Limitations of Cash Management
1. Opportunity Cost of Holding Cash: Holding excess cash for precautionary reasons incurs an opportunity cost, as funds could potentially be invested to generate returns. Striking the right balance between liquidity and investment opportunities is challenging.
2. Interest Rates and Inflation Impact: Fluctuations in interest rates and inflation can affect the returns on short-term investments and the real value of cash over time. Low-interest-rate environments may limit the earnings potential on idle cash.
3. Economic Uncertainty: Economic uncertainties can impact the predictability of cash flows and make it challenging to plan for cash needs accurately. It may affect the cash management strategies.
4. Seasonal Variations and Business Cycles: Businesses with seasonal variations may experience uneven cash flows throughout the year. It can be complex to accommodate the cash management strategies with these fluctuations.
5. Credit Policy Impact: Offering loose credit terms to customers may result in delayed receivables, affecting the cash conversion cycle and leading to cash flow challenges.
6. Market Fluctuations: Economic fluctuations and unfavourable market conditions may impact the value of the investments made by the company. These uncertain conditions can affect the liquidity of the company and its capacity to meet contingencies.
7. Technology: Relying heavily on technology becomes risky as it exposes the entities to various downfalls of technology such as cyber threats, hacking of data, or technology failures.