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In managing financial growth of company, Cash, receivables and inventory jointly form working
capital of a firm. It is imperative for experts to keep good balance of these factors.

Management of Cash
Cash is considered as vital asset and its proper management support company development and
financial strength. An effective cash management program designed by companies can help to
realise this growth and strength. Cash is vital element of any company needed to acquire supply
resources, equipment and other assets used in generating the products and services. Marketable
securities also come under near cash, serve as back pool of liquidity which provides quick cash
when needed.

Cash management is the stewardship or proper use of an entity’s cash resources. It assists to keep
an organization functioning by making the best use of cash or liquid resources of the
organization. Cash management is associated with management of cash in such a way as to
realise the generally accepted objectives of the firm, maximum productivity with maximum
liquidity. It is the management’s capability to identify cash problems before they ascend, to solve
them when they arise and having made solution available to delegate someone carry them out.
The notion of cash management is not new and it has attained a greater significance in the
modern world of business due to change that took place in business operations and ever
increasing difficulties and the cost of borrowing” (Howard, 1953 ). It is the most liquid current
assets, cash is the common denominator to which all current assets can be reduced because the
other current assets i.e. receivables and inventory get eventually converted into cash (Khan, 1983
). This emphasises the importance of cash management. The term cash management denotes to
the management of cash resource in such a way that generally accepted business objectives could
be accomplished. In this perspective, the objectives of a firm can be combined as bringing about
consistency between maximum possible effectiveness and liquidity of a firm. Cash management
may be defined as the ability of a management to identify the problems related with cash which
may come across in future course of action, finding appropriate solution to curb such problems if
they arise, and lastly delegating these solutions to the competent authority for carrying them out.
Cash management maintains sufficient quantity of cash in such a way that the quantity denotes
the lowest adequate cash figure to meet business obligations. Cash management involves
managing cash flows (into and out of the firm), within the firm and the cash balances held by a
concern at a point of time.

In financial literature, Cash management denotes to wide area of finance involving the
collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and
investments. The notion of cash management is not novel and it has gained more significance in
contemporary business world due to change that took place in the conduct of business and ever
increasing difficulties and the cost of borrowing.

Objective of Cash Management

1. To make Payment According to Payment Schedule: Firm needs cash to meet its routine
expenses including wages, salary, taxes etc.
2. To minimise Cash Balance: The second objective of cash management is to reduce cash
balance. Excessive amount of cash balance helps in quicker payments, but excessive cash
may remain unused & reduces profitability of business. Contrarily, when cash available
with firm is less, firm is unable to pay its liabilities in time. Therefore optimum level of
cash should be maintained (Excel Books India, 2008).

An effective management is considered to be important for the following reasons:

1. Cash management guarantees that the firm has sufficient cash during peak times for
purchase and for other purposes.
2. Cash management supports to meet obligatory cash out flows when they fall due.
3. Cash management helps in planning capital expenditure projects.
4. Cash management helps to organize for outside financing at favourable terms and
conditions, if necessary.
5. Cash management helps to allow the firm to take advantage of discount, special
purchases and business opportunities.
6. Cash management helps to invest surplus cash for short or long-term periods to keep the
idle funds fully employed.
General Principles of Cash Management
Harry Gross has recommended certain general principles of cash management.

