cash management.ppt
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CASH MANAGEMENT
Team Members
Reagan S
Satish A
Shriram RRavi Chandran R
Siva raman A
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LEARNING OBJECTIVES
• Explain the reasons for holding cash
• Underline the need for cash management
• isc!ss the techni"!es of preparing cashb!dget
• #oc!s on the management of cashcollection and disb!rsement
• Emphasi$e the need for investing s!rpl!scash in mar%etable sec!rities
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Cash Management
• Cash management is concernedwith the managing of: – cash fows into and out o the rm,
– cash fows within the rm, and
– cash balances held by the rm at a point o timeby nancing decit or investing surplus cash
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Cash management cycle
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Four Facets o CashManagement
• Cash planning
• Managing the cash ows
• Optimum cash level• Investing surplus cash
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Mot!"es or #ol$!ngCash
• The transactions motive
• The preca!tionar& motive
• The spec!lative motive
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Cash %lann!ng
• Cash &lann!ng !s a techn!'ue to&lan an$ control the use o cash(
• Cash Forecast!ng an$ Bu$get!ng – Cash )u$get !s the most s!gn!*cant $e"!ce
to &lan or an$ control cash rece!&ts an$
&ayments( – Cash orecasts are nee$e$ to &re&are cash
)u$gets.
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Short+term CashForecasts
– The important functions of short-term cash forecasts
• To determine operating cash
re"!irements• To anticipate short'term (nancing
• To manage investment of s!rpl!s cash)
– Short-term Forecasting Methods• The receipt and disb!rsements method
• The ad*!sted net income method)
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The Rece!&t an$,!s)ursements Metho$
• The "!rtues o the rece!&t an$ &aymentmetho$s are-
+t gives a complete pict!re of all the items ofexpected cash ,o-s)
+t is a so!nd tool of managing dail& cashoperations)
• Th!s metho$. ho/e"er. su0ers rom theollo/!ng l!m!tat!ons-
.) +ts reliabilit& is red!ced beca!se of the!ncertaint& of cash forecasts) #or example/collections ma& be dela&ed/ or !nanticipateddemands ma& ca!se large disb!rsements)
0) +t fails to highlight the signi(cant movementsin the -or%ing capital items)
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The A$1uste$ Net IncomeMetho$
• The )ene*ts o the a$1uste$net !ncome metho$ are-+t highlights the movements in the -or%ing
capital items/ and th!s helps to %eep a controlon a (rm1s -or%ing capital)+t helps in anticipating a (rm1s (nancialre"!irements)
• The ma1or l!m!tat!on o th!smetho$ !s-+t fails to trace cash ,o-s/ and therefore/ its!tilit& in controlling dail& cash operations islimited)
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Long+term CashForecast!ng
• The ma1or uses o the long+termcash orecasts are-
+t indicates as compan&1s f!t!re (nancial needs/
especiall& for its -or%ing capital re"!irements) +t helps to eval!ate proposed capital pro*ects) +t
pinpoints the cash re"!ired to (nance these pro*ectsas -ell as the cash to be generated b& the compan&to s!pport them)
+t helps to improve corporate planning) 2ong'termcash forecasts compel each division to plan for f!t!re
and to form!late pro*ects caref!ll&)
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Manag!ng Cash Collect!ons an$,!s)ursements
• Accelerat!ng Cash Collect!ons – Decentralised Collections
– oc!-"o# S$stem
• Controlling Dis"ursements – Dis"ursement or %a$ment Float
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F t I t t
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Features o Instruments oCollect!on !n In$!a
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Clear!ng
• The clear!ng &rocess refers to the exchangeb& ban%s of instr!ments dra-n on them/thro!gh a clear!nghouse)
• +nstr!ments li%e che"!es/ demand drafts/interest and dividend -arrants and ref!ndorders can go thro!gh clearing)
• oc!mentar& bills/ or promissor& notes do not
go thro!gh clearing)• The clearing process has been highl&
a!tomated in a n!mber of co!ntries)
