A STUDY ON ANALYSIS OF CASH

MANAGEMENT ON PRIVATE SECTOR

A Project Submitted to
University Of Mumbai For Partial Completion Of The
Degree OF
Master in Commerce
Under The Faculty Of Commerce

BY
CHETAN NARAYAN GHADI

Under The Guidance Of

Prof. JIGNESH BHATIA

PRAKASH DEGREE COLLEGE

KANDIVALI (WEST)

For The Year Of

2018-19

1
 A STUDY ON ANALYSIS OF CASH
MANAGEMENT ON PRIVATE SECTOR

A Project Submitted to
University Of Mumbai For Partial Completion Of The
Degree OF
Master in Commerce
Under The Faculty Of Commerce

BY
CHETAN NARAYAN GHADI

Under The Guidance Of

Prof. JIGNESH BHATIA

PRAKASH DEGREE COLLEGE

KANDIVALI (WEST)

For The Year Of

2018-19

2
 INDEX
CHAPTER PARTICULAR PAGE
NO. NO
1 INTRODUCTION 7
2 RESEARCH METHODOLOGY 42
3 LITERATURE REVIEW 44
4 DATA ANALYSIS AND DATA 66
PRESENTATION
5 CONCLUSION AND SUGGESTION
6 BIBLIOGRAPHY

3
 CERTIFICATE

This is to Certify that MR.CHETAN NARAYAN GHADI has worked & duly
Completed his Project Work for the degree of Master in Commerce under the Faculty
of commerce in the ADVANCE COST ACCOUNTING & His Project is Entitled “
Deductions in Respect of A STUDY ON ANALYSIS OF CASH MANAGEMENT ON
PRIVATE SECTOR

I further Certify that Entire Work has been done by the Learner Under My Guidance
& that no part of it has been submitted Previously , for any Degree or Diploma of any
University.

It is his Own Works & facts Reported by his Personal Findings & Investigations.

Name & Signature Of Guiding Teacher

Date Of Submission :

External Examiner

4
 Declaration by Learner

I The Undersigned Miss/ Mr Chetan Narayan Ghadi Here by declare that

the work embodied in this project work titled “A STUDY ON ANANLYSIS
OF CASH MANAGEMENT ON PRIVATE SECTOR” forms my own
contribution to the research work carried out under the guidance of

Is a result of my own research work and has not been previously submitted to
any other university for any other Degree/Diploma to this or any other
university

Wherever reference has been made to previous work of others, it has been
clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.

Name and Signature of the learner

Certified by

Name and signature of the Guiding Teacher:

5
 Acknowledgment

To list who all have helped me is difficult because they are so numerous and
the depth is so enormous

I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I would like to thank my Principal, Dhanshree Mota for providing the

necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator Kinjal Patel for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide

JIGNESH BHATIA whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly
helped me in the completion of the project especially My Parents and Peers
who supported me throughout my project.

6
 Chapter 1: Introduction

"Cash, like the blood stream in the human body, gives vitality and strength to a
business enterprises. Though cash hold the smallest portion of total current assets.
However, "Cash is both the beginning and end of working capital cycle - cash,
inventories, receivables and cash." ' it is the cash, which keeps the business going.
Hence, every enterprises has to hold necessary cash for its existence.‖ Moreover,
Steady and healthy circulation of cash throughout the entire business operations is
the basis of business solvency.

A Now-a-days non-availability and high cost of money have created a serious

problem for industry. Nevertheless, cash like any other asset of a company is treated
as a tool of profit. Further, today the emphasis is on the right amount of cash, at the
right time, at the right place and at the right cost. In the words of R.R. Bari,
Maintenance of surplus cash by a company unless there are special reasons for
doing so, is regarded as a bad sigh of cash management.

As, holding of cash balance has an implicit cost in the form of its opportunity cost.
Cash may be interpreted under two concepts. In narrow sense, Cash is very
important business asset, but although coin and paper currency can be inspected
and handled, the major part of the cash of most enterprises is in the form of bank
checking accounts, which represent claims to money rather than tangible property.
While in broader sense, Cash consists of legal tender, cheques, bank drafts, money
orders and demand deposits in banks. In general, nothing should be considered
unrestricted cash unless it is available to the management for disbursement of any
nature.

Thus, from the above quotations we may conclude that in narrow sense cash means
cash in hand and at bank but in wider sense, it is the deposit in banks, currency,
cheques, bank draft etc. in addition to cash in hand and at bank. Cash management
includes management of marketable securities also, because in modern terminology

7
money comprises marketable securities and actual cash in hand or in bank. The
concept of cash management is not new and it has acquired a greater significance in
the modern world of business due to change that took place in the conduct of
business and ever increasing difficulties and the cost of borrowing. Apart from the
fact that it is the most liquid current assets, cash is the common denominator to
which all current assets can be reduced because the other current assets i.e.
receivables and inventory get eventually converted into cash. This underlines the
significance of cash management.

1.1 Background
Cash Management originally means the management of liquidity in order to meet
their day to-day commitment (Collins & Jarvis, 2000). There are many companies
that do not put enough focus on managing the liquidity of the firm. The result of poor
focus on cash management often means that the financial assets are bound. Instead
of being bound, it could be used to invest for example in material. According to
recent studies they found that small businesses have a poor cash management
attention (Denver, 2005) To have efficient and effective liquidity management is very
important for the survival, especially for smaller businesses (Sardakis et al, 2007). It
is a mater of life and death for smaller companies because they can survive for a
long time without a profit but fails when they cannot meet a payment.

Liquidity means the level of cash and near cash assets held, together with cash in
and outflows of the assets (Ekanem, 2010). This concept is becoming more and
more used in Sweden. Managing the liquidity is not something new but cash
management is a modern way of doing that. Cash management do not focus on
getting the most profit margin on sales or reduce the cost in order to save money
(Soenen, 1993). This is about earning extra money “between the lines”, by being
smart and efficient with the payment routines. Knowing where to invest the money
and to know which accounts to use in order to earn extra money through interests.
The companies can through that earn cash on cash (pengar på pengar). Most of the
banks in Sweden offer cash management as a service for other companies (Larsson
& Hammarlund, 2004).
8
Cash management is a very broad subject and there are a lot of factors to consider
when trying becoming more efficient. Which factors to consider depends on the
company and type of industry (Ekanem. 2010). There are still some main factors that
all companies should be aware of and those factors are discussed in this paper.
Having payment routines is crucial to be as efficient as possible. This will make it
easier for the company to have control over the customers and also earn extra
money through interests. The key here is to make the payments from the customers
interests bearing as fast as possible. It is also important to get the money as fast as
possible from the customer and how to do that 2 will be discussed later.