1. Determinable Variations of Cash Needs: A reasonable amount of funds, in the form of

cash is required to be kept aside to overcome the period expected as the period of cash
shortage. This period may either be short and temporary or last for a longer duration of
time. Normal and regular payment of cash leads to small cutbacks in the cash balance at
periodic intervals. Making this payment to different workers on different days of a week
can balance these reductions. Another practice for balancing the level of cash is to
schedule cash disbursements to creditors during the period when accounts receivables
collected amounts to a large sum but without putting the helpfulness at stake.
2. Contingency Cash Requirement: There may arise certain cases, which fall beyond the
forecast of the management. These establish unexpected calamities, which are too
difficult to be provided in the normal course of the business. Such contingencies always
demand for special cash requirements that was not assessed and provided for in the cash
budget. Denials of wholesale product, huge amount of bad debts, strikes, and lockouts are
some of these contingencies. Only a prior experience and investigation of other similar
companies prove supportive as a customary practice. A useful procedure is to shield the
business from such calamities like bad-debt losses, fire by way of insurance coverage.
3. Availability of External Cash: This factor also has immense significance in the cash
management which refer to the availability of funds from outside sources. There
resources help in providing credit facility to the firm, which materialized the firm’s
objectives of holding minimum cash balance. As such if a firm succeeds in obtaining
 sufficient funds from external sources such as banks or private financers, shareholders,
government agencies, the need to maintain cash reserves lessens.
4. Maximizing Cash Receipts: Nearly, all financial managers have objective to make the
best possible use of cash receipts. Cash receipts if tackled carefully results in minimizing
cash requirements of a concern. For this purpose, the comparative cost of granting cash
discount to customer and the policy of charging interest expense for borrowing must be
appraised continually to determine the ineffectiveness of either of the alternative or both
of them during that particular period for maximizing cash receipts. Some techniques
proved helpful in this context are mentioned below:
i. Concentration Banking: In this system, a company launches banking centres for
collection of cash in different areas. Thus, the company instructs its customers of
neighbouring areas to send their payments to those centres. The collection amount
is then deposited with the local bank by these centres as early as possible.
Whereby, the collected funds are transferred to the company’s central bank
accounts operated by the head office.
ii. Local Box System: Under this system, a company rents out the local post offices
boxes of different cities and the customers are asked to forward their remittances
to it. These remittances are picked by the approved lock bank from these boxes to
be transferred to the company’s central bank operated by the head office.
iii. Reviewing Credit Procedures: This type of technique assists to determine the
impact of slow payers and bad debtors on cash. The accounts of slow paying
customers should be revised to determine the volume of cash tied up. Besides this,
evaluation of credit policy must also be conducted for introducing essential
modifications. As a matter of fact, too strict a credit policy involves rejections of
sales. Thus, restricting the cash inflow. On the other hand, too lenient, a credit
policy would increase the number of slow payments and bad debts again reducing
the cash inflows.
iv. Minimizing Credit Period: Shortening the terms allowed to the customers would
definitely quicken the cash inflow side-by-side reviewing the discount offered
would prevent the customers from using the credit for financing their own
operations gainfully.
v. Others: There is a need to introduce various procedures for managing large to
very large remittances or foreign remittances such as, persona pick up of large
sum of cash using airmail, special delivery and similar techniques to accelerate
such collections.
5. Minimizing Cash Disbursements: The intention to minimize cash payments is the
ultimate benefit derived from maximizing cash receipts. Cash disbursement can be
brought under control by stopping deceitful practices, serving time draft to creditors of
large sum, making staggered payments to creditors and for payrolls.
6. Maximizing Cash Utilization: It is emphasized by financial experts that suitable and
optimum utilization leads to maximizing cash receipts and minimizing cash payments. At
times, a concern finds itself with funds in excess of its requirement, which lay idle
without bringing any return to it. At the same time, the concern finds it imprudent to
dispose it, as the concern shall soon need it. In such conditions, company must invest
these funds in some interest bearing securities. Gitman suggested some fundamental
 procedures, which helps in managing cash if employed by the cash management. These
include:

i. Pay accounts payables as late as possible without damaging the firm’s credit
rating, but take advantage of the favourable cash discount, if any.
ii. Turnover, the inventories as quickly as possible, avoiding stock outs that might
result in shutting down the productions line or loss of sales.
iii. Collect accounts receivables as early as possible without losing future loss sales
because of high-pressure collections techniques. Cash discounts, if they are
economically justifiable, may be used to accomplish this objective (Gitman,
1979.).

