Cash Management

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Cash Management � PAGE \* Arabic �1�


Cash Management

University of Phoenix

August 13, 2007


Cash Management

To help control the cash balance of the business, a number of models have been proposed. A model developed proposes the use of upper and lower control limits for cash balances and the use of a target cash balance. Such model assumes that the business will invest in marketable investments that can easily be liquidated. As necessary, these investments will be purchased or sold, to keep the cash balance within the control limits (Atrill & McLaney, 2001 p.318).

For the businesses cash balance, upper and lower limits are set by management. Action will have to be taken when the balance goes beyond either the upper or lower limits, unless it is clear that the balance will return fairly quickly to within the upper or lower limit, respectively. If the upper limit is breached, some cash will be used to buy some marketable securities.

The business will need to sell some securities or borrow some cash, if lower limits are breached. The model banks heavily on management judgment to determine where the control limits are set and the period within which breaches of the control limits are acceptable. Past experience may be useful in helping managers decide on these issues. Other models are used that do not rely on management judgment and which instead, use quantitative techniques to determine the optimum cash policy (p.318).

Another technique to manage cash effectively is for a business to prepare a cash budget. This is a very important tool for both planning and control purposes. These enable the managers of a business to see the expected result of the planned events on the cash balance. The cash budget will identify periods when there...