Accounts receivable is also included in the payment systems. What the company
wants to do is to manage the accounts receivable in an effective way in order to get
rid of unnecessary capital that is tied up (Farris & Hutchison, 2002). If the payment
routines are important then the payout systems are equally important. By not having
efficient payout routines can lead to unnecessary bounded capital that the company
wants to avoid (Randall & Farris, 2009). Using a liquidity-budget is also discussed
here to simplify and have control over the payment flows. The factors to consider for
budgeting are proposed such as the size of the liquidity reserve as well. Knowing
where to invest the money is very important and there are a lot of choices here. This
paper will examine and improve the liquidity position for Jonsons Byggnads AB
through cash management thinking. Jonsons Byggnads AB is a local construction
firm located in Jönköping. The elements that will be in focus can be seen on this
figure below.

9
 PAYOUT
EFFIIENT
PAYOUT
ROUTINES

CASH
MANAGEMENT LIQUIDITY
PAYMENTS
JOHNSONS MANAGEMENT
BYGG

SHORT TERM
FINANING

Figure 1: Areas this paper will focus on to examine Jonsons Bygg liquidity position.

Cash management is a very broad subject and there are of course more factors
within cash management to study. If not having one person within the company that
manages the liquidity, as Jonsons bygg have today. There is big chance that the
company is missing great opportunities to improve their liquidity. Again, all issues
within cash management are not relevant for Jonsons byggnads AB and will not be
discussed in this paper.

10
 1.2 HISTORY OF CASH MANAGEMENT
In 1981, President Ronald Reagan, OMB, and the President’s Private Sector Survey
on Cost Control said that the Federal Government could save a great deal of money
by managing Federal cash as carefully as businesses manage their cash.
Essentially, most Federal agencies concentrated on operating their programs and
ignored the time-value of money. The President’s Management Improvement
Program took aim at reforming Federal financial management by making one of its
top priorities the cessation of the needless loss of interest on cash flows.

In 1981-82, a portion of the President’s Management Improvement Program, Reform

’88, was developed as a comprehensive program to improve, consolidate, and
streamline the management systems of the Federal Government by a target date of
1988. Reform ’88 put new life into the management of Federal cash. Each Federal
agency was required to monitor its own cash flows, selecting the best tools for
speeding collections to the Treasury and timing disbursements to vendors, grantees,
and other payment recipients.

Before 1982, the U.S. Government made 30 percent of its payments too late and 45
percent too early, resulting in unnecessary late charges and lost interest earnings.
Congress passed the Prompt Payment Act of 1982 (and its amendment in 1988)
requiring Federal agencies to make payments on time, to pay interest when
payments are late, and to take discounts only when payments are made on or before
the discount date. It also provides a formula for determining if a discount is cost-
effective. OMB wrote the regulations to implement the Prompt Payment Act, which
provides for timely payment, better relations with contractors, improved competition
for Government business, and reduced costs to the Government.

Once the necessary legislation and regulations were in place to improve Federal
agency management of payments, the Government turned its focus on collections.
Congress passed the Deficit Reduction Act of 1984. A section of the Act, referred to
generally as the Collection and Deposit Legislation, moved agencies closer to the
goal of institutionalizing cash management in the Federal Government. It legislated
cash management for collections and deposits analogous to the directives given to
Federal agencies about paying their bills on time in the Prompt Payment Act of 1982.
The Collection and Deposit Legislation mandated that the Treasury would hold
11
Federal agencies responsible for their collection and deposit practices. Federal
agencies must use electronic transfer of funds, lockboxes, and automatic withdrawal
of funds wherever feasible and in accordance with Treasury regulations.

The Collection and Deposit Legislation requires FMS to conduct periodic cash
management reviews of Federal agency financial operations. These reviews
examine and analyze agency management of the following programs: collections
and deposits, disbursements, inventories, imprest funds, and other cash held outside
the Treasury. The Federal agency and FMS agree on recommendations and plans
for improvement.

The Cash Management Improvement Act (CMIA) was enacted in1990 to improve the
transfer of Federal funds between the Federal Government and the States. The
statutory purpose of CMIA is to: (1) ensure efficiency, (2) provide effectiveness, and
(3) ensure equity.

The National Performance Review began in 1993 when President Bill Clinton
announced a 6-month review of the Federal Government. The goal was to identify
problems and offer solutions and ideas for savings. The report was divided into four
sections: (1) Cutting Red Tape, (2) Putting Customers First, (3) Empowering
Employees to Get Results, and (4) Cutting Back to Basics. One of the three steps to
accomplish the last section, Cutting Back to Basics, is to collect more through
imposing or increasing user fees where pricing makes economic sense, and by
collecting what the Government is owed in delinquent debt or fraudulent
overpayment of benefits. Essentially, the Government must find better, more
efficient, and more effective ways to pay for its programs and activities.

On April 26, 1996, Congress passed the Debt Collection Improvement Act of 1996.
A major part of this Act began the EFT Program. The EFT Program requires Federal
agencies to disburse payments via electronic funds transfer, with few exceptions.
The Treasury published regulations to provide guidance to Federal agencies.
Agencies began enrolling payment recipients for electronic payments by collecting
payment recipients’ bank account information and enhancing their systems to
provide various electronic payment alternatives.

12
The cooperative efforts of Federal agencies, the private sector, OMB, and FMS have
spawned an impressive list of improvements since the mid-1980’s and generated
billions of dollars in interest savings.

THE CASH MANAGEMENT ARENA

The primary entities in the management of the Government's cash are OMB, the
Federal Reserve System, and FMS.

The Federal Reserve Banks serve as the fiscal agent for the Federal Government.
Created in 1913 by Congress, the Federal Reserve System consists of a 7-member
Board of Governors in Washington, DC; 12 regional Federal Reserve Banks (FRBs);
and 25 branches.

The Federal Reserve lends money to financial institutions, distributes coins and
currency, regulates all banks that are members of the Federal Reserve System, and
plays a leading role in the operation of the nationwide funds transfer system. The
Federal Reserve Bank of New York (FRBNY) is the largest of the 12 regional FRBs.
ecause of its size and location in the heart of the U.S. financial district, FRBNY is the
center for the Government's financial transactions.

FMS, a bureau of the Treasury, is the Government's financial manager. It is the lead
agency in cash, credit, and debt management. FMS manages Federal payments and
collections, promotes sound financial management practices by Federal agencies,
oversees the Government’s central accounting and reporting system, provides debt
collection services to Federal agencies, and provides a variety of other financial
services. FMS issues guidelines and regulations and assists other agencies in
managing financial transactions to maximize investment earnings and reduce the
interest costs on borrowed funds.

13
 1.3 MEANING OF CASH MANAGEMENT

Cash Management is concerned with minimizing unproductive balances,

investing temporarily cash advantageously and to making the best possible
arrangement to meeting planned and unexpected demand on the firm’s cash. It
involves managing of cash flows in and out of the firm i.e. cash flows within the
firm and cash balances held by the firm at a point of time.

