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Comparing Cash Management Techniques

A. Compare and contrast various cash management techniques.
b. Compare and contrast the various methods of short-term financing.

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a. Compare and contrast various cash management techniques.

The following are the reasons for holding cash:
? Transaction Motive for Holding Cash
A firm needs cash to make payments for acquisition of resources and services for the running the business.
? Precautionary Motive for Holding Cash
A firm keeps additional funds to meet any emergency situation.
? Speculative Motive for Holding Cash
Some firms may also maintain cash for taking advantages of speculative changes in prices of input and output.

(Pandey, I.M., Financial Management)

Objective of Cash Management
Optimum Balance of Cash
A firm should hold an optimum balance of cash, and invest any temporary excess amount in short-term (marketable) securities. In choosing these securities, the firm must keep in mind safety, maturity and marketability of its investment.
Four facets on Cash Management
Cash planning
Managing the cash flows
Optimum cash level
Investing surplus cash

Techniques of Cash Management

1) Float Management

Float is the delay between the time when a cheque is issued by a company and the time when it is cleared.
http://www.systemdynamics.org/conferences/1997/paper010.htm as retrieved on 5 Jul 2007 21:26:44 GMT.

Hence float is time taken to receive the collection from customer or to make the payment to the supplier.

They are following:

? Disbursement float= Amount * No. of days of clearance for payment

? Collection float= Amount * No. of days to clear for deposit

? Net float= Collection Float- Disbursement float

According to the system dynamics:
Managing floats may be of a great importance for a firm, owing to delays generated by floats, a company may benefit from extra funds, free of interest. Consequently, other conditions being equal, levering on float it will be possible to increase investments and - if operating unit revenues will be higher than costs - to achieve a growing internal flow of funds that will allow supporting growth

Thus float management can help in having additional funds without any cost. This will help in improving the profitability.

2) Improving relationship with Supplier and customer
Industry norms set a ...

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