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.
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The views of the economists about the nature of money have undergone changes during the past century or so. The early classical economists, for example, gave little importance to the role of money as a causative factor in the national economy of a country. They looked upon money as an unimportant and passive factor in the operation of the economy.
In modern times, however, the conception of money has undergone a change. The modern economists disagree with the classical view that money is a passive and insignificant factor, that monetary disturbances are rare and that they automatically correct themselves with the lapse of time. According to the modern economists, money plays a leading and decisive role in determining the level of economic activity in a country.
Money, according to them, is a powerful instrument, which controls and regulates the level of general economic activity in the economy. The supply of money, for example, has significant effects upon the total volume of investment, output, employment, distribution and consumption of wealth. An increase in the supply of money, for example, may lead to greater investment, output and employment.
An excessive increase in the supply of money may result in hyperinflation, rising prices and growing shortages in the economy. A decrease in the supply of money, on the contrary, may produce just the opposite effects on the national economy. It may result in deflation, falling prices and falling production. Both inflation and deflation have far-reaching effects not only on the production, but also on the distribution of income and wealth in society. Furthermore, money is a liquid asset, which can be easily hoarded as a form of wealth.
Hoarding and dishoarding of money can have important and far-reaching effects on the working of the economy. Large-scale hoarding of money on the part of the public will result in a diminution of the money supply, with all the attendant consequences. A sudden and large-scale dishoarding of money will surely have inflationary effects on the economy.
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