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Why do you need to manage cash?
- Entities manage cash in relation to the following issues:
- the need to have sufficient cash
- the timing of cash flows
- the cost of cash
- the cost of not having enough cash
- Managers face a trade-off between risk and return when contemplating how much cash to hold
- Cost may be minimised by holding as little cash as possible, but risk is increased
Why do you need to know the timing of your cash inflow and outflow?
- The timing of most cash flows is normally variable, the only exceptions probably being the payment by the entity of wages and taxes
- Entities can plan the timing of the purchase and sale of assets, and the requirements for capital injections, to suit their needs.
- Similarly, in contracting for loans or placing funds in the short-term money market, an entity can negotiate timing that best suits its own needs
What is the cost of holding on to cash?
- Cost of holding cash:
- opportunity cost of holding currency or cash deposits, rather than short-term securities
- cost of ensuring physical security of currency
- Electronic alternatives
- have reduced the amounts of currency handled by entities
- but has increased costs elsewhere
What are the cost of insufficient cash?
- Not having enough cash at the required time may result in the loss of the business
- A deficit in cash has the potential to become a permanent condition — insolvency
- Temporary cash shortages may be overcome by arranging emergency loans
- However, as a general rule, the more desperate the need, the higher the cost of emergency funds
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