Function of Cash Management

It is well acknowledged in financial reports and various studies that cash management is
concerned with minimizing fruitless cash balances, investing temporarily excess cash usefully
and to make the best possible arrangements for meeting planned and unexpected demands on the
firm’s cash (Hunt, 1966). Cash Management must have objective to reduce the required level of
cash but minimize the risk of being unable to discharge claims against the company as they arise.
There are five cash management functions:

1. Cash Planning: Experts emphases the wise planning of funds that can lead to huge
success. For any management decision, planning is the primary requirement. According
to theorists, “Planning is basically an intellectual process, a mental pre-disposition to do
things in an orderly way, to think before acting and to act in the light of facts rather than
of a guess.” Cash planning is a practise, which comprises of planning for and controlling
of cash. It is a management process of predicting the future need of cash, its available
resources and various uses for a specified period. Cash planning deals at length with
formulation of necessary cash policies and procedures in order to perform business
process constantly. A good cash planning aims at providing cash, not only for regular but
also for irregular and abnormal requirements.
2. Managing Cash Flows: Second function of cash management is to properly manage cash
flows. It means to manage efficiently the flow of cash coming inside the business i.e.
cash inflow and cash moving out of the business i.e. cash outflow. These two can be
effectively managed when a firm succeeds in increasing the rate of cash inflow together
with minimizing the cash outflow. As observed accelerating collections, avoiding
excessive inventories, improving control over payments contribute to better management
of cash. Whereby, a business can protect cash and thereof would require lesser cash
balance for its operations.
3. Controlling the Cash Flows: It has been observed that prediction is not an exact
knowledge because it is based on certain conventions. Therefore, cash planning will
unavoidably be at variance with the results actually obtained. Due to this, control
becomes an unavoidable function of cash management. Moreover, cash controlling
becomes indispensable as it increases the availability of usable cash from within the
enterprise. It is understandable that greater the speed of cash flow cycle, greater would be
the number of times a firm can convert its goods and services into cash and so lesser will
 be the cash requirement to finance the desired volume of business during that period.
Additionally, every business is in possession of some concealed cash, which if traced out
significantly decreases the cash requirement of the enterprise.
4. Optimizing the Cash Level: It is important that a financial manager must focus to
maintain sound liquidity position i.e. cash level. All his efforts relating to planning,
managing and controlling cash should be diverted towards maintaining an optimum level
of cash. The prime need of maintaining optimum level of cash is to meet all requirements
and to settle the obligations well in time. Optimization of cash level may be related to
establishing equilibrium between risk and the related profit expected to be earned by the
company.
5. Investing Idle Cash: Idle cash or surplus cash is described as the extra cash inflows over
cash outflows, which do not have any specific operations or any other purpose to solve
currently. Usually, a firm is required to hold cash for meeting working needs facing
contingencies and to maintain as well as develop friendliness of bankers.
In banking area, cash management is a marketing term for some services related to cash
flow offered mainly to huge business customers. It may be used to describe all bank
accounts (such as checking accounts) provided to businesses of a certain size, but it is
more often used to describe specific services such as cash concentration, zero balance
accounting, and automated clearing house facilities. Sometimes, private banking
customers are given cash management services.
Financial instruments involved in cash management include money market funds,
treasury bills, and certificates of deposit.

Benefits of Cash Management System

In the period of technology progression, the Cash Management System provides following
Benefits to its customers:

1. Funds availability as per need on day zero, day one, day two, day three etc. i.e. Corporate
can plan their cash flows.
2. Bank interest saved as instruments are collected faster.
3. Affordable and competitive rates.
4. Single point enquiry for all queries.
5. Pooling of funds at desired locations.

To summarize, Cash Management denotes to the concentration, collection and disbursement of

cash. The major role for managers is to maintain the flow of cash. Cash Management include a
series of activities aimed at competently handling the inflow and outflow of cash. This mainly
involves diverting cash from where it is to where it is needed. It is established that cash
management is the optimization of cash flows, balances and short-term investments.

