Cash is a wonderful asset. It allows the owner to make business decisions. Once a company has insufficient cash balances to cover its level of trading activity. It will be unable to trade if it cannot secure additional credit. It's directors and managers will be replaced by an administrator or a receiver and the business will probably be wound up or sold to another owner. It is for this reason that cash management is so vital.

The amount of cash which any business needs to hold will depend upon its payment cycle. This can be illustrated by the following example. A company knows that is takes on average 15 days to turn its raw material into finished stock and further 40 days to receive payment from its debtors. The firm must pay its suppliers within days, and so its cash conversion cycle is days less days 25 days. If raw materials of are purchased each day on 30 days credit, then the firm will have to pay for its raw materials within 30 days, while having to wait 55 days for its money. The business must be able to finance this for 25 days and so Rs 750 will be needed for working capital purposes.

Any reduction in manufacturing time of delay made in paying creditors will reduce the amount of working capital needed. Similarly, any reduction in the time taken to receive payments from debtors would also benefit the firm.

The aim is to have sufficient cash for the level of trading. Some companies are so worried about being short of cash that large cash balances are built up. When questioned, the owners say that they are waiting for the ideal investment or are considering purchasing another business, but often it is just being used as a security blanket. When this happens, the firm is not as efficient as it could be. Even assuming that the money is being invested in interest earning assets. The return is still likely to be less than could be earned by investing it in the business. If this continues over a long period of time, the business will experience lover earnings per share, which will make it vulnerable to take over bid if its shares are quoted on a stock exchange.

The key to having sufficient cash lies in accurate forecasting. Most businesses are seasonal. This means that they cannot rely on a steady stream of sales each month but experience peaks and troughs in sales. In these cases, cash balances must be built up in the good months to carry the business through the poor months. This can be done by drawing up a cash budget. 

Cash is a wonderful asset. It allows the owner to make business decisions. Once a company has insufficient cash balances to cover its level of trading activity. It will be unable to trade if it cannot secure additional credit. It's directors and managers will be replaced by an administrator or a receiver and the business will probably be wound up or sold to another owner. It is for this reason that cash management is so vital.

The amount of cash which any business needs to hold will depend upon its payment cycle. This can be illustrated by the following example. A company knows that is takes on average 15 days to turn its raw material into finished stock and further 40 days to receive payment from its debtors. The firm must pay its suppliers within days, and so its cash conversion cycle is days less days 25 days. If raw materials of are purchased each day on 30 days credit, then the firm will have to pay for its raw materials within 30 days, while having to wait 55 days for its money. The business must be able to finance this for 25 days and so Rs 750 will be needed for working capital purposes.

Any reduction in manufacturing time of delay made in paying creditors will reduce the amount of working capital needed. Similarly, any reduction in the time taken to receive payments from debtors would also benefit the firm.
The aim is to have sufficient cash for the level of trading. Some companies are so worried about being short of cash that large cash balances are built up. When questioned, the owners say that they are waiting for the ideal investment or are considering purchasing another business, but often it is just being used as a security blanket. When this happens, the firm is not as efficient as it could be. Even assuming that the money is being invested in interest earning assets. The return is still likely to be less than could be earned by investing it in the business. If this continues over a long period of time, the business will experience lover earnings per share, which will make it vulnerable to take over bid if its shares are quoted on a stock exchange.