It is necessary for business to maintain a certain amount of cash in hand or bank,

always even if the other current assets are at a sustained figure. Cash is both
beginning and the end of the working capital cycle – cash, inventories,
receivables and cash. Working capital cycle – cash, inventories, receivables and
cash.

Cash is the basic input needed to keep a business running on a continuous

basis. It is also the ultimate output expected to be realized by selling the services
or product manufactured by an enterprise.

Cash Management assumes more importance than other current assets because
cash is the most significant and the least productive asset that a firm holds. The
aim of Cash Management should be to maintain adequate cash position to keep
the firms operations in profitable manner. There are two primary reasons for a
firm to hold cash.

1 To meet the needs of day-to –day transactions.

2 To protect the firm against uncertainties characterizing its cash flow.

Proper cash management is required for smooth running and maximum

profitability of the business.

14
It is clear that cash is like blood stream in the human body, gives vitality and
strength to a business enterprise. It is necessary that the management of
business enterprise should provide sufficient coverage to their currently maturing
obligations in the form of enough cash and near cash assets, high and stable
cash flows and sound profit margin. The first function of cash management
increases the turnover of working capital cycle to bringing down the size of cash,
the function reduces the problem of financing the working capital. Trade creditors,
banks and external agencies provide finance.

Cash Management involves managing the monies of the firm in order to attain
maximum cash availability and maximum cash income. Idle Cash management is
concerned with minimizing unproductive cash balances, investing temporarily
excess cash advantageously, and to making the best possible arrangements for
meeting planned and to making the best possible arrangements for meeting
planned and unexpected demand on the firm’s cash flows within the firm, and
cash balances held by the firm at a point of time.

Cash management must be thought of in terms of the overall liquidity needs of

the firm, specifically its current assets and liabilities. In order to reduce the
influence of uncertainties with regard to cash needs and to ensure adequate
liquidity, firms have to gauge the need for protective liquidity. Firms have to
gauge the need for protective liquidity. The efforts involved for this purpose
usually take the form of:

Assessment of the probabilities or odds that each of these will develop within a
given period in future, such as 5 years.
Assessment of the probabilities and developments creating cash drains will occur
at the same time.

Assessment of the likely amount of cash drain that will result if each of the
contingencies develops. An important policy decision regarding cash
management is : what should be the optimal amount of cash balance to consider
the form impact of the following factors :

15
 1. The philosophy of the management regarding liquidity and risk of
insolvency.
2. The expected cash inflows and outflows based on the cash budget
forecasts encompassing long-range and short-range cash needs.
3. The size of sales in relation to fixed asset investment.
4. The degree of deviation between the expected and actual net cash flows.
5. The maturity structure of the firm’s liabilities.
6. The firm’s ability to borrow at short notice in the event of emergency.
7. Efficient planning and control of cash.
8. The status of the firm’s receivables and inventory
9. The credit position of the firm.
10. The nature of business.

Cash management must be thought of in terms of the overall liquidity needs of

the firm, specifically its current assets and liabilities. In order to reduce the
influence of uncertainties with regard to cash needs and to ensure adequate
liquidity, firms have to gauge the need for protective liquidity. Firms have to
gauge the need for protective liquidity. The efforts involved for this purpose
usually take the form of:

It is clear that cash is like blood stream in the human body, gives vitality and
strength to a business enterprise. It is necessary that the management of
business enterprise should provide sufficient coverage to their currently maturing
obligations in the form of enough cash and near cash assets, high and stable
cash flows and sound profit margin. The first function of cash management
increases the turnover of working capital cycle to bringing down the size of cash,
the function reduces the problem of financing the working capital. Trade creditors,
banks and external agencies provide finance.

16
1.4 MOTIVES OF HOLDING CASH IN PRIVATE SECTOR

1) Transaction motive –

The firms need a cash to carry out the day-to-day functions of the business.
Just as the firm’s level of operations affects working capital requirements, it
affects the need of cash. The volume of sales increases cash will be received
from customers and will be expended for materials and wages in larger
amount. Adequate cash to cover these and other transactions allows the firm
to pay bills on due time. The firm needs cash primarily to make payments for
purchases, wages, operating expenses, taxes, dividend etc. A firm may invest
its cash in marketable securities whose maturity corresponds with some
anticipated payments such as dividend, taxes etc. in future. However, the
transaction motive mainly refers to holding cash to meet anticipated payments
whose timing is not perfectly matched with cash receipts.

2) Contingency motive –

If the firm could perfectly forecast its need for cash, but it is not possible to
forecast for unexpected occurrence or emergencies requirement of cash. The
firm must be prepared for contingencies. If suddenly a major customer does
not pay outstanding, the cash inflows will be reduce below the forecast level.
The firms must have money to pay its own bills until the customer’s check
arrives. A supplier may be having difficulties and may be forced to eliminate
the firms a credit purchases. The unanticipated cash to buy raw material a
contingency need related to cash outflows. It proceeds a cushion or buffer to
withstand unexpected emergency. The precautionary amount of cash
depends upon the predictability of cash flows. Stronger the ability of the firm
to borrow at short notice, less the precautionary balance required.
Precautionary balance may be kept in cash and marketable securities.
Marketable securities play an important role. The amount of cash set aside for
precautionary reason is not expected to earn anything. The firm should

17
attempt to earn more profit on it. Such funds should be invested in high liquid
and low risk marketable securities and relatively in cash.

3) Opportunity motive –

It involves the chances of profit from cash available. For example, a supplier
may have several cancellations of orders and may wish to move a large
unwanted inventory of raw materials from his warehouse. If a supplier offers a
large discount of purchasing of the materials, the firm will have the opportunity
to avail of a substantial saving on its purchases and consequent profits from
the sale of finished goods. The firm will hold cash when it is expected that
interest rates will rise and security price will fall. Securities can be purchased
when the interest rates are expected to fall. The firm will benefit by the
subsequent fall in interest rates and increases in security prices. The firm may
also speculate on materials prices. If it is expected that material price will fall,
the firm can postpone materials purchasing and make purchases in future
when price actually falls.

In addition to these needs of cash, several important factors may be identified,

which affects the size of cash balance maintained by the firm –

1) Availability of short term credit – To avoid holding unnecessary large

balances of cash for contingency or opportunity needs, most firms attempt to
make arrangement to borrow money in cash of unexpected needs.

2) Money market rates – The money market consists of the

institutions and individuals who lend or borrow money as part of
the normal course of business activity. The interest charged on
any loan is affected by a number of factors including the size of
loan and the credit rating of the borrower.

18
3) Variation in cash flows – In addition to contingency needs,
some firms experience wide fluctuations in cash flows as a routine
matter. If a firm require its customer to pay the bills on the 10th of
the month the firm may be unable to meet its own obligations due
at the same time.
As a general rule, a firm with steady inflows and outflows can
maintain a fairly cash balance. The balance is also lower than for
firms with widely fluctuating flows. The firm can more accurately
predict its cash balances and has fewer difficulties with cash
management.