Management of Receivable
Accounts receivable typically comprise more than 25 percent of a firm’s assets. The term
receivables is described as debt owed to the firm by the customers resulting from the sale of
goods or services in the ordinary course of business. There are the funds blocked due to credit
sales. Receivables management denotes to the decision a business makes regarding to the overall
credit, collection policies and the evaluation of individual credit applicants. Receivables
Management is also known as trade credit management. Robert N. Anthony, explained it as
“Accounts receivables are amounts owed to the business enterprise, usually by its customers.
Sometimes it is broken down into trade accounts receivables; the former refers to amounts owed
by customers, and the latter refers to amounts owed by employees and others”.

Receivables are forms of investment in any enterprise manufacturing and selling goods on credit
basis, large sums of funds are tied up in trade debtors. When company sells its products, services
on credit, and it does not receive cash for it immediately, but would be collected in near future, it
is termed as receivables. However, no receivables are created when a firm conducts cash sales as
payments are received immediately. A firm conducts credit sales to shield its sales from the
rivals and to entice the potential clienteles to buy its products at favourable terms. Generally, the
credit sales are made on open account which means that no formal reactions of debt obligations
are received from the buyers. This enables business transactions and reduces the paperwork
essential in connection with credit sales.

Accounts Receivables Management denotes to make decisions relating to the investment in the
current assets as vital part of operating process, the objective being maximization of return on
investment in receivables. It can be established that accounts receivables management involves
maintenance of receivables of optimal level, the degree of credit sales to be made, and the
debtors’ collection.

Receivables are useful for clients as it increases their resources. It is preferred particularly by
those customers, who find it expensive and burdensome to borrow from other resources. Thus,
not only the present customers but also the Potential creditors are attracted to buy the firm’s
product at terms and conditions favourable to them.

Receivables has vial function in quickening distributions. As a middleman would act fast enough
in mobilizing his quota of goods from the productions place for distribution without any
disturbance of immediate cash payment. As, he can pay the full amount after affecting his sales.
Likewise, the customers would panic for purchasing their needful even if they are not in a
position to pay cash immediately. It is for these receivables are regarded as a connection for the
movement of goods from production to distributions among the ultimate consumer.
Maintenance of receivable

Objectives of receivables management: The objective of Receivables Management is to

promote sales and profits until that point is reached where the return on investment in further
funding receivables is less than the cost of funds raised to finance that additional credit i.e. cost
of capita.
Management of Accounts Receivables is quite expensive. The following are the main costs
related with accounts receivables management:

Cost of Management of Accounts Receivables

Advantages of accounts receivable management:
Accounts Receivables Management has numerous benefits. These include:

1. Increased Sales: Offering goods or services on credit enhances sales, by holding old
customers and attraction potential customers.
2. Increased Market Share: When the firm is able to maintain old customers and attract new
customers automatically market share will be bigger to the extent new sales.
3. Increase in profits: Increase sales, leads to increase in profits, because it need to produce
more products with a given fixed cost and sales of products with a given sales network in
both cost per unit comes down and the profit will be better.

Management of Inventory
Inventory management is basically related to task of controlling the assets that are produced to
be sold in the normal course of the firm’s procedures. In supply chain management, major
variable is to effectively manage inventory. The significance of inventory management to the
company depends on the extent of its inventory investment.

The objectives of inventory management are of twofold:

1. The operational objective is to uphold enough inventory, to meet demand for product by
efficiently organizing the firm’s production and sales operations.
2. Financial interpretation is to minimize unproductive inventory and reduce inventory,
carrying costs.

Effective inventory management is to make good balance between stock availability and the cost
of holding inventory.
Components of inventory management: Inventories exist in different forms in a manufacturing
company. These include:

1. Raw materials: Raw materials are those inputs that are transformed into completed goods
throughout manufacturing process. Those form a major input for manufacturing a
product. In other words, they are very much needed for uninterrupted production.
2. Work-in-process: Work-in-process is a stage of stocks between raw materials and
finished goods. Work-in-process inventories are semi-finished products. They signify
products that need to undergo some other process to become finished goods.
3. Finished products: Finished products are those products which are totally manufactured
and company can immediately sell to customers. The stock of finished goods provides a
buffer between production and market.
4. Stores and spares: It comprises of office and plant cleaning materials like soap, brooms,
oil, fuel, light, bulbs and are purchased and stored for the purpose of maintenance of
machinery.

