This chapter initiates our study of liquidity management. Here, we focus on the cash flow process and the reasons why a firm holds cash balances. The objectives of a sound cash management system are identified. The concept of float is defined. Several techniques that firm can use to favorably affect their cash receipts and disbursement patterns are examined. Finally, the composition of the firm’s marketable securities portfolio is discussed.
In addition, the risk-return trade-off associated with the firm’s investment in accounts receivable is discussed. For accounts receivable, this trade-off occurs as less creditworthy customers with  higher probability of bad debts are taken on to increase sales. The analysis is similar to sound inventory management. Here a larger investment in inventory leads to more efficient production and speedier delivery; this should result in increased sales. However, additional financing costs to support the increase in inventory and increased handling and carrying costs are required.