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Management of cash and receivables . Meaning and Nature of cash. MEANING OF CASH:-

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management of cash and receivables
Management of cash and receivables
meaning and nature of cash
Meaning and Nature of cash


Cash is one of current assets of a business concern should always keep sufficient cash for meeting its obligations. Cash means both cash in hand and cash at bank and even includes marketable securities which can be easily converted into cash.


Cash itself does not produce goods and services. It is used as a medium to acquire other assets. It is the other assets which are used in manufacturing goods or providing services. The idle cash can be deposited in bank to earn interest. A business has to keep required cash for meeting various needs. These remains a gap between cash inflows and cash outflow. Sometimes cash receipts are more than the payments or it may be vice verse at another time. A financial manger tries to synchronies the cash inflows and cash outflows.

motives for holding cash
Motives for holding cash
  • Transaction motive:- a firm needs cash for making transactions in the day to day operations.
  • Precautionary motive:-a firm is required to keep cash for meeting various contingencies.
  • Speculative motive:- it relates to holding of cash for investing in profitable opportunities as and when they arise.
cash management
Cash management
  • Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and it is unproductive when not used.
  • Cash management deals with the following: i) cash inflows and outflows. ii) cash flows within the firm iii) cash balance held by the firm at a point of time.
facets of cash
Facets of cash

a)Cash planning:- it is technique to plan and control the use of cash.

b)Cash forecasts and budgeting :- a cash budget is the estimate of cash receipts and disbursements during a future period of time. it includes short term and long term cash forecasts. It may be made with the help of following methods:

i) receipts and disbursements method. ii) adjusted net income method.

m anaging cash flows
Managing cash flows

Cash management will be successful only if cash collections are accelerated and cash disbursements are delayed.

Methods of accelerating cash inflows are:-

1) Prompt payment by customers:-In order to accelerate cash inflows collection from customer should be prompt.

2) Quick conversion of payment into cash:-Cash inflows can be accelerated by improving the cash collecting process. 3) Decentralized collections:-A number of collecting centers are opened in different areas to reduce the time.

4)Lock box system:- Under this method, the firm selects some collecting centres at different places on basis of number of consumers and remittance to be received.

method of slowing cash outflow
Method of slowing cash outflow

1)Paying on last date:- The disbursements can be delayed on making payments on the last due date only.

2) Payment through drafts:- A company can delay payments by issuing drafts to the suppliers instead of giving cheques.

3) Adjusting payroll funds:- It can be done by reducing the frequency of payments.

4) Centralization of payment:-The payments should be centralized and through drafts.

5) Inter-bank Transfer:- An efficient use of cash is possible by inter-bank transfer.

determining optimum cash balance
Determining optimum cash balance

A firm has to maintain a minimum amount of cash for setting the dues in time. if a firm maintain less cash balance then its liquidity position will be weak. If higher cash balance is maintain then an opportunity to earn is lost. There are two approaches to determine an optimal cash balance:- i) minimizing cost models ii)Preparing cash budget.

cash management models
Cash management models

A number of mathematical models have also been developed to determine the optimal cash balance:-

a)operating cycle model

b)Inventory model

c)Stochastic model

d)Probability model

The models mainly used to determine optimum balance of cash are Inventory model by WilliamJ. Baumol and Stochastic model by M.H.Miller.

william j baumol s model
William j. Baumol's model

William J. Baumol developed a model which is usually used in inventory management but has its application in determining optimum cash balance. The optimal cash balance is the trade off between cost of borrowing or holding cash and transaction cost(i.e cost of converting marketable security into cash). The optimal cash balance is reached at a point where total cost is minimum. It can be represented algebrically as:-

C= (2A x F/O)1/2

Where, C= Optimum balance

A= Annual(or monthly) cash disbursements

F= Fixed cost per transaction

O= Opportunity cost of holding cash.

