Slide 2:
Are no funds block in idle cash.Idle resourses entail a great deal of cost in terms of Interest charges and in terms of oppurtunities costs.Hence question of idle cash must also be kept in mind.A cash management scheme therfore is a delicate balance between the twin objective of liquidity and costs.
Slide 3:
Cash management is concerned with managing of:
1.Cash flows in and out of the firm.
2.cash flows within the firms.
3.cash balances held by the firms at the point of time by financing deficit or investing surplus cash.
Liquidity position :
Liquidity position Liquidity position is a difference between the sum of liquid assets and incoming cash flows on one side and outgoing cashflows resulting from commitments on another side measured over a defined period being the measure of the liquidity risk.
Liquidity v/s profitability :
Liquidity v/s profitability Liquidity: the ease of converting an asset to cash.
Ex. Real estate has low liquidity compared to stocks
Liquidity also refers to a firm’s ability to generate positive cash flows to meet short-term financial obligations
Profitability: Revenues minus costs
Note: If all sales are credit sales, then cash flows are less than revenues. If some costs are non-cash (such as depreciation) then profits will understate cash flow
Slide 6:
The financial manager is always faced with the dil -1ntrat of liquidity vs. profitability. He has to strike a balance between the two.
a. The firm has adequate cash to pay for its bills.
b. The firm has sufficient cash to make unexpected large purchases and, above all.
c. The firm has cash reserve to meet emergencies, at all times.
Profitability goal, on. the other hand, requires that the funds of the firm are so used so as to yield Olt highest return.
Liquidity and profitability are very closely related. When one increases the other decreases. Apparently liquidity and profitability goals conflict in most of the decisions which the finance manager makes. For example, it higher inventories are kept in anticipation of increase in prices of raw materials, profitability goal is approached but the liquidity of the firm is endangered. Similarly, the firm by following a liberal credit policy may be in a position to push up its sales but its illiquidity decrease.
Slide 7:
There is also a direct relationship between higher risk and higher return Higher risk on the one hand endangers the liquidity—a" the firm, higher return on the other hand increases its profitability. A company may increase its profitability by having a very high debt equity ratio. However, when the company raises funds from outside sources, it is committed to make the payment of interest, etc. at fixed times and in fixed amounts and hence to that extent of its liquidity is reduced.
Thus, in every area of financial management, the financial, manager is to choose between risk and profit and generally he chooses in between the two. He should forecast cash flows and analyse the various sources of funds. Forecasting of cash flow and managing the flow of internal funds are the functions which lead to liquidity, cost control and forecasting future profits are the functions of finance manager which lead to profitability. An efficient finance manager fixes that level of operations where both profit and risk are optimised.