Nature of Cash

Principle & Practice of Management

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Nature of Cash

Cash is one of the components of current assets. It is a medium of exchange for purpose of goods and services and for discharging liabilities. Cash management is one of the key areas of working capital management as cash is both beginning and the end of working capital cycle-cash, inventories, receivables and cashes. It is the most liquid asset and the basic input required to keep the business running on a continuous basis. To quote Gitman, “liquid assets provide a pool of funds to cover unexpected outlays, thereby reducing the risk of a liquidity crisis”. It is like blood stream in the human body, gives vitality and strength to the firm. Adequate availability of cash is essential to meet the business needs. Since it is necessary for daily business operations and is productive, the cashes owned by an enterprise at any time should be carefully regulated.
Cash Nature
Efficient management of the inflow and outflow of cashes plays a crucial role in the overall performance of a firm. Shortage of cashes will disrupt the firm’s manufacturing process while excess cashes will remain idle without any contribution towards profit. It is not an end itself, but is a means to achieve the end. To quote Brigham, “Cash is a non-earning asset, so excessive cash balance simply lowers the total assets turnover, thereby reducing both the rate of return on net worth and the value of the stock.” The steady and healthy circulation of it throughout the entire business operation is the business solvency. Like any other asset of a company, cashs is a tool for profit. Thereby, the emphasis is laid on the right amount of cash at the right time, at the right place and at the right cost.
Therefore, effective management of cash involves an effort to minimise investment in it without impairing to the liquidity of the firm. It implies a proper balancing between the two conflicting objectives of the liquidity and profitability.
Cash is the medium of exchange for purchase of goods and services, and for discharging liabilities. In cash management the term cash has been used in two senses:
1. Narrow Sense: Under this cash covers currency and generally accepted equivalents of cash, viz., cheques, demand drafts and banks demand deposits.
2. Broad Sense: Here, It includes not only the above stated but also cash assets. There are bank’s time deposits and marketable securities. The marketable security can easily sold and converted into cash. Here, cash management is in broader sense.