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CASH MANAGEMENT

PRESENTED TO: PRESENTED BY:Dr. DEEPA MANGLA SEEMA14104023

VIVEK 14104025

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Cash forecasting

• Short-term cash forecasts• Long-term cash forecasts.

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Short-term forecasting methods

• The receipt and disbursement method.• The adjusted net income method.

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CASH MANAGEMENT

It is concerned with the managing of :(1) Cash flows into and out of the firm,(2) cash flows within the firm,(3) cash balances held by the firm at a point of time

by financing deficit or investing surplus cash.It also seeks to achieve liquidity and control .it is significant because it is used to pay the firms

obligation.

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Facets of cash management

• Cash planning• Managing the cash flows• Optimum cash level• Investing surplus cash

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Motives for holding cash

• The transactions motive.• The precautionary motive.• The speculative motive.

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Cash planning

• Cash planning is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and need of the firm and reduces the possibility of idle cash balances and cash deficits.

• Cash planning may be done on daily ,weekly or monthly basis. it depends upon the size of firm and philosophy of the management.

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Cash forecasting

• Short-term cash forecasts• Long-term cash forecasts.

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Short-term forecasting methods

• The receipt and disbursement method.• The adjusted net income method.

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RECEIPT AND PAYMENT METHOD

• BENEFITS : It gives a complete picture of all the items of expected cash flows.

• It is a sound tool of managing daily cash operations.

• Limitation:its reliability is reduced because of uncertainity of cash forecasts.

• It fails to highlight the significant movements in the working capital items.

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Cash Management Model

• A number of mathematical model have been to develop to determined the optimal cash balance.

• Two of such model are as follow;a) William J. Baumol's inventory model b) M. H. Miller and Daniel Orr’s Stochastic

model

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William J. Baumol's Inventory Model

Baumol’s Model of Cash Management- • Trades off between opportunity cost or carrying

cost or holding cost & the transaction cost. As such firm attempts to minimize the sum of the holding cash & the cost of converting marketable securities in to cash.• Helps in determining a firm's optimum cash

balance under certainty

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Optimum Cash Balance under Certainty: Baumol’s Model

GRAPHICAL REPRESENTATION

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William J. Baumol's Inventory model

Assumptions• Cash needs of the firm is known with certainty• Cash Disbursement over a period of time is

known with certainty • Opportunity cost of holding cash is known and

remains constant• Transaction cost of converting securities into

cash is known and remains constant

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William J. Baumol's Inventory Model

Algebraic representation of William J. Baumol's Inventory model

C = 2A*F

C = Optimum BalanceA = Annual Cash DistributionF = Fixed Cost Per TransactionO = Opportunity Cost Of Holding

o

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William J. Baumol's Inventory Model

Evaluation of the model • Helpful in determining optimum level of Cash

holding • Facilitates the finance manager to minimize

Carrying cost and Maintain Cash• Indicates idle cash Balance Gainful employment • Applicable only in a situation of certainty in

other words this model is deterministic model

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Miller-Orr Model

Overview• The Miller and Orr model of cash

management is one of the various cash management models in operation. It is an important cash management model as well. It helps the present day companies to manage their cash while taking into consideration the fluctuations in daily cash flow.

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Miller-Orr ModelAllows Daily Cash Flow Variation

Provides two control limits1)Upper Control Limit2)Lower Control Limit & Return Point

The Difference depends upon3) The Transaction Cost (c)4) The Interest Rate (i)5) The Standard Deviation of net cash flow (σ)

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Formula

(Upper limit- Lower Limit)=( 3/4 x transaction cost X variance of cash flows )1/3 interest rate

Symbolically (Z)= ( 3/4 x cσ /i² )1/3

Upper Limit= Lower Limit + 3ZReturn Point= Lower Limit + Z

Average Cash Balance = Lower Limit +4/3 Z

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Miller-Orr Model

Benefits

• Allows for net cash flow in a random fashion.• transfer can take place at any time and are

instantaneous with a fixed transfer cost.• Produce control limit can be used as basis for

balance management

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Miller-Orr Model

Limitations• May prove difficult to calculate. • Monitoring needs to be calculated for

the organizations benefits becomes a tedious Work.

Investing Surplus Cash in Marketable Securities

• Selecting Investment Opportunities:– Safety– Maturity– Marketability

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Types of Short- Term Investment Opportunities

• Treasury Bills• Commercial Papers• Certificates of Deposits• Bank Deposits• Money Market Mutual Funds

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