4) Compensating balances – If a firm has borrowed money from

a bank the loan arrangement may require the firm to maintain a
minimum balance of cash in its bank account. It is called a
compensating balance. In effect, this requires the firm to use the
service of the bank making the loan and gives the bank a
guaranteed deposit of money on which it pays no interest. Another
reason for the compensating balances is that the bank is expected
to provide certain free services for the firm.

The interest free deposits is the bank’s compensating for its advice
and assistance A requirement to maintain a minimum cash
balance increases the amount of cash that the firm must hold. It
may be argued that this does not in fact, increases the firm’s
liquidity. Since the firm cannot write checks on the compensating
balances, it does not really have liquidity from the funds.

19
5) Maximizing cash receipts – A primary principle and basic
objective of the financial manager is to make most of all possible
cash receipts. Continual evolution is always called for to check the
comparative cost of granting cash discounts of customer as
contrasted with the alternate policy involving the interest expense
for borrowing instead.

6) Minimizing cash disbursements - Concurrent in objective to

maximizing cash receipts payments to creditors and for payroll is
fundamental. Procedure payments made to larger creditors by
using time drafts serve to make payments by the latest possible
fixed date. Prevention of fraudulent practices is also of prime
importance in the handling of cash disbursements.

7) Maximizing cash utilization - There are many occasions when

a firm has more funds than required. These funds remain in the
current account with the bank or in firm’s cash box, it will bring no
return to the firm. At the same time being temporary in nature,
these funds cannot be disposed of permanently, because after a
short while the firm would again require these funds. A prudent
financial manager would make the best possible use of idle funds
even for a short duration.

The interest free deposits is the bank’s compensating for its advice
and assistance A requirement to maintain a minimum cash
balance increases the amount of cash that the firm must hold. It
may be argued that this does not in fact, increases the firm’s
liquidity. Since the firm cannot write checks on the compensating
balances, it does not really have liquidity from the funds.
20
 1.5 FUNCTIONS OF CASH MANAGEMENT

Cash management is concerned with minimizing unproductive cash balances,

investing temporarily excess cash advantageously and to make the best possible
arrangements for meeting planned and unexpected demands on the firm’s
cash. Cash Management must aim to reduce the required level of cash but
minimize the risk of being unable to discharge claims against the company as
they arise. All these aims and motives of cash management largely depend upon
the efficient and effective functioning of cash management. Cash management
functions can be studied under five heads, namely, cash planning, managing
cash flow, controlling cash flow, optimizing the cash level and investing idle cash.
All these functions are discussed below in details:

1. Cash Planning

Good planning is the very foundation of attaining success. For any management
decision, planning is the foremost requirement. Planning is basically an
intellectual process, a mental pre-disposition to do things in an orderly way, to
think before acting and to act in the light of facts rather than of a guess. Cash
planning is a technique, which comprises of planning for and controlling of cash.
It is a management process of forecasting the future need of cash, its available
resources and various uses for a specified period. Cash planning, thus, deals at
length with formulation of necessary cash policies and procedures in order to
carry on business continuously and on sound lines. A good cash planning aims at
providing cash, not only for regular but also for irregular and abnormal
requirements.

2. Managing Cash Flows

The heading simply suggests an idea of managing properly the flow of cash
coming inside the business i.e. cash inflow and cash moving out of the business

21
i.e. cash outflow. These two are said to be properly managed only, if a firm
succeeds in accelerating the rate of cash inflow together with minimizing the cash
outflow. As observed expediting collections, avoiding unnecessary inventories,
improving control over payments etc. contribute to better management of cash.
Whereby, a business can conserve cash and thereof would require lesser cash
balance for its operations.

3. Controlling the Cash Flows

As forecasting is not an exact science because it is based on certain

assumptions. Therefore, cash planning will inevitably be at variance with the
results actually obtained. For this reason, control becomes an unavoidable
function of cash management. Moreover, cash controlling becomes essential as it
increases the availability of usable cash from within the enterprise. As it is
obvious that greater the speed of cash flow cycle, greater would be the number of
times a firm can convert its goods and services into cash and so lesser will be the
cash requirement to finance the desired volume of business during that period.
Furthermore, every enterprise is in possession of some hidden cash, which if
traced out substantially decreases the cash requirement of the enterprise.

4. Optimizing the Cash Level

A financial manager should concentrate on maintaining sound liquidity position

i.e. cash level. All his efforts relating to planning, managing and controlling cash
should be diverted towards maintaining an optimum level of cash. The foremost
need of maintaining optimum level of cash is to meet the necessary requirements
and to settle the obligations well in time. Optimization of cash level may be
related to establishing equilibrium between risk and the related profit expected to
be earned by the company.

22
5. Investing Idle Cash

Idle cash or surplus cash refers to the excess of cash inflows over cash outflows,
which do not have any specific operations or any other purpose to solve
currently. Generally, a firm is required to hold cash for meeting working needs
facing contingencies and to maintain as well as develop goodwill of bankers. The
problem of investing this excess amount of cash arise simply because it
contributes nothing towards profitability of the firm as idle cash precisely earns no
returns.

Further permanent disposal of such cash is not possible, as the concern may
again need this cash after a short while. But, if such cash is deposited with the
bank, it definitely would earn a nominal rate of interest paid by the bank. A much
better returns than the bank interest can be expected if a company deploys idle
cash in marketable securities. There are yet another group of enterprise that
neither invest in marketable securities nor willing to get interest instead they
prefer to deposit excess cash for improving relations with banks by helping them
in meeting bank requirements for compensating balances for services and loans.

The foremost need of maintaining optimum level of cash is to meet the necessary
requirements and to settle the obligations well in time. Optimization of cash level
may be related to establishing equilibrium between risk and the related profit
expected to be earned by the company. The foremost need of maintaining
optimum level of cash is to meet the necessary requirements and to settle the
obligations well in time. Optimization of cash level may be related to establishing
equilibrium between risk and the related profit expected to be earned by the
company.

23
Factors Determining Cash Needs

Maintenance of optimum level of cash is the main problem of cash

management. The level of cash holding differs from industry to
industry, organisation to organisation. The factors determining the
cash needs of the industry is explained as follows:

1. Matching of cash flows:

The first and very important factor determining the level of cash
requirement is matching cash inflows with cash outflows. If the
receipts and payments are perfectly coincide or balance each other,
there would be no need for cash balances. The need for cash
management therefore, due to the non-synchronisation of cash
receipts and disbursements. For this purpose, the cash inflows and
outflows have to be forecast over a period of time say 12 months with
the help of cash budget. The cash budget will pin point the months
when the firm will have an excess or shortage of cash.

