CA Intermediate · Financial Management and Strategic Management

Treasury and Cash Management for CA Intermediate Financial Management

Treasury and Cash Management is about how a firm plans, holds, collects, pays and invests its cash. You solve it by learning the definitions, building a cash budget month by month, and applying Baumol and Miller-Orr formulas carefully, then interpreting the result in one line.

What this chapter covers

This chapter sits in Section A of Paper 6, Financial Management. It covers how a business keeps enough cash to meet its needs without letting idle money earn nothing. It starts with the role of the treasury function, then moves to why firms hold cash and how they forecast and control it.

The chapter has two kinds of content. Some topics are theory: functions of treasury, motives for holding cash, float, collection and disbursement techniques, and money market instruments. Others are numerical: the cash budget, the Baumol model and the Miller-Orr model. Both kinds can appear as MCQs or as written answers.

It connects directly to working capital management, where cash is one current asset among receivables and inventory. It also links to cost of capital and short-term financing, because surplus cash is invested and shortfalls are funded. Learn it alongside working capital so that the cash cycle makes sense as one picture.

This chapter mixes theory and numericals, so it gives you more than one way to earn marks. The theory parts suit MCQs. Every paper has 30 marks of MCQs, spread across its syllabus, and there is no negative marking, so you can attempt every one. A cash budget question rewards a neat format with step marks even if one figure goes wrong. Practising the fixed layouts and formulas helps you avoid slips in the numerical parts.

Treasury and Cash Management: topics in the order to study them

1Treasury Management: Meaning and FunctionsStart here because it sets the context and vocabulary for everything that follows, and it is easy theory to finish quickly.
2Cash Management: Motives and ObjectivesOnce you know what treasury does, learn why firms hold cash and what cash management aims to achieve.
3Cash Budget and Cash ForecastingThis is the main numerical tool, and you need it before the models, which assume you already know your cash needs.
4Cash Management Models: Baumol and Miller-OrrThese models decide how much cash to hold or convert. They make sense only after you understand cash flows and forecasts.
5Cash Collection, Float and Disbursement ManagementThis topic covers speeding up receipts and controlling payments, which is easier once you see why cash timing matters.
6Investment of Surplus Cash and Money Market InstrumentsFinish with where surplus cash goes. It is factual and works well as a last-day revision topic.

How to prepare Treasury and Cash Management

Split your time between concept learning and numerical practice. Theory takes little time but needs repetition. Numericals need working with a pen.

Read the treasury functions and cash motives once, then close the book and list them from memory. Do this until you can list all of them without gaps.
Learn the cash budget layout: opening balance, receipts, payments, closing balance, then minimum balance and surplus or deficit. Practise at least three questions in this fixed layout.
Write the Baumol formula and the Miller-Orr formulas on one page. Note what each symbol means and its units, such as per day or per year.
Solve two numericals for each model. After each answer, write one line on what the result tells the firm, for example the optimal size of each conversion or the upper limit for cash.
Make a short table of float types and collection and disbursement techniques. Add one real-life example next to each so that you can recall them.
List the money market instruments with a one-line feature for each: issuer, tenor and risk. Revise this list in the final week.
Attempt a mixed set of MCQs on the whole chapter. Check every wrong answer and note whether the cause was a formula slip or a concept gap.

Common mistakes in Treasury and Cash Management

Including depreciation or other non-cash items in the cash budget.
Fix: Before listing any item, ask whether cash goes in or out in that period. Leave out depreciation and provisions.
Putting sales in the month they are made instead of the month cash is received.
Fix: Draw a small timeline of collections for each month of sales before building the budget.
Mixing units in the Baumol formula, such as a monthly cash need with an annual holding cost rate.
Fix: Convert T and H to the same period first. Write the unit beside each value before you calculate.
Forgetting to convert the Miller-Orr variance or daily standard deviation correctly, or misusing the spread formula.
Fix: Write the spread formula in full, compute the cube root step by step and then derive the upper limit and return point from it.
Stopping at the number and giving no interpretation.
Fix: Add a one-line conclusion, such as the amount to convert each time or what to do when the balance touches a limit.
Confusing money market instruments with capital market ones, or mixing up their features.
Fix: Learn each instrument by issuer, tenor and purpose, and revise from a one-page comparison list.

Last-day revision: Treasury and Cash Management

Treasury management covers cash, funding, investment, risk and relationships with banks and investors.
The three classic motives for holding cash are transactions, precautionary and speculative.
Cash management aims to meet payments on time while keeping idle cash low.
A cash budget shows receipts, payments and closing balance period by period. Non-cash items such as depreciation are excluded.
Cash budget closing balance = opening balance + receipts − payments. Compare it with the minimum cash balance to find surplus or deficit.
Baumol model: optimal conversion C = √(2 × T × F ÷ H), where T is total cash need, F is the cost per transaction and H is the holding cost rate.
Baumol assumes steady cash use and no cash receipts during the period.
Miller-Orr model suits uncertain cash flows. It sets a lower limit, a return point and an upper limit.
In Miller-Orr, upper limit = lower limit + spread, and return point = lower limit + spread ÷ 3, where spread = 3 × [(3 × transaction cost × variance of daily cash flows) ÷ (4 × daily interest rate)]^(1/3).
Float is the time gap between a payer initiating a payment (for example, issuing a cheque) and the payee getting usable funds. It has three parts: mail float (time the cheque is in transit), processing float (time the payee takes to record and deposit it) and clearing float (time the banks take to clear it). Collection float delays your receipts.
Speed up collections with lockbox and concentration banking. Slow down payments only within ethical and contractual limits.
Money market instruments include treasury bills, commercial paper, certificates of deposit and call money. Match each to its issuer and tenor.

Treasury and Cash Management practice questions

Treasury and Cash Management in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Treasury and Cash Management: frequently asked questions

Is Treasury and Cash Management numerical or theoretical?

It has both. The cash budget, Baumol and Miller-Orr are numerical. Treasury functions, motives, float and money market instruments are theory, and they often come as MCQs.

Which model should I use when a question gives no mention of variance?

Read the data. If the question gives steady cash use, transaction cost and holding cost, use Baumol. If it gives variance of daily cash flows, a lower limit and an interest rate, use Miller-Orr.

How should I present a cash budget in the exam?

Use a columnar format with one column per month. Show opening balance, receipts, payments, closing balance and the minimum balance. Add workings for collections and payments below the table so you earn step marks.

Can I attempt every MCQ from this chapter?

Yes. MCQs carry no negative marking, so attempt all of them. Eliminate options you know are wrong and pick the best of the rest.