Understanding Cash Management and Its Purpose

Posted by Imam Larh on Friday, 16 March 2018

Cash can be interpreted as the value of cash in the company and other items that in the near future can be cashed as a means of payment of financial needs that have the most high liquidity.

Cash consists of cash (paper / metal) whether the company or the bank in the form of checks demand deposit, money order (cash bon), and so forth. This article will cover overall on cash management.

Understanding Cash Management

Cash Management is a collection of activities of estimation, planning, collection, expenditure and cash investment from a company in order to operate smoothly.

Without good cash management a company will go bankrupt because of cash shortage, even if the company makes a profit. Because the business situation has a lot of uncertainty, it needs good cash management and cash planning.

Purpose of Cash Management

Basically cash management aims to consider the risks of the returns fund to make a balance between having too much or a little cash. If too little cash is invested, it reduces the opportunity to earn more profitable returns in the future. But if too much cash is invested, there will be cash insolvency.

Adequate cash will improve the company's ability to meet any expenses required by the company. Adequate cash means that cash reserves are kept at a minimum point so not too much ideal cas and can actually bring in potential profits if invested in other investment instruments.


Liquidity
Management must consciously maintain the liquidity and amount of cash that must be in the company.

EarningAny corporate expenditure should be aimed at obtaining the possibility of greater yield compared to the issued cash. In addition, management must ensure that payments are made economically.


Aspects In Cash Management
To implement a good cash management there are three aspects that are required as follows:

1. Daily Cash Administration
The daily cash administration is an orderly administration of cash receipts and disbursements as well as final cash balances, so that an up to date cash account can be prepared, which can provide information on the structure of cash receipts, cash disbursements and last cash balances when necessary.

With the administration of good daily cash administration will provide goodness and benefits for the company, especially for financial managers who are directly responsible for the company's finances.


2. Cash Budget
Cash budget is needed in analyzing economic activities to run well and smoothly in accordance with the desired goals by the company.

3. Iron Cash Inventory
In cash management, every finance manager always strives to have a well-organized cash flow in the company. Therefore, it should be endeavored to keep the cash inflows and cash outflows always in a balanced state, ie there is no excess cash balance with a shortage of cash balances.


Excessive cash balances can sacrifice rentability because of the embedded amount of cash that amounts to unproductive. Conversely, in the event of cash shortage will cause the company can not run its operations properly and can not meet the obligations that must be paid immediately. In this case, the company must provide cash in the amount required.

Motives In Cash Management
Cash management is a fundamental financial function within a company. This is related to the control and cash planning, because in the activity financial managers must know the amount of cash required at all times in the company's activities.


Motive in cash management is divided into 4 as follows:

1. Transaction Motives
Companies need some cash to finance the day-to-day business activities, such as to pay salaries or wages, pay bills, buy goods, and repay debts to creditors when they fall due.


2. Motif Watchful-Watch
The watch motive intended here is to keep an eye on the likely needs but not clear when the event occurred. Such as fire and accident.

3. Speculative Motives
Speculative motives are used to take advantage of opportunities, such as firms using their cash to invest in securities in the hope that after buying these securities the price will go up.

4. Motive Compensating Balance
This motive is basically more related to the compulsion of the company to borrow some money in the bank.

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