miller and orr model
Miller and orr model

M.H. miller and Daniel Orr expended on the Baumol model and developed stochastic model for firms with uncertain cash inflow and cash outflows. The model provides two control limits the upper control limit and the lower control limit along with a return point. the spread between the upper and lower cash balance limits can be computed using miller Orr model as below:

Z= 3(3/4 x transaction cost x variance of cash flows /interest rate)1/3

and return point= lower limit + spread(z)/ 3

variance of cash flows = (standard deviations)2


MEANING:- Receivables represent amounts owe to the firm as a result of sale of goods or services in the ordinary course of business. These are claims of the firm against its customers and from part of its current assets. Receivables are also known as accounts receivables, customer receivables or book debts. The period of credit and extent of receivables depends upon the

credit policy followed by the firm.

costs of maintaining receivables
Costs of maintaining receivables:-

1. Cost of financing receivables:- The receivables are financed from the funds supplied by shareholders for long term financing and through retained earnings.

2. Cost of collection:-Cost of collection include sending reminders to customers for early payment, legal recourse taken for collection of receivable

3. Bad debts:- The amounts which the customer fail to pay are known as bad debts.

factors influencing size of receivable
Factors influencing size of receivable
  • Size of credit sales
  • Credit policies
  • Terms of trade
  • Expansion plans
  • Credit collection efforts
  • Habits of customers
receivable management
Receivable Management

A sound managerial control require proper management of liquid assets and inventory. Receivable result from credit sales. A concern is required to allow credit sales in order to expand sales volume and profits.

Receivable management is the process of making decisions relating to investment in trade debtors. Investment in this asset involve cost consideration .There is always a risk of bad debts too.

objective of receivable management
Objective of receivable management

In the words of Bolton, S.E., the objective of receivables management is “ to promote sales and profits until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit”. Thus the objective of receivables management is to take a sound decision as regards investment in debtors.

dimensions of receivables management
Dimensions of receivables management

Aspects of receivables management:- 1)Forming of credit policy. 2)Executing the credit policy. 3)Formulating and executing collection policy.

1 forming of credit policy
1) Forming of credit policy

For efficient management of receivables, a concern must adopt a credit policy. its related:- a) Quality of trade accounts or credit standards:-the volume of sales will be influenced by the credit policy of a concern.

b) Length of credit period:-length of credit means the period allowed to the customers for making the payment. The customers paying well in time may also be allowed certain cash discount. More credit time is allowed to increase sales to existing customers and also to attract new customers.

c) Cash discount:-cash discount is allowed to expedite the collection of receivables. The concern will be able to use the additional funds received from expedited collections due to cash discount.

d) Discount period:-the collection of receivables is influenced by the period allowed for availing the discount.

2 executing credit policy
2) Executing credit policy

a) Collecting credit information:-The first step is to gather credit information about the customer to know about their financial position. The information may be available from financial statements, credit rating agencies, reports from banks, firm records,etc.

b) Credit analysis:-The finance manager should analyse the information gathered to find out the credit worthiness of potential customers.

c) Credit decision:-The finance manager has to take decision whether the credit is to be extended and if yes then up to what level. he will match the creditworthiness of customer with credit standard of the company.

d) Financing investments in receivables and factoring:-The finance manager should make efforts to get receivables financed so that working capital needs are met in time. The banks allow raising of loans against security of receivable. Another method of getting funds against receivable is their outright sale to the bank. There may be other agencies which can buy receivable and pay cash. This is known as factoring.

formulating and executing collection policy
Formulating and executing collection policy
  • The concern should devise procedure to be followed when accounts become due after expiry of credit period. The collection policy can be termed as strict or lenient. The strict policy will enable early collection of dues and will reduce bad debt losses. But it may lead to increased collection cost. On the other hand, a lenient policy may increase the debt collection period and more bad debt losses.
  • The collection policy should also devise steps to be followed in collecting over due amounts like:- a)sending a reminder for payment b)Personal request through telephone etc. c)personal visit to customers d) taking help from collecting agencies and lastly. e)taking legal action