Importance of Cash Management
Cash management means optimal cash maintain in a business. If an excess is taken in a business, it is harmful because it does not grow profit. Contrary if the cash is taken deficit position them the liquidity crises exists. It is a key component of a company’s financial stability and solvency.
Cash management is one of the key areas of working capital management. Apart from the fact that is the most liquid current asset, cash is the common denominator to which all current assets can be reduced because the other major liquid assets, i.e., receivables and inventories get eventually converted into cash. If your business cannot meet its monthly obligations for operations and liabilities you are not solvent. This means that a downturn in the economy or any loss of sales could be devastating.
- Cash is often called a “Non – earning asset”
- It helps to meet obligatory cash outflows when they fall due.
- It is required to pay for labor and raw materials to buy fixed assets, to pay taxes, to pay interest on a debt, to pay dividends and so on.
- It helps to arrange for outside financing at favorable terms and conditions, if necessary.
- Cash itself can be invested in different interest earning sources.
- It signifies that a higher amount of cash will increases our opportunity cost of capital.
- It helps to invest surplus cash for short or long-term periods to keep the idle funds fully employed.
- Allows adequate cash for purchases and other purposes.
- Ability to meet cash flow.
- Allows planning for capital expenditure.
- Allows for financing at better terms.
- Enables you to make special purchases and take advantage of business opportunities.