Cash Management - Cash Management Chapter 6 Working capital...

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Cash Management
Chapter 6 Working capital finance The management of cash Cash flow forecasts Treasury management Cash management models Investing surplus cash Working capital funding strategies 00 MO NTH 0000
Overview working capital finance Financing decision Maximisation of shareholder wealth Investment decision Dividend decision Finance to fund investments in working capital Cash forecasting to plan how to deal with cash shortages Cash forecasting to ensure that dividends can be paid
Syllabus learning outcomes (1) Explain the various reasons for holding cash, and discuss and apply the use of relevant techniques in managing cash, including: (i) Preparing cash flow forecasts to determine future cash flows and cash balances (ii) Assessing the benefits of centralised treasury management and cash control (iii) Cash management models, such as the Baumol model and the Miller-Orr model (iv) Investing short-term
Syllabus learning outcomes (2) Calculate the level of working capital investment in current assets and discuss the key factors determining this level, including: (i) The length of the working capital cycle and terms of trade (ii) An organisation's policy on the level of investment in current assets (iii) The industry in which the organisation operates
Syllabus learning outcomes (3) Describe and discuss the key factors in determining working capital funding strategies, including: (i) The distinction between permanent and fluctuating current assets (ii) The relative cost and risk of short-term and long-term finance (iii) The matching principle (iv) The relative costs and benefits of aggressive, conservative and matching funding policies (v) Management attitudes to risk, previous funding decisions and organisation size
Key models and theories The previous two chapters on working capital introduced the concepts of liquidity and working capital and also described how inventory, receivables and payables can be managed. This chapter looks at the management of cash: the key ingredient to survival. There are two models to be aware of: Baumol Miller Orr
The nature of cash ' Cash is king ' Cash is ready money in the bank or in the business. Unlike inventory and receivables, it can be used to pay wages, rent and suppliers. Having good profits does not necessarily mean that a business has enough cash. Cash might have been spent on buying non-current assets or paying dividends. You can't spend profit; you can only spend cash. Monitoring cash inflows and outflows to ensure that there is enough cash is one of the most important management tasks for any business. Ultimately it is a lack of cash when it’s needed that causes a business to fail.
Reasons for holding cash There are three reasons (or motives) for holding cash: Transactions motive: to meet the day-to-day transactions of running a business Precautionary motive: as a safety net for unexpected events such as a large customer failing. An overdraft facility or line of credit will also provide this safety. Speculative motive: to take advantage of opportunities eg bulk buy discounts or investment in a new line of business when the opportunity arises.

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