Introduction

This chapter discusses the theoretical framework, empirical review both covering early studies between 1980 to 1999 and the current studies covers 2000 to 2009. At the end the summary of whole discussion has been provided.

Theoretical framework

Concept of cash and cash management

Cash concepts

According to (Davidson et al, 1999), cash is any medium of exchange, which is immediately negotiable. It must be free of restriction for any business purpose. Cash has to meet the prime requirements of general acceptability and availability for instant use in purchasing and payment of debt. Acceptability to a bank for deposit is a common test applied to cash items. This is a process of Planning, controlling, and accounting for cash transactions and cash balances. It is channeling available cash into expenditures that enhance productivity, directly or indirectly.

In addition, Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These might be converted to cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to meet the payroll. Profit growth does not necessarily mean more cash. (Davidson et al, 1999)

Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis: it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain idle. Without contributing anything towards the tint’s profitability. Thus, a major function of the financial manager is to maintain a Sound cash position. (Pandey, 2007)

Cash is the money which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm, and balances in its bank accounts. Sometimes near-cash items, such as marketable securities or bank times deposits, are also included in cash. The basic characteristic of near-cash assets is that they can readily be converted into cash. Generally, when a firm has excess cash, it invests it in marketable securities. This kind of investment contributes some profit to the firm. (Hampton, 2001)

Cash management concepts

Waltson and Head (2007) explained Cash management as the concept which is concerned with optimizing the amount of cash available, maximizing the interest earned by spare funds not required immediately and reducing losses caused by delays in the transmission of funds.

According to Zimmerer et al (2008) cash management is the process of forecasting, collecting, disbursing, investing, and planning for cash a company needs to operate smoothly. They further added that cash management is a vital task because it is the most important yet least productive asset that a small business owns. A business must have enough cash to meet its obligations or it will be declared bankrupt. Creditors, employees and lenders expect to be paid on time and cash is the required medium of exchange.

However, some firm retain an excessive amount of cash to meet any unexpected circumstances that might arise. These dormant cash have an income-earning potential that owners are ignoring and this restricts a firm’s growth and lowers its profitability. Investing cash, even for a short time, can add to company’s earning. Proper cash management permits the owner to adequately meet cash demands of the business, avoid retaining unnecessarily large cash balances and stretch the profit generating power of each dollar the business owns (Zimmerer et al, 2008).

Cash management is particularly important for new and growing businesses. (Jeffrey P. Davidson et al, 1992) indicated in their book that cash flow can be a problem even when a small business has numerous clients, offers a superior product to its customers, and enjoys a sterling reputation in its industry.

Companies suffering from cash flow problems have no margin of safety in case of unanticipated expenses. They also may experience trouble in finding the funds for innovation or expansion. Finally, poor cash flow makes it difficult to hire and retain good employees.

Westerfield et al, 1999 noted that it is important to distinguish between true cash management and a more general subject of liquidity management. The distinction is a source of confusion because the word cash is used in practice in two different ways.

First, it has its literal meanings, actual cash on hand. However, financial managers frequently use the word to describe a firm’s holdings of cash along with its marketable securities, and marketable securities are sometimes called cash equivalents or near cash. In our distinction between liquidity management and cash management is straightforward, they added.

Liquidity management concerns the optima quantity for liquid asset management policies. Cash management is much more closely related to optimizing mechanisms for collecting and disbursing cash, and it’s this subject that we primarily focus on this chapter.

Empirical Evidence

Early study 1980–1999

General overview

In late 1980s authors played a great contribution in the concept of cash management. Ross et al (1988:619) explained that cash management involves three steps;

• Determining the appropriate target cash balance
• Collecting and disbursing cash efficiently
• Investing “ excess cash ‘ in