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Controll!ng,!s)ursements
• ela&ing disb!rsement res!lts in maxim!m availabilit& off!nds) Ho-ever/ the (rms that dela& in ma%ing pa&mentsma& endanger its credit standing)
• 3hile/ for accelerated collections a decentrali$ed collection
proced!re ma& be follo-ed/ for a proper control ofdisb!rsements/ a centrali$ed s&stem ma& be advantageo!s)
• Some (rms !se the techni"!e of 4&lay!ng the 2oat1 tomaximi$e the availabilit& of f!nds) 3hen the (rm1s act!al
ban% balance is greater than the balance sho-n in the(rm1s boo%s/
the di5erence is called $!s)ursement or &ayment 2oat)
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O&t!mum Cash Balance
• O&t!mum Cash Balance un$erCerta!nty- Baumol3s Mo$el
• O&t!mum Cash Balance un$er4ncerta!nty- The M!ller5OrrMo$el
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B l3 M $ l
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Baumol3s Mo$el5Assum&t!ons-
• The (rm is able to forecast its cashneeds -ith certaint&)
• The (rm1s cash pa&ments occ!r
!niforml& over a period of time)• The opport!nit& cost of holding cash
is %no-n and it does not change overtime)
• The (rm -ill inc!r the sametransaction cost -henever it convertssec!rities to cash)
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Baumol3s Mo$el
• The (rm inc!rs a hol$!ng cost for %eeping the cashbalance) +t is an opport!nit& cost6 that is/ the ret!rnforegone on the mar%etable sec!rities) +f the opport!nit&cost is %/ then the (rm1s holding cost for maintaining anaverage cash balance is as follo-s7
• The (rm inc!rs a transact!on cost -henever it convertsits mar%etable sec!rities to cash) Total n!mber oftransactions d!ring the &ear -ill be total f!ndsre"!irement/ T / divided b& the cash balance/ C/ i)e)/ T/C) The per transaction cost is ass!med to be constant) +f pertransaction cost is c/ then the total transaction cost -ill be7
• The total ann!al cost of the demand for cash -ill be7
• The optim!m cash balance/ C8/ is obtained -hen the totalcost is minim!m) The form!la for the optim!m cashbalance is as follo-s7
Holding cost = ( / 2)k C
Transaction cost = ( / )c T C
* 2cT C
k
=
Total cost = ( / 2) ( / )k C c T C +
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Baumol's model for cash balance Cost trade-off: Baumol's model
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The M!ller5Orr Mo$el
• The M9 model provides for t-o control limits:the !pper control limit and the lo-er controllimit as -ell as a ret!rn point)
• +f the (rm1s cash ,o-s ,!ct!ate randoml& and
hit the !pper limit/ then it b!&s s!;cientmar%etable sec!rities to come bac% to anormal level of cash balance <the ret!rn point=)
• Similarl&/ -hen the (rm1s cash ,o-s -ander
and hit the lo-er limit/ it sells s!;cientmar%etable sec!rities to bring the cashbalance bac% to the normal level <the ret!rnpoint=)
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M!ller+Orr mo$el
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The M!ller+Orr Mo$el
• The di5erence bet-een the !pperlimit and the lo-er limit depends onthe follo-ing factors7
– the transaction cost <c=
– the interest rate/ <i=
– the standard deviation <σ = of net cash ,o-s)
•
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The M!ller+Orr Mo$el
• The form!la for determining thedistance bet-een !pper and lo-ercontrol limits <called Z = is as follo-s 7
1/ 3(Upper Limit – Lower Limit) = (3/ 4 × Transaction ost × as! "low #ariance / $nterest %ate)
Upper Limit = Lower Limit & 3
%et'rn oint = Lower Limit &
T!e net eect is t!at t!e irms !old t!e a*erage t!e cas! +alance e,'al to-
.*erage
Z
Z
as! alance = Lower Limit & 4/3 Z
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INVESTING S4R%L4S CAS# INMAR6ETABLE SEC4RITIES
• Select!ng In"estmentO&&ortun!t!es- – Safet$&
– Maturit$& and
– Mar!eta"ilit$ (
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Short term In estment
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Short+term In"estmentO&&ortun!t!es-
– Treasur$ "ills
– Commercial papers
– Certi'cates of deposits
– (an! deposits – Inter-corporate deposits
– Mone$ mar!et mutual funds
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Than% &o!)
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