Cash Management versus Liquidity Management

Before we move on, we should note that it is important to distinguish between true cash management and a more general subject, liquidity management. The distinction is a source of confusion because the word cash is used in practice in two different ways. First of all, it has its literal meaning, actual cash on hand. However, financial managers frequently use the word to describe a firm's holdings of cash along with its marketable securities, and marketable securities are sometimes called cash equivalents or near-cash. In our discussion of oil companies' cash positions at the beginning of the chapter, for example, what was actually being described was their total cash and cash equivalents.

The distinction between liquidity management and cash management is straightforward. Liquidity management concerns the optimal quantity of liquid assets a firm should have on hand, and it is one particular aspect of the current asset management policies we discussed in our previous chapter. Cash management is much more closely related to optimizing mechanisms for collecting and disbursing cash, and it is this subject that we primarily focus on in this chapter.

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