2. Short Costs:
Short costs are defined as the expenses incurred as a result of
shortfall of cash such as unexpected or expected shortage of cash
balances to meet the requirements. The short costs includes,
transaction costs associated with raising cash to overcome the
shortage, borrowing costs associated with borrowing to cover the
shortage i.e. interest on loan, loss of trade-discount, penalty rates by
banks to meet a shortfall in compensating, cash balances and costs
associated with deterioration of the firm’s credit rating etc. which is
reflected in higher bank charges on loans, decline in sales and profits.
24
3. Cost of Cash On Excess Balances:

One of the important factors determining the cash needs is the cost of
maintaining cash balances i.e. excess or idle cash balances. The cost
of maintaining excess cash balance is called excess cash balance
cost. If large funds are idle, the implication is that the firm has missed
opportunities to invest and thereby lost interest. This is known as
excess cost. Hence the cash management is necessary to maintain
an optimum balance of cash. . The need for cash management
therefore, due to the non-synchronisation of cash receipts and
disbursements. For this purpose, the cash inflows and outflows have
to be forecast over a period of time say 12 months with the help of
cash budget.

The short costs includes, transaction costs associated with raising

cash to overcome the shortage, borrowing costs associated with
borrowing to cover the shortage i.e. interest on loan, loss of trade-
discount, penalty rates by banks to meet a shortfall in compensating,
cash balances and costs associated with deterioration of the firm’s
credit rating etc.

4. Uncertainty in business:

Uncertainty plays a key role in cash management, because cash

flows can not be predicted with complete accuracy. The first
requirement of cash management is a precautionary cushion to cope
with irregularities in cash flows, unexpected delays in collections and
disbursements, defaults and expected cash needs the uncertainty
can be overcome through accurate forecasting of tax payments,
25
dividends, capital expenditure etc. and ability of the firm to borrow
funds through over draft facility.

5. Cost of Procurement and management of cash:

The costs associated with establishing and operating cash

management staff and activities determining the cash needs of a
business firm. These costs are generally fixed and are accounted for
by salary, storage and handling of securities etc. The above factors
are considered to determine the cash needs of a business firm.

Finance sets spending limits for procurement, and procurement aims

to save money when and where possible through both cost savings
and cost avoidance measures. Using an automated procure-to-pay,
or P2P system to connect procurement to back office functions, from
purchase requisition all the way through invoice processing helps to
improve efficiency and mitigate risk. Finance is able to pay for
everything procurement orders and receives, and procurement is able
to use three-way matching to ensure the items they order are what
they receive, and what they receive is what they pay for.

Finance provides spend management reports, revenue reports, and

other critical data that demonstrates overall company health.
Procurement should use these reports to facilitate day-to-day
decision-making processes, along with budgeting and financial
planning.

26
 1.6 EFFECTIVE CASH MANAGEMENT STRATEGIES
FOR PRIVATE SECTOR

As trusted advisors, accountants and bookkeepers, we are in a good

position to advise small businesses when they are facing cash-flow
issues. Below, I describe 10 strategies to help improve a company’s
cash position. Not all of these strategies make sense for all businesses.
However, some combination of these can be employed by any business.

In the long-term, free cash-flow, equity and debt financing are the best
sources of working capital. However, these options may not be available
for all businesses. In such cases, there are alternative cash-flow
management strategies that small business can use to ease the strain
on their working capital. Here are some of those:

1. Ask for a deposit or milestone payment

Companies whose product or service requires substantial cash or effort

before they deliver are good candidates for asking clients for a deposit
or milestone payment. Graphic designers, web designers, marketing
agencies, PR agencies and even construction companies fall into this
bucket. Not all clients may be willing to make a deposit or milestone
payment. The only thing that is guaranteed is that you won’t get what
you don’t ask for. So, encourage your customers to ask their customers
for a deposit. That might be just what they need to get on solid footing.

Graphic designers, web designers, marketing agencies, PR agencies

and even construction companies fall into this bucket. Not all clients may
be willing to make a deposit or milestone payment.

27
2. Ask customers to pay faster

Another option for managing cash-flow is to get customers to pay faster.

This can take several forms. The simplest form is to give vendor
discounts, where 2/10, Net 30 terms would entail giving customers a 2%
discount if the invoice is paid within 10 days. Otherwise, the full amount
is due in 30 days. This can be an attractive proposition for a company’s
customers, as it allows them to make the equivalent of a 73% APR in ten
days just by paying their bills faster.

3. Cut or Delay expenses

In the event that customers won’t pay faster, another option is to delay
expenses. The strategy can take on a variety of forms, depending on the
business. Manufacturing companies may consider using lower cost
inputs to deliver the same goods or service, while a service company
may opt for spending less time on the same work. Companies should
also consider exhausting existing inventory before purchasing new
inventory, or hiring part-time or contract employees to replace full-time
employees.

Also consider how your client’s personal expenses impact their

business. Given how much of their expenses may be personal in
nature—either indirectly via the salary they pay themselves, or directly
as a sole proprietor—they might want to consider what opportunities
they have to cut back on their personal expenses. It may entail eating
out less, downsizing, living more frugally or delaying a vacation. Out of
all the variables listed here, personal expenses are the ones business
owners have the most direct control over.

28
4. Request more favorable payment terms from vendors

As they value their clients, vendors have a strong incentive to help

finance their customers’ purchases. Getting an extra two weeks to make
a payment could be the difference between missing payroll and
expanding. If your payment terms are 15 days, ask for 30 days. If they
are 30 days, ask for 45 days. Depending on your relationship with your
vendors, you’ll find that at least some will be open to a more favorable
arrangement. And, be persistent! Perhaps you’ve tried asking for more
favorable payments terms before, but were declined. You have little to
lose by asking again, either inquiring the same vendor or a different
vendor. Of course, the more timely and dependable you are with them,
the more willing they will be to extend their terms.

5. Finance purchase orders

For manufacturing or merchandising companies that require a significant

amount of cash to fulfill their purchase orders, financing purchase orders
could be a solution. Once you have a purchase order on hand, the
financing company will pay the vendor so you can get the merchandise
or inventory the company needs to fulfill the purchase order. This
eliminates the problem of getting a large order, but not being able to
Fulfill it because of cash to buy the inventory or materials. As they value
their clients, vendors have a strong incentive to help finance their
customers’ purchases. Getting an extra two weeks to make a payment
could be the difference between missing payroll and expanding.
Companies should also consider exhausting existing inventory before
purchasing new inventory, or hiring part-time or contract employees to
replace full-time employees.

29
6. Increase margins

Increasing its margins will help a business spin-off more cash that can
be used to fund operations. The only two ways a business can increase
its margin are by increasing what it charges or decreasing the cost to
deliver the product or service. Neither of these may be feasible for a
majority of businesses. However, raising prices is a real option for
businesses with strong demand for their product or service, or with a
unique product, offering or value proposition that is not available from
competitors. Any increase in prices will have to be positioned carefully to
avoid alienating customers.

