The following points highlight the five ways for the management of cash balance. The ways are: 1. Setting Cash Balance 2. Cash Cycle 3. Zero Balance Account 4. Money Market Banking 5. Petty Cash Imprest System.

Way # 1. Setting Cash Balance:

The level of cash holding of a firm depends upon number of factors. In setting cash balances for itself a company can use ratio analysis.

One measure that would assist in the management of cash is the ratio of the cash balance to the level of current assets:

The Financial manager of a company could benefit from a study of the movement over time of the cash to current assets ratio. Another approach to determining the amount of cash that the company may need to carry cash is to examine the cash balance in relation to the sales of the period.


This can be done by studying the cash turnover ratio:

Another way setting level of cash balance is to ascertain it as a percentage of turnover of the firm, say 1.5% of net sales.

Way # 2. Cash Cycle:


Richards and Langhlin (1980) suggested that the cash flow cycle could be modelled on the basis of its elements, which they identified as:

Effective working capital management would require us to reduce the cash conversion cycle to manageable proportions. By reducing the inventory conversion period and the receivables conversion period and by extending the payables deferral, this can be achieved. The close observation of the cash cycle from time to time would itself ensure that things are under control.

Way # 3. Zero Balance Account:

For efficient cash management some firms employ an extensive policy of substituting marketable securities for cash by the use of zero balance accounts in which zero balance is maintained.


Every day the firm totals all cheques presented for payment against the account and transfers the balance amount of cash in the account by buying marketable securities. In case of shortage of cash the firm will sell the marketable securities depending on the need for cash.

Way # 4. Money Market Banking:

One of the tasks of ‘treasury function’ of larger companies is the investment of surplus funds in the money market. Money market banks obtain funds by competing in the money market for the deposits of corporate customers, public authorities, wealthy individuals, and other banks.

Deposits are made for specific periods ranging from overnight to one year, at highly competitive rates which reflect supply and demand on a daily, even hourly basis. Consequently the rates can fluctuate quite dramatically, especially for the shorter-term deposits. Even the most significant rate, the 3-month interbank rate, has fluctuated greatly over the years.

Way # 5. Petty Cash Imprest System:

For better control on cash, generally the companies use petty cash imprest system wherein the day to day petty expenses are estimated taking into account past experience and future needs and generally a week’s requirement of cash will be kept separate for making petty expenses.


Again, the next week will commence with the predetermined balance. This will reduce the strain of the management in managing petty cash expenses and help in the managing cash efficiently.