cash management 2010

8/13/2019 Cash Management 2010

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Cash Management


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Introduction

1. One of the key areas of working capital

management

2. Most liquid current asset

3. Common denominator


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Cash

Cash is one of the current asset

It is needed at all times in the business

Business should always keep sufficientcash for meeting its obligations.

Cash is the most unproductive of all the

assets. The cash in hand will not addanything to the concern.

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Nature of Cash

Only currencyCash in hand and cash at

bank and also includes marketable

securities too as part.

It does not produce goods or services

It is a medium to acquire other assets

It help the business in producing cash There is a gap between cash inflows and

cash out flows.

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Motives for maintaining cash

1. Transaction motive

2. Precautionary motive

3. Speculative motive4. Compensating motive


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Transaction motive

1. To meet routine cash requirements to finance

transaction in the ordinary course of business

2. To balance current receipts and disbursement3. Example: Cash payment for purchasing,

operating expenses, financial charges


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Precautionary motive

1. Defensive in nature

2. Holding cash/near-cash as a cushion to meet

unexpected contingencies/demand for cash

3. Floods, strikes and failure of important customers

4. Earlier settlement of bills

5. Unexpected slow down in collection of accounts

receivable6. Cancellation of some orders

7. Sharp increase in cost of row materials


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Speculative Motive

1. Holding cash/near-cash to quickly take

advantage of opportunities typically outside

the normal course of business

2. Positive and aggressive approach

3. Examples-

i. An opportunity to purchase raw materials

ii. A chance to speculate on interest rate movements

iii. Make purchase at favorable prices


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Compensating motive

1. Holding cash/near-cash to compensate banks

for providing certain services or loans

2. Example: compensation balances-

i. An absolute minimum

ii. A minimum average balance


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Objectives of cash management

1. To meet cash disbursement needs (payment

schedule)

2. To minimize funds committed to cash

management


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Factors determining cash needs

1. Synchronization of cash flows

2. Short cost

3. Excess cash balance

4. Procurement and management

5. Uncertainty


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Strategies require for effective

Cash Management Cash PlanningA technique to plan and control. A

projected cash flow statement will help to determine the

possible uses of cash.

Cash Forecasting and BudgetingIt is a technique or

device for the control of receipts and payments of cash.

It is an analysis of flow cash in a business over a future,

short or long period of time. It is a forecast of expected

cash intake and outlay. Long term and short term

forecasts may be made with the help of the followingmethods.

Receipts and disbursements method

Adjusted net income method

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Managing cash flows:Cash management will be successful only if cash

collections are accelerated and cash disbursements as

far as possible delayed. The following methods of cash

management will help.

Methods of accelerating cash inflows Make the customers to pay promptly

Convert the payments which is in the form of Cheques or

DD into cash quickly

Big firms operating in different areas can have collectioncenters in those area (Decentralized collections)

Lock Box systemfirm hires post box from post office

and the parties are asked to send the Cheques to that

post box number. 13


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Methods of slowing cash outflows:

Delaying the payments till last date

Making payments through drafts

Adjusting the payroll funds by making the weekly

payment in to month etc.

Cheques shall be issued from the main office

then it will take time for the Cheques to becleared through post.

Interbank transfers shall be made to make

efficient use of cash14


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Determining Optimum Cash Balance

The two approaches to determine the

optimum cash balance are

i. Minimizing Cost models

ii. Preparing Cash budget

Cash budget is the most important tool for

cash management.

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Baumols Model Assumptions

The cash needsof the firm are known with certainty

The cash disbursements of the firm occurs uniformly

over a period of time and is known with certainty

The opportunity cost of holding cash is known ad itremains constant

The transaction cost of converting securities into cash is

known and remains constant.

C = 2AF/O C = Optimum balance

A = Annual or monthly cash disbursements

F = Fixed cost per transaction

O = Opportunity cost of holding cash 16


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Miller and Daniel Orr model

1. Provides for cost-efficient transactional balances

2. Assumes uncertain cash flows

3. Determines an upper limit and return point for cash balances(optimum cash balance level)

C= bE (N)/t + iE (M)

b-the fixed cost per conversion

E(N)- the expected numbers of conversions

t- the number of days in the periodi- the lost opportunity cost

E(M)- the expected average daily cash balance

C- total cash management costs


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Orglers model

1. Provides for integration of cash managementwith production and other aspects of the firm

2. Comprises three sections-

I. Selection of appropriate planning horizonII. Selection of appropriate decision variables

i. Payment schedule

ii. Short-term financing

iii. Transaction of marketable securities

iv. Cash balance

III. Formulation of cash management strategy itself


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Cash budget: management tool

Cash budget is a statement of the inflows andoutflows of cash that is used to estimate its short-term requirements.

It pinpoints the surplus or deficit cash of firm as it

moves from one period to another period. It is also known as short-term cash forecasting.

Elements/preparation of cash budget-

Planning horizon

Selection of factors: Operating cash flows

Financing cash flows

Cash receipts

Cash disbursements


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Purpose of Cash Budget

Estimating cash requirements

Planning short term financing

Scheduling payments Planning and phasing the purchase of raw

materials

Evolving and implementing credit policies Checking and verifying the accuracy of

long-term cash forecasting.

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cash management 2010

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