In the event that customers won’t pay faster, another option is to delay
expenses. The strategy can take on a variety of forms, depending on the
business. Manufacturing companies may consider using lower cost
inputs to deliver the same goods or service, while a service company
may opt for spending less time on the same work

7. Sell or lease idle equipment

When cash is tight, everything should be on the table. This is especially

true of idle equipment that can be sold for cash or leased to another
company that can put it to use. Even if the company is using the
equipment, it should consider that the same equipment could be rented
for much less, while the proceeds from the sale can be used to fund the
business in the interim. This especially makes sense for long-lived
equipment that is easy to move, transport or install. If you have a
storage center with equipment, you’ll also be saving on storage costs.
With Craigslist, chances are, you’ll be able to pick up the same
equipment at a later time for a fraction of the cost.

30
8. Sell future revenue

A merchant cash advance is a viable strategy for consumer businesses

like retailers and restaurants. It involves taking a loan that is
automatically repaid via a percentage of the credit and debit card
transaction volume received by the business. This strategy is especially
viable for businesses with strong transaction history. Just make sure that
the company’s margins can support the cost of the financing. Otherwise,
they could be paving their way to financial ruin.

9. Turn down, shift or post-pone work

Managing cash-flow is as much about timing as anything. Getting a

year’s worth of business in one month is overwhelming for most
businesses. On the flip side, insufficient business could mean shutting
the doors. Thus, managing the volume of business for consistency can
be a helpful way to manage cash-flow. This may entail turning down or
postponing work certain times of the year. This strategy is not realistic
for companies with strongly seasonal business. Retailers, snowplowers
and tax accountants will not be able to change the seasonality of their
business. However, many other companies and industries do have the
ability to better plan for more consistent volume and shift the timing of
the work. Think win-win. For instance, you can offer good clients a
discount for postponing their work, order or service.

31
10. Sell invoices

Selling invoices, also known as invoice factoring, invoice discounting,

invoice financing, etc., is a very flexible and quick form of business
funding available for B2B companies. In a nutshell, invoices are assets
of a company. The product or service has been completed and
delivered, but the cash is locked up in the invoice until the customer
pays. Factoring can be a solution when payment terms are 15, 30 or
even 60 days. Instead of waiting 60 days for the client to pay, a
company can “sell” the invoice to a factoring company and get money
upfront. 60 days later, the client pays off the invoice, so the company
never had to take on any debt. Here is a great post about the basics
of invoice factoring, and what to look for in a funding provider. This may
entail turning down or postponing work certain times of the year. This
strategy is not realistic for companies with strongly seasonal business.

It involves taking a loan that is automatically repaid via a percentage of

the credit and debit card transaction volume received by the business.

This especially makes sense for long-lived equipment that is easy to

move, transport or install. If you have a storage center with equipment,
you’ll also be saving on storage costs. The only two ways a business
can increase its margin are by increasing what it charges or decreasing
the cost to deliver the product or service. Neither of these may be
feasible for a majority of businesses. The product or service has been
completed and delivered, but the cash is locked up in the invoice until
the customer pays.

32
 1.7 HOW PRIVATE SECTOR AVOID CASH FLOW
PROBLEM

1. Keep a cash flow forecast

Set targets for the next six to 12 months to keep track of finances and
to avoid any shortfalls. The most basic way to set up a cash flow
forecast is to keep a simple spread sheet listing income and costs on
a monthly basis.

Take note of any seasonal variations – for example, heating bills will
probably go up during winter. Factor in fixed and variable costs to
your cash flow forecast and be realistic – include every item.

2. Keep on top of payments

Send out invoices promptly and be quick to chase overdue bills. It’s
also worth setting out clear payment terms with suppliers from the
start of doing business with them – 30 days is standard.

Get to know your customer payment dates and don’t ignore

irregularities or delays – a poor paying customer might be about to go
bust. Knowing when you’re due to be paid for a product or service will
help you keep on top of your cash flow.

33
3. Stay on top of stock management

Efficient stock management is just as important as managing cash

flow. Reconcile your stock records at the same time as you reconcile
your bank account – be it weekly or monthly. This way you will remain
on top of items that you have left in stock and those that require
reordering.

An efficiently managed stock control system will have a positive

impact on your cash flow because you will never be holding too much
stock, or have all your money tied up in it.

4. Stay friendly with lenders

Many businesses need a cash boost from a bank or lender every now
and again, particularly when they’re starting out, and might need
credit or an overdraft to get up and running.

Stay on good terms with them and keep them informed of any
unforeseen outgoings or changes in forecasts.

By developing a good relationship, based on trust, with banks and

lenders, they’ll be more likely to treat you favourably should your
business need future financial assistance. This way you will remain
on top of items that you have left in stock and those that require
reordering.

34
5. Access credit

If your business is growing rapidly – say, for example, you’ve just won
a new contract from a client and you’re worried about having enough
money to meet your overheads – seek access to a line of credit from
a bank or financier, such as an overdraft or short-term loan.

In many cases, this is a viable option because banks are more willing
to lend to a business if they can see a draft service contract or letter
of intent.

Once the client pays, you can pay your debt. You will only have to
pay interest to the bank or financier for the amount of time you
actually need the cash.

6. Tighten up on your outgoings

Assess the frequency with which you pay suppliers, tax bills, utilities
and so on – is it possible to pay in instalments or make terms more
flexible?

Use your powers of negotiation to strike deals that are favourable to

you and your business.

Also, check on all those little things you spend money on that can add
up – as the old saying goes, watch the pennies and the pounds will
take care of themselves.

35
7. Anticipate problems before they happen

Identify potential cash flow problems in advance by regularly updating

your cash flow forecast, monitoring market conditions, keeping an eye
on customers and suppliers who may be in trouble, and taking action
as soon as you see a problem.

Don’t bury your head in the sand and hope an issue will go away.
By keeping on top of your cash flow you’ll be able to deal with
problems quickly and efficiently. Also, if worried, talk to an
accountant, investor or business mentor. Use your powers of
negotiation to strike deals that are favourable to you and your
business.

An efficiently managed stock control system will have a positive

impact on your cash flow because you will never be holding too much
stock, or have all your money tied up in it.

Take note of any seasonal variations – for example, heating bills will
probably go up during winter. Factor in fixed and variable costs to
your cash flow forecast and be realistic – include every item

36
1.8 DIFFERENT SERVICES OFFERED BY PRIVATE BANKS

The following is a list of services generally offered by banks and

utilised by larger business and corporations

Account Reconcilement Services

B a l a n c i n g a c h e c k b o o k c a n b e a d i f f i c u l t process for a very

large business, since it issues so many checks it can take a lot of human
monitoring to understand which checks have not cleared and therefore
what the company's true balance is. To address this, banks have
developed a system which allows companies to upload a list of all the
checks that they issue on a daily basis, so that at the end of the month
the bank statement will show not only which checks have cleared,
but also which have not. More recently, banks have used this
system to prevent checks from being fraudulently cashed if they
are not on the list, a process known as positive pay.

