Cash control

Question 1

Reasons for holding cash

Answer 1

Balancing act
Liquidity (ability to pay bills as a full due and take advantage of opportunities immediately)

Vs

Profitability (minimising the holding of cash to generate improved returns)

Question 2

What are the three motives of holding cash?

Answer 2

Transactions motive
Day-to-day expenses

Precautionary motive
Rainy day fund for unexpected costs

Investment motive
Money available to invest if a good opportunity rises

Question 3

How could you deal with a forecast cash deficit?

Answer 3

You could initially look at the elements of working capital and do the following:
- receivable - Chase outstanding debts and offer prompt payment discount

• payables - delay paying suppliers
• Inventory - reduce inventory levels by having a sale

If not, you could look at other financing solutions such as bank loans and leasing assets instead of buying them . You could also delay or cancelled dividend payments.

Question 4

How could you deal with a forecast cash surplus?

Answer 4

You could look at short-term investments such as:
- interest-bearing bank accounts
- Negotiable instruments
- Short dated government bonds
- Short term investments

When looking at these, you should consider the risk, maturity and liquidity of these items