Cash Management


Cash and marketable securities management is the primary objective of the treasury and financial department. This includes financing working capital needs, managing debts, paying vendor bills, collecting accounts receivables, controlling currency positions and interest rates, and preparing financial statements.


Cash management is based on such liquidity/profitability trade-off, which contributes to an increase in shareholders’ value in the long run. In other words, the trade-off means maintaining high liquidity and control over the cash balance for as long as possible, while the opportunity cost of holding it should be as low as possible.

The objectives of cash management are:

  1. Cash budget preparation. It is necessary to calculate cash inflows and cash outflows during a period and forecast the cash balance at the end of it. Moreover, cash budget preparation helps determine not only cash shortage but also excess cash and therefore improves the solvency of a business.
  2. Determination of minimum cash balance. Such balance is needed to meet any unexpected cash outflows.
  3. Determination of optimal cash balance. On the one hand, it helps maintain liquidity and meet working capital needs. On the other hand, it allows the opportunity cost of holding cash to be minimized.
  4. Investment in marketable securities. Idle cash should be invested to reduce the opportunity cost.
  5. Reducing cash management expense.

Cash conversion cycle

During the period from when raw materials are purchased until the final sale, the cash of a business is tied up in inventory. When finished goods are sold on credit, the cash of a business is tied up until the receivables are collected.

However, a business can also buy raw materials on credit so that such purchases do not result in any cash outflows until the payables due date. Thus, the cash conversion cycle is the number of days the cash of a business is tied up in its working capital.

Cash conversion cycle = Days of sales in inventory + Days of sales outstanding – Days payables outstanding

A business should decrease this ratio and therefore reduce working capital needs. In other words, a business has to lower the production cycle and boost collection of receivables. At the same time, a business should pay its suppliers as late as possible.

Cash balances

Effective cash management involves maintaining the following cash balances:

  1. Compensating balance
  2. Minimum balance
  3. Transaction balance
  4. Speculative balance

Banks can require clients to maintain a compensating cash balance in their accounts. For example, under a credit line agreement, a bank may set a compensating balance in the amount of 10% of the contract amount.

A minimum cash balance is a safety buffer to prevent a shortage of cash if unexpected cash outflows occur.

The transaction cash balance is assigned to meet the needs in cash to fund operations, e.g., paying bills, salaries.

A speculative cash balance is maintained to be able to benefit from opportunities that arise. For example, the seller may offer a discount for early payment, and if the amount exceeds the cost of financing, this opportunity will provide an additional benefit.

Thus, cash management involves maintaining a targeted cash balance, the benefits of which exceed the opportunity cost of holding it.

Cash management process

The process of cash management is shown in the figure below.

Cash Management Process

As was mentioned above, cash management of a business should reduce the cash collection period and lengthen cash payments. It helps reduce the optimal cash balance and therefore reduce the opportunity cost of holding it.

Excess or idle cash should be invested in short-term marketable securities, which are often called short-term investments in a balance sheet. In the process of selecting marketable securities, we should take into account the following:

  • period of time during which cash will be idle
  • acceptable risk
  • yield

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