Component of inventory

Inventory control encompasses managing the inventory that is previously in the warehouse,
stockroom or store. This is to know the type of products are “out there”, how many each item
and where it is kept. It means having accurate, complete and timely inventory transactions record
and avoiding differences between accounting and real inventory levels. Two tools commonly
used to ensure inventory accuracy and control are ABC analysis and cycle counting.

The process of Inventory management consists of determining, how to order products and how
much to order as well as identifying the most effective source of supply for each item in each
stocking location. Inventory management contains all activities of planning, forecasting and
replenishment. The main purpose of inventory management is minimize differences between
customers demand and availability of items. These differences have caused by three factors that
include customers demand fluctuations, supplier’s delivery time fluctuations and inventory
control accuracy.

Types of Inventory
The aim of carrying inventories is to separate the operations of the firm. It means to make each
function of the business independent of each other function so that delays or closures in one area
do not affect the production and sale of the final product. Because production cessations result in
increased costs, and because delays in delivery can lose customers, the management and control
of inventory are important duties of the financial manager. There are many types of inventory.
The common categories of inventory include raw materials inventory, work-in-process
inventory, and finished-goods inventory.

Raw-Materials Inventory: Raw materials inventory include basic materials purchased from other
firms to be used in the firm’s production operations. These goods may include steel, lumber,
petroleum, or manufactured items such as wire, ball bearings, or tires that the firm does not
produce itself. Regardless of the specific form of the raw-materials inventory, all manufacturing
firms maintain a raw-materials inventory. The intention is to separate the production function
from the purchasing function that is, to make these two functions independent of each other so
delays in the delivery of raw materials do not cause production delays. If there is a delay, the
firm can satisfy its need for raw materials by liquidating its inventory.

Work-in-Process Inventory: Work-in-process inventory comprises of partly finished goods

requiring additional work before they become finished goods. The more difficult and lengthy the
production process, the larger the investment in work-in-process inventory. The main aim of
work-in-process inventory is to disengage the various operations in the production process so
that machine failures and work stoppages in one operation will not affect other operations.

Finished-Goods Inventory: Finished-goods inventory includes goods on which production has

been completed but that are not yet sold. The purpose of a finished-goods inventory is to separate
the production and sales functions so that it is not required to produce the goods before a sale can
occur and sales can be made directly out of inventory.

Motives of inventory management:

Managing inventories involve lack of funds and inventory holding costs.
Maintenance of inventories is luxurious. Still there is motive to retain inventories. There are
three general motives:
 1. The transaction motive: Firm may hold the inventories in order to facilitate the smooth
and continuous production and sales operations. It may not be possible for the company
to obtain raw material whenever necessary. There may be a time lag between the demand
for the material and its supply. Therefore, it is needed to hold the raw material inventory.
Similarly, it may not be possible to produce the goods instantly after they are demanded
by the customers. Hence, it is needed to hold the finished goods inventory. The need to
hold work-in-progress may arise due to production cycle.
2. The precautionary motive: Firms also prefer to hold them to protect against the risk of
unpredictable changes in demand and supply forces. For example, the supply of raw
material may get delayed due to the factors like strike, transport disruption, short supply,
lengthy processes involved in import of the raw materials.
3. The speculative motive: Firms may like to buy and stock the inventory in the quantity
which is more than needed for production and sales purposes. It is done to get the
advantages in terms of quantity discounts connected with bulk purchasing or expected
price rise.

Merits of Inventory Management

There are several advantages of managing inventory in proper way.

1. Inventory management guarantees adequate supply of materials and stores to minimize

stock outs and shortages and avoid costly interruption in operations.
2. It keeps down investment in inventories, inventory carrying costs, and obsolescence
losses to the minimum.
3. It eases purchasing economies throughout the measurement of requirements on the basis
of recorded experience.
4. It removes duplication in ordering stock by centralizing the source from which purchase
requisition emanate.
5. It allows better utilization of available stock by enabling inter-department transfers within
a firm.
6. It offers a check against the loss of materials through carelessness or pilferage.
7. Perpetual inventory values provide a stable and reliable basis for preparing financial
statements a better utilization.