Advanced Web Services

Most banks have an Internet-based system which is more

advanced than the one available to consumers. This enables
managers to create and authorize special internal logon
credentials, allowing employees to send wires and access other
cash management features normally not found on the consumer
web site.

37
Armored Car Services

Large retailers who collect a great deal of cash may have the
bank pick this cash up via an armored car company, instead of
asking its employees to deposit the cash.

Automated Clearing House

services are usually offered by the cash

management division of a bank. The Automated Clearing House is an
electronic system used to transfer funds between banks. Companies use
this to pay others, especially employees (this is how direct deposit
works).

Certain companies also use it to collect funds from customers (this is

generally how automatic payment p l a n s wo r k ) . T h i s s ys t e m i s
criticized by s o me c o n s u me r a d vo c a c y g r o u p s , because
under this system banks assume that the company initiating the debit is
correct until proven otherwise.

Balance Reporting Services

Corporate clients who actively manage their cash balances usually

subscribe to secure web-based reporting of their account and

transaction information at their lead bank. These sophisticated

compilations of banking activity may include balances in foreign
currencies, as well as those at other banks.
They include information on cash positions as well as 'float'
(e.g.,c h e c k s i n t h e p r o c e s s o f c o l l e c t i o n ) . Fi n a l l y, t h e y o f f e

38
r transaction-
s p e c i f i c d e t a i l s o n a l l f o r ms o f p a y m e n t a c t i vi t y, i n c l u d i n g d
e p o s i t s , c h e c k s, wi r e t r a n s f e r s i n a n d o u t , A C H ( a u t o m a
t e d c l e a r i n g h o u s e d e b i t s a n d c r e d i t s ) , investments, etc.

Cash Concentration Services

L a r g e o r n a t i o n a l c h a i n r e t a i l e r s o f t e n a r e i n areas where
their primary bank does not have branches. Therefore, they
open b a n k a c c o u n t s a t va r i o u s l o c a l b a n k s i n t h e a r e a . To
p r e ve n t f u n d s i n t h e s e a c c o u n t s f r o m b e i n g i d l e a n d n o t
earning su f f i c i e n t in t e r e s t , many of
t h e s e c o m p a n i e s h a ve a n a g r e e m e n t s e t wi t h t h e i r p r i m a r y
b a n k , wh e r e b y t h e i r primary bank uses the Automated
Clearing House to electronically "pull" the money from these banks
into a single interest-bearing bank account.

Lockbox
Services

Often companies (such as utilities) which receive a large number

of payments via checks in the mail have the bank set up a post
office box for them, open their mail, and deposit any checks found. This
is referred to as a "lockbox" service.
Positive Pay

P o s i t i ve pay is a s e r vi c e wh e r e b y the c o mp a n y
e l e c t r o n i c a l l y shares its check register of all written checks with the
bank. The bank there fore will only pay checks listed in that register, with
exactly the same specifications
a s l i s t e d i n t h e r e g i s t e r ( a m o u n t , p a ye e , s e r i a l n u m b e r , e t c
. ) . Th i s s ys t e m dramatically reduces check fraud.
39
Zero Balance Accounting

can be thought of as somewhat of a

hack
.Companies with large numbers of stores or locations can very often be
confused if all those stores are depositing into a single bank
account. Traditionally, it would be impossible to know which
deposits were from which stores without seeking to view images
of those deposits. To help correct this problem, banks developed
a system where each store is given their own bank account, but all the
money deposited into the individual store accounts
are automatically moved or swept into the company's main bank
account. This allows the company to look at individual statements
for each store. U.S. banks are almost all converting their systems so that
companies
can
tell which store made a particular deposit, even if these deposits are
all deposited into a single account. Therefore, zero balance
accounting is being used less frequently.

Wire Transfer

A wire transfer is an electronic transfer of funds. Wire transfers can be

done by a simple bank account transfer, or by a transfer of cash at a
cash
office. Bank wire transfers are often the most expedient method for
transferring funds between bank accounts. A bank wire transfer is a
message to the receiving b a n k requesting them to effect
p a ym e n t in accordance wi t h the

40
i n s t r u c t i o n s g i v e n . Th e m e s s a g e a l s o i n c l u d e s s e t t l e me n t i
n s t r u c t i o n s . T h e a c t u a l wi r e transfer itself is virtually
instantaneous, requiring no longer for transmission than a
telephone call.

Controlled Disbursement

This is another product offered by banks under Cash Management

Services. The bank provides a daily report, typically early in the
d a y, t h a t p r o vi d e s t h e a mo u n t o f d i s b u r s e me n t s t h a t wi l l
b e c h a r g e d t o t h e customer's account. This early knowledge of daily
funds requirement allows the customer to invest any surplus in
intraday investment opportunities, typically money market
investments. This is different from delayed disbursements,
where payments are issued through a remote branch of a
bank and customer is able to delay the payment due to
increased float time.

41
 CHAPTER 2
RESEARCH METHODOLOGY

Research design

The research approach used for the study is descriptive. The form of the
study is on the cash management in general and specific to the financial
position.

Data collection Primary data

The study has been made using secondary data, which are obtained
from annual reports and statements of accounts.

Secondary data

The study is period for the annual reports and statement of accounts
extended from the year 2000-2001 to 2005-2006.

Analytical tools for the study

During the course of research for the researcher for analysis and
interpretation of data is given below has applied various tools.

Cash flow statement analysis

Funds from operations

42
Ratio analysis.

Trend analysis
Research is a process through which we attempt to achieve
systematically and with the s u p p o r t o f d a t a t h e a n s we r t o a
question, the resolution of a p r o b l e m, or a
g r e a t e r understanding of a phenomenon. This process, which is
frequently called
Research methodology,
has eight distinct characteristics

43
 CHAPTER 3: LITERATURE REVIEW

Meaning

Cash is the money which a firm can disburse immediately

without any restriction. The term cash includes coins,
c u r r e n c y a n d c h e q u e s h e l d b y t h e f i r m, a n d b a l a n c e s i n i t s
b a n k accounts. Sometimes near-cash items, such as marketable
securities or bank times deposits, are also included in cash. The
basic characteristic of near-cash assets is that they can readily
be converted into cash.

FACETS OF CASH MANAGEMENT

Cash management

is concerned with the managing of: (i) Cash flows into and out of
the firm, (ii) Cash flows within the firm, and (iii) Cash balances held by
the firm at a point of time by financing deficit or investing surplus
cash. It can be represented by a cash management cycle .Sales
generate cash which has to be disbursed out. The surplus cash
has to be invested while deficit this cycle at a minimum cost. At
the same time, it also seeks to achieve liquidity and
control. Cash management assumes more importance than other
current assets because cash is the most significant and the least
productive asset that a firm’s holds. It is significant because it is used to
pay the firm’s obligations. However, cash is unproductive

44
.
Unlike fixed assets or inventories, it does not produce goods for
sale. Therefore, the aim of cash management is to maintain
adequate control over cash position to keep the firm sufficiently liquid
and to use excess cash in some profitable way.

