Definition and importance of cash


Definition and importance of cash

Cash consists of coins and currency on hand and in bank accounts, cheques, bank drafts and money orders received from customers and other sources. Cash balances are presented in the Balance Sheet as current assets.

Cash is an important item for business entities because at some stage most transactions involve movement of cash. This could be collections from customers, payments to creditors for purchases or meeting of operating expenses like salaries and wages. Business entities therefore, must ensure they have sufficient cash balances in order to meet:

a)         needs of current operations,
b)         maturing obligations as they fall due, and
c)         any unforeseen contingencies.

However, business entities should not have excessive cash balances such that cash is idle.  Idle cash earns no return and in fact its value is eroded by inflation. Therefore adequate balances should be maintained where there is no shortage or excess of cash. Cash budgets are prepared to project cash flows and plan for eventual deficiencies or surpluses. There are also more complex financial modeling techniques that are employed in determining cash balances.

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