Cash has been defined in the Government Financial Statistics (GFS) manual. Cash on hand refers to notes, coins, and deposits held on demand by government institutional units with a bank or another financial institution. Cash equivalents are defined to be highly liquid investments that are readily convertible to cash on hand.

Cash management is necessary because there are mismatches between the timing of payments and the availability of cash. Even if the annual budget is balanced, with realistic revenue and expenditure estimates, in-year budget execution will not be smooth, since both the timing and seasonality of cash inflows (which depend in turn on tax and nontax flows, and timing of grant or loan disbursements) and of expenditures can result in conditions of temporary cash surpluses or temporary cash shortfalls. For example, if taxes are paid quarterly, there can be large temporary cash surpluses around the time taxes are due, and temporary deficits in other time periods.

Storkey (2003) provides the following definition: ― cash management is having the right amount of money in the right place and time to meet the government‘s obligations in the most cost-effective way.‖ Other definitions emphasize active cash management of temporary cash surpluses and temporary deficits.

Moderrn cash management has four major objectives:

  • To ensure that adequate cash is available to pay for expenditures when they are due. Pooling revenues in a treasury single account (TSA) facilitates this.
  • To borrow only when needed and to minimize government borrowing costs.
  • To maximize returns on idle cash, i.e., to avoid the accumulation of unremunerated or low yielding government deposits in the central bank or in commercial banks.
  • To manage risks, by investing temporary surpluses productively, against adequate Effective cash management contributes to the smooth implementation of the operational targets of fiscal policy, the public debt management strategy, and monetary policy.

Approaches of Centralized Cash Management

a) Netting

In a typical multinational family of companies, there are a large number of intra-corporate transactions between subsidiaries and between subsidiaries and the parent. If all the resulting cash flows are executed on a bilateral, pair wise basis, a large number of currency conversions would be involved with substantial transaction costs. With a centralized system, netting is possible whereby the cash management center (CMC) nets out receivables against payables, and only the net cash flows are settled among different units of the corporate family.

Payments among affiliates go back and forth, whereas only a netted amount need be transferred. For example, the German subsidiary of an MNC sells goods worth $1 million to its Italian affiliate that in turn sells goods worth $2 million to the German unit. The combined flows total $3 million. On the net basis, however, the German unit need remit only $1 million to the Italian unit. This is called bilateral netting. It is valuable, though only if subsidiaries sell back and forth to each other. But a large percentage of multinational transactions are internal – leading to a relatively large volume of inter-affiliate payments – the payoff from multilateral netting can be large, relative to he costs of such a system.

The netting center will use a matrix of payables and receivables to determine the net payer or creditor position of each affiliate at the date of clearing.

b) Cash Pooling Netting

The CMC act not only as a netting center but also the repository of all surplus funds. Under this system, all units are asked to transfer their surplus cash to the CMC, which transfers them among the units as needed and undertakes investment of surplus funds and short-term borrowing on behalf of the entire corporate family. The CMC can in fact function as a finance company which accepts loans from individual surplus units, makes loans to deficit units and also undertakes market borrowing and investment. By denominating the intra-corporate loans in the units‘ currencies, the responsibility for exposure management is entirely transferred to the finance company and the operating subsidiaries can concentrate on their main business, viz. production and selling of goods and services. Cash pooling will also reduce overall cash needs since cash requirements of individual units will not be synchronous.

c) Collection and Disbursement of Funds

Accelerating collections both within a foreign country and across borders is a key element of international cash management. Considering either national or international collections, accelerating the receipt of funds usually involves the following:

  • defining and analyzing the different available payment channels,
  • selecting the most efficient method (which can vary by country and customer),
  • giving specific instructions regarding procedures to the firm‘s customers and banks.

Management of disbursements is a delicate balancing act of holding onto funds versus staying on good terms with suppliers. It requires detailed knowledge of individual country and supplier policies, as well as the different payment instruments and banking services available around the world. A constant review of disbursements and auditing of payment instruments help international firms achieve better cash management.