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Cash Management: Techniques and Basic Principles Tools Explain!

Hello, Cash Management, a business concern requiring cash to pay for the acquisition of resources and services for the business’s normal conduct. Cash is one of the important and important parts of current assets. Cash is that wealth. Which can quickly remove business concerns without any restrictions?

The term cash includes coins, currency, business concerns checks, and balances in its bank accounts. Cash management includes cash flow and outflow, cash flow within the concern and cash balance from the concern, etc.

Also read: Functions of Commercial Banks: Ultimate banking Guideline

Motives for Holding Cash

1. Compensating motive

It is a motive for holding cash to compensate banks for providing certain services or loans. Banks provide a variety of services to the business concern, such as clearance of cheque, transfer of funds, etc.

2. Speculative motive

It is the motive for holding cash to quickly take advantage of opportunities typically outside the normal course of business. A certain amount of cash is needed to meet an opportunity to purchase raw materials at a reduced price or make purchases at favorable prices.

3. Precautionary motive

It is the motive for holding cash or near cash as a cushion to meet unexpected contingencies. Cash is needed to meet an unexpected situation like floods strikes, etc.

4. Transaction motive

It is a motive for holding cash or near cash to meet routine cash requirements to finance transactions in the normal course of business. Cash is needed to make purchases of raw materials, pay expenses, taxes, dividends, etc.

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Cash Management Techniques

These are two important parts of cash flow management. Which sheds light on.

  1. Quick Cash Collection.
  2. Slow disbursement.

1. Speedy Cash Collections

Business concern must concentrate in the field of Speedy Cash Collections from customers. For that, the concern prepares a systematic plan and refined techniques. These techniques aim at, the customer who should be encouraged to pay as quickly as possible and the payment from customers without delay. Speedy Cash Collection business concern applies some of the important techniques as follows:

Prompt Payment by Customers

Business concern should encourage the customer to pay promptly with the help of offering discounts, special offers, etc. It helps to reduce the delaying payment of customers and the firm can avoid delays from the customers. The firms may use some of the techniques for prompt payments like billing devices, self-address cover with a stamp, etc.

Early Conversion of Payments into Cash

Business concerns should take careful action regarding the quick conversion of the payment into cash. For this purpose, the firms may use some of the techniques like postal float, processing float, bank float, and deposit float.

Concentration Banking

It is a collection procedure in which payments are made to regionally dispersed collection centers, and deposited in local banks for quick clearing. It is a system of decentralized billing and multiple collection points.

Lock Box System

It is a collection procedure in which payers send their payment or cheques to a nearby post box that is cleared by the firm’s bank. Several times that the bank deposits the cheque in the firm’s account. Under the lockbox system, business concerns hire a post office lockbox at important collection centers where the customers remit payments.

The local banks are authorized to open the box and pick up the remittances received from the customers. As a result, there are some extra savings in mailing time compared to the concentration bank.

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2. Slowing Disbursement

Effective cash management is not only in the part of the speedy collection of its cash and receivables but also it should concentrate on slowing their disbursement of cash to the customers or suppliers. Slowing disbursement of cash is not the meaning of delaying the payment or avoiding the payment. Slowing disbursement of cash is possible with the help of the following methods:

Avoiding the early payment of cash

The firm should pay its payable only on the last day of the payment. If the firm avoids the early payment of cash, the firm can retain the cash with it and that can be used for other purposes.

Centralized disbursement system

A decentralized collection system will provide speedy cash collections. Hence centralized disbursement of cash system takes time for collection from our accounts as well as we can pay on the date.

Cash Management Models

Cash management models analyze methods that provide a certain framework as to how cash management is conducted in the firm. Cash management models are the development of the theoretical concepts into analytical approaches with mathematical applications. There are three cash management models that are very popular in the field of finance.

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