Money Management

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Money management aims at ensuring that a sufficient amount of money is raised from appropriate sources at the right time, and is invested in suitable projects which would increases the net returns of the firm and thereby the value of the firm. Thus, money management consists of raising required funds, investing the funds and managing the working capital.

For the long and short-term requirements of the firm, a sufficient amount of funding is to be raised from different sources. While selecting the resources, they should match the purpose for which the fund is required. For example, the need for long-term funds like construction of building, acquisition of machinery, etc., should be sought from long-term sources like share capital, debentures or term loans.

Once the funds are raised, their investment may pose a serious problem. The basic criterion for investing in a particular asset is that it should realize a positive net return, i.e., the benefits should be more than the cost. Moreover, if there are mutually exclusive projects with positive net returns, the project with the highest net return should be selected. For this purpose, various techniques of capital budgeting are employed.

In addition to long-term capital, a concern wants short-term capital to manage the day-to-day running of the business. For efficient performance, the firm has to maintain a sufficient level of inventory to ensure uninterrupted production and distribution. Enough cash is required to meet the expenses and obligation of suppliers and creditors. There should be provisions for meeting any contingency, and a desired level of accounts receivable to retain the customers and to improve sales.

The money required for these purposes can be called working capital; the money locked up here does not generate income. But, for maintaining liquidity, the firm has to make sufficient investments here. Proper management of working capital is necessary to reach a trade-off between liquidity and profitability.

Source by Seth Miller

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