Bank Cash management: How Banks Manage Day-To-Day Cash

Bank Cash management: How Banks Manage Day-To-Day Cash

The bank is a business entity engaged in a business activity mainly covering cash transactions. But the cash or money with which a bank conducts its business to a great proportion belongs to the depositors. Generally, bank owners’ contribution does not exceed 4;6% of the total capital.

Besides bearing interests, banks have to incur costs for each transaction. So, the lion’s share of the funds with which the bank performs is borrowed funds, either from the depositors, the money market, or others. These borrowed funds are not cost-free. Since the bank mobilizes funds with costs, the bank can not keep such costly funds idle.

On the other hand, if utilized for profit, all funds will cause a liquidity crisis. To overcome this dilemma, proper and efficient cash management is required. We will observe the functions of day-to-day cash management in the following section:

Functions of the day-to-day cash management of the bank:

How Banks Manage Day-To-Day Cash
  1. Maintain continuous inflow of cash in a planned manner;
  2. Ensure outflow cash in a planned manner on time, and advance outflow must be discouraged;
  3. Manage inflow-outflow so that cash balance does not fall below the minimum level;
  4. Makeup the deficit of both primary and secondary reserve before the same reaches the danger level;
  5. Potential surplus inflow and outflow of cash must be detected well ahead so that appropriate arrangements for the investment of surplus and borrowings for the deficit are made possible on favorable terms and conditions.

We must remember that cash management is tough for banks because inflow and outflow forecasts are mere estimates. Bank managers don’t know who will demand when & how small amount.

Only past figures and experience of bank officials of the clients’ transaction behavior are the basis which may vary for many uncontrollable factors.

Depositors may submit cheques anytime during the banking hour, or the clearinghouse may demand the payment. There are rid means by which we can predict the future accurately & exactly.

Though the maturity of term deposits is blown, sometimes, for unavoidable reasons, depositors may demand encashment df the FDR before maturity. In such a situation, batik can not decline to make the payment. The bank may face a fund crisis if such a scenario is large.

Banks can only know with certainty about the term of their investments. So cash management has many uncertainties.

So, it is a challenging task for banks to manage cash efficiently and with much comfort. Bank managers analyze past trends and average activities to understand cash inflow and outflow.

Basic asset accounts of cash management

Generally, cash means the circulated money of the bank. This cash may be in different forms

  1. of paper currency
  2. Metallic coins.

But the scope of cash management is much wider. Normally, the assets focused at the time of cash management are of four types.

  1. Currency and coins in the bank’s vault,
  2. Due to the central bank,
  3. Due to other commercial banks,
  4. Cash item in the process of collection.

The above cash assets are discussed below-

1. Currency and coins in the bank’s vault

The currency and coins are counted separately. These are packed based on some notes or coins. The newly deposited cash is also packed in Illis way.

At the time of payment, the record should be kept for how many notes & coins of what denomination is disbursed on what instruments with the date of issue, relevant number, and the like.

The physical actual balance and balance as arrived at through records must tally; Usually, deficient amounts (if any), when detected, can be arranged from head office, other branches of the same bank, or the central bank as a last resort.

On the other hand, the surplus amounts (if any), when detected, may be deposited to the head office, other branches of the same or sister banks, or to the central bank.

2. Due to the central bank

It is possible to raise the required fund from the central bank by borrowing and selling govt securities and treasury bills.

On the other hand, surplus cash can be utilized by purchasing govt, securities, and treasury bills from the central bank.

Besides, daily deposits to and withdrawals from reserve accounts maintained in the central bank must be carefully handled and recorded, else for faults, warnings, and punishments though unpalatable, will also impair the bank’s image.

3. Due to other commercial banks

Banks keep surplus funds, especially in current deposits, in other branches of the same bank or that of sister banks of the command area in the same locality for their mutual benefit. Keeping a portion of such a deposit in the corresponding bank is not unusual.

4. Cash items in the process of collection

Sources of TransactionInflowOutflow
– Cheques were sent for clearing.
– Income from the cheques sent for clearing.
Payment of cheques submitted by other banks through the clearinghouse.
InvestmentMoney from the sale of an investment.Purchase of bonds or debentures.
TransactionReturn on investment at the end of maturity. 
Decrease in the loan balance.Increase in the loan balance.
Others– Increase in the receivables from a foreign agent.
– Increase in the balance of receivables from foreign agents.
– Increase in the govt, tax, and loan account.
– Increase in the payables to foreign agents.
– Decrease in the balance payable to the foreign agent.
– Decrease in the govt, tax, and loan accounts.

Normally, the received cheques are sent to the clearinghouse of the central bank for collection. The received cash is credited to the account of the collector bank after the daily meeting of the clearinghouse.

After credit, the next day, the collected funds are credited to the client. Notably, the respective clients are informed about the dishonored or returned cheques.

The cash management at the bank and branch levels will naturally and logically differ. It is prudent and less risky to analyze and forecast cash position at the branch level first and next at the bank level. The chart showing cash management at the bank level is as follows:

Opening BalanceDaily receivedDaily paymentClosing Balance
of the day
From Head Office/Central Bank ReserveTotalTo the ClientsTo the Head Office/Central Bank Reserve
Branch# 1xxxxxxxxxxxxxxxxxxxx
Branch# 2xxxxxxxxxxxxxxxxxxxx
Branch# 3xxxxxxxxxxxxxxxxxxxx
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