maintaining the minimum cash balance must be looked into together with other objectives i.e., maintaining the payment schedule etc., which require that the firm must have the sufficient liquidity (even at the cost of reducing profitability). But the objective of minimum cash balance affects the liquidity & thereby increasing the profitability. Thus, these objectives seems to be contradicting in nature & hence the financial manager has to achieve a trade-off between them. He ha to ensure that minimum cash balance being maintained by the firm is not affecting the payments schedule & meeting all disbursement needs. However , meeting payments commitments takes higher priority than minimizing the cash balance.
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However , the objectives of cash management i.e., maintaining the minimum cash balance must be looked into together with other objectives i.e., maintaining the payment schedule etc., which require that the firm must have the sufficient liquidity (even at the cost of reducing profitability). But the objective of minimum cash balance affects the liquidity & thereby increasing the profitability. Thus, these objectives seems to be contradicting in nature & hence the financial manager has to achieve a trade-off between them. He ha to ensure that minimum cash balance being maintained by the firm is not affecting the payments schedule & meeting all disbursement needs. However , meeting payments commitments takes higher priority than minimizing the cash balance.
For more help in Objectives of Cash Management please click the button below to submit your assignment: