By cash management, we mean the management of cash in currency form, bank balances, and readily marketable securities. Cash is the most important component of the working capital of a firm. It is also the terminal conversion point for other constituents. Each firm holds cash to some extent at any point in time. The Source of this cash may be the working capital operating cycle or capital inflows. Similarly, the outflow of cash from the cash reservoir of a firm can be either to the operating cycle or for capital repayment.
The various forms of cash holding
Cash is considered to be the most liquid of current assets. It is held either as cash balances with the firms or in bank accounts. There are two ways of holding bank balances – first as current accounts through which the day to day transactions of the firm are carried out and secondly as fixed deposits in which balances are held for a specified twice period. Current account balances are most liquid. Fixed account balances are convertible into cash by adjustment downwards of the rate of interest even before maturity. Hence even fixed deposit balances should be treated at par as regards liquidity. But there is a catch here. Quite a few fixed deposits are not held perse, but as margin money deposits for availing the facilities like letters of credit and guarantee from banks. To the extent of such margin money deposits, the liquidity of bank balances of the firm is impaired.
Cash balances are also held as a un availed portion of the working capital facilities granted by the banks. All such balances earn money for the firm in terms of the interest that is saved on unveiled portion. Yet the money remains available to the firm almost on call. Such balances are most suitable to a firm for enhancement of liquidity provided the firm has the policy of availing bank finance for its working capital requirements.
These firms maintain just enough balance in their current accounts and transfer the surplus immediately to the borrower accounts for saving interest thereon. In most such cases, even the routine transactions are carried out through the borrowal accounts, thus precluding the need for maintaining current accounts even.
Control of Bad debts
Control of bad-debts is an important part of controlling the working capital or the current assets of the company. Credit policy should be followed which may not lead to bad-debts and expedite collections. Periodical checks should be maintained by classifying debtors as outstandings from 0-30 days, 30-60 days, 60-90 days, and 90 and over. Amount due for 60 days or more should be followed seriously and collected.