Demerits of Holding Inventory

Besides several benefits, there are some drawbacks of holding inventory.

1. Price decline: It is a major disadvantage of inventory holding. Price decline is the result
of more supply and less demand. It can be said that it may be due to introduction of
competitive product. Generally, prices are not controllable in the short term by the
individual firm. Controlling inventory is the only way that a firm can counter act with
these risks. On the demand side, a decrease in the general market demand when supply
remains the same may also cause price to increase. This is also long-lasting management
 problem, because reduction in demand may be due to change in customer buying habits,
tastes and incomes.
2. Product deterioration: It is also serious demerits of inventory holding. Holding of finished
completed goods for a long period or shortage under inappropriate conditions of light,
heat, humidity and pressures lead to product worsening.
3. Product obsolescence: If items are hold for long time, it may become outdated. Product
may become outmoded due to improved products, changes in customer choices,
particularly in high style merchandise, changes in requirements. Then this is a major risk
and it may affect in terms of huge revenue loss. It is costly for the firms whose resources
are limited and tied up in slow moving inventories.

In final words, the notion of inventory management has been one of the many analytical
characteristics of management. It involves optimization of resources available for holding stock
of various materials. If there is shortage of inventory, it leads to stock-outs, causing stoppage of
production and a very high inventory will result in increased cost due to cost of carrying
inventory.

Managing Current Liabilities

A current liability is an obligation that is payable within one year. The collection of liabilities
comprising current liabilities is closely watched, a business must have enough liquidity to
guarantee that they can be paid off when due. In accounting area, current liabilities are often
understood as all liabilities of the business that are to be settled in cash within the financial year
or the operating cycle of a given firm, whichever period is longer.

In exceptional cases where the operating cycle of a business is longer than one year, a current
liability is described as being payable within the term of the operating cycle. The operating cycle
is the time period required for a business to acquire inventory, sell it, and convert the sale into
cash. In most cases, the one-year rule will apply.

Since current liabilities are normally paid by liquidating current assets, the presence of a large
amount of current liabilities calls attention to the size and prospective liquidity of the offsetting
amount of current assets listed on a company’s balance sheet. Current liabilities may also be
settled through their replacement with other liabilities, such as with short-term debt.

The combined amount of current liabilities is major component of several measures of the short-
term liquidity of a business. That include:

 Current ratio. This is current assets divided by current liabilities.

 Quick ratio. This is current assets minus inventory, divided by current liabilities.
 Cash ratio. This is cash and cash equivalents, divided by current liabilities.
Common examples of Current Liabilities
Accounts payable: These are the trade payables due to suppliers, usually as evidenced by
supplier invoices.
Sales taxes payable: This is the obligation of a business to remit sales taxes to the government
that it charged to customers on behalf of the government.
Payroll taxes payable: This is taxes withheld from employee pay, or matching taxes, or
additional taxes related to employee compensation.
Income taxes payable: This is income taxes owed to the government but not yet paid.
Interest payable: This is interest owed to lenders but not yet paid.
Bank account overdrafts: These are short-term advances made by the bank to offset any
account overdrafts caused by issuing checks in excess of available funding.
Accrued expenses: These are expenses not yet payable to a third party, but already incurred,
such as wages payable.
Customer deposits: These are payments made by customers in advance of the completion of
their orders for goods or services.
Dividends declared: These are dividends declared by the board of directors, but not yet paid to
shareholders.
Short-term loans: This is loans that are due on demand or within the next 12 months.
Current maturities of long-term debt: This is that portion of long-term debt that is due within
the next 12 months.

To summarise, financial experts defined current liabilities as “obligations whose liquidation is

reasonably expected to require the use of existing resources properly categorized as current
assets or the certain of current liabilities.”