Cash management is also important because it is difficult to predict cash

flows accurately, particularly the inflows, and there is no
prefect coincidence between the inflows and outflows of cash. During
some periods, cash outflows will exceed cash inflows, because
payments for taxes, dividends, or seasonal inventory build up. At
other times, cash inflow will be more than
cash payments because there may be large cash sales and debtors ma
y be realized in large sums promptly. Further, cash management is
significant because cash constitutes the smallest portion of the total
current assets, yet management’s considerable time is devoted
in managing it. In r e c e n t p a s t , a n u m b e r o f i n n o va t i o n s h a ve
b e e n d o n e i n c a s h m a n a g e m e n t t e c h n i q u e s . A n obvious aim
of the firm these days is to manage its cash affairs in such a way
as to keep cash balance at a minimum level and to invest the surplus
cash in profitable investment opportunities.

In order to resolve the uncertainty about cash flow prediction and lack of
synchronization between cash receipts and payments, the firm should d
evelop appropriate strategies for cashmanagement. The firm should
evolve strategies for cash management. The firm should evolve
strategies regarding the following four facets of cash management.

45
Cash planning:

Cash inflows and outflows should be planned to project cash surplus

or deficit for each period of the planning period. Cash budget
should be prepared for this purpose.

Managing the cash flows:

The firm should decide about the properly managed. The cash
inflows should be accelerated while, as far as possible, the cash
outflows should be decelerated.

Optimum cash level:

T h e f i r m s h o u l d d e c i d e a b o u t t h e a p p r o p r i a t e l e ve l o f c a s h
balances. The cost of excess cash and danger of cash deficiency should
be matched todetermine the optimum level of cash balances.

Investing surplus cash:

The surplus cash balances should be properly invested to

earn profits. The firms should decide about the division of such cash bal
ances betweena l t e r n a t i ve s h o r t -
t e r m i n ve s t me n t o p p o r t u n i t i e s su c h a s b a n k d e p o s i t s , m a r k
e t a b l e securities, or inter-corporate lending.

46
MOTIVES FOR HOLDING CASH

The firm’s need to hold cash may be attributed to the following three
motives:

 The transactions motive

• The precautionary motive

• The speculative motive

TRANSACTION MOTIVE

T h e t r a n s a c t i o n s mo t i ve r e q u i r e s a f i r m t o ho l d c a s h t o
conduct its business in the ordinary course. The firm
needs cash primarily to make payments for purchases, wages and
salaries, other operating expenses, taxes, dividends etc. The need
to hold cash would not arise if there
were perfect synchronization between cash receipts and cash payments
, i.e., enough cash is receivedw h e n t h e p a y m e n t h a s to be
made. But cash receipts
and payments are not perfectly synchronized. For those
periods, when cash payments exceed cash receipts, the firm
should maintain some cash balance to be able to make required
payments. For transactions purpose, a firm may invest its cash
in marketable securities. Usually, the firm will purchase
securities whose maturity corresponds with some anticipated
payments, such as dividends or taxes in the future. Notice that
the transactions motive mainly refers to holding cash to meet
anticipated payments whose timing is not perfectly matched with cash
receipts.

47
PRECAUTIONARY MOTIVE

The precautionary motive is the need to hold cash to meet contingencies

inthefuture. It provides a cushion or buffer to withstand some unexpecte
d emergency. The precautionaryamount of cash depends upon the
predictability of cash flows. If cash flows can be predicted with
accuracy, less cash will be maintained for an emergency. The amount of
precautionary cash is also influenced by the firm’s ability to borrow at
short notice when the need arises. Stronger the ability of the firm to
borrow at short notice, less the need for precautionary
balance. The precautionary balance may be kept in cash
and marketable securities. Marketable securities play an important role
here. The amount of cash set aside for precautionary reasons is not
expected to earn anything; the firm should attempt to earn some profit
on it. Such funds should be invested in high-liquid and low-risk
marketable securities. Precautionary balances should, thus,
be held more in marketable securities and relatively less in cash.

SPECULATIVE MOTIVE

T h e s p e c u l a t i ve mo t i ve r e l a t e s t o t h e h o l d i n g o f c a s h f o r i n
ve s t i n g i n p r o f i t - ma k i n g opportunity to make profit may arise when
the security prices change. The firm will hold cash ,when it is expected
that interest rates will rise and security prices will fall. Securities
can be purchased when the interest rate is expected to fall; the firm will
benefit by the subsequent fall in interest rates and increase in security
prices. The firm may also speculate on materials prices. If it is expected
that materials prices will fall, the firm can postpone materials purchasing
and

48
make purchases in future when pric4e actually falls. Some firms may hol
d cash for speculative purposes. By and large, business firms do not
engage in speculations. Thus, the primary motives to hold cash and
marketable securities are: the transactions and the precautionary
motives.

CASH PLANNING

Cash flows are inseparable parts of the business operations of firms. A

firm needs cash to invest in inventory, receivable and fixed assets
and to make payment for operating expenses in order to maintain
growth in sales and earnings. It is possible that firm may be making
adequate profits, but may suffer from the shortage of cash as its growing
needs may be consuming cashvery fast. The ‘poor cash’ position of the
firm cash is corrected if its cash needs are planned in a d va n c e . A t
times, a firm can have e xc e s s cash may remain
i d l e . A g a i n , s u c h e xc e s s c a sh outflows. Such excess cash
flows can be anticipated and properly invested if cash planning
is r e s o r t e d t o . C a s h p l a n n i n g i s a t e c h n i q u e t o p l a n a n d
c o n t r o l t h e u s e o f c a s h . I t h e l p s t o anticipate the future cash
flows and needs of the firm and reduces the possibility of idle
cash balances ( which lowers firm’s profitability ) and cash deficits (whic
h can cause the firm’s failure).

Cash planning protects the financial condition of the firm by developing a

projected cash s t a t e m e n t f r o m a f o r e c a s t o f exp e c t e d c a s h
i n f l o ws a n d o u t f l o ws f o r a g i ve n p e r i o d . Th e forecasts may be
based on the present operations or the anticipated future

49
operations. Cash plans are very crucial in developing the overall
operating plans of the firm.

Cash planning may be done on daily, weekly or monthly basis. The

period and frequency of cash planning generally depends upon the
size of the firm and philosophy of management. Large firms
prepare daily and weekly forecasts. Medium-size firms usually prepare
weekly and mo n t h l y f o r e c a s t s . S ma l l f i r ms ma y
not prepare formal cash forecasts because of the non-
availability of information and small-scale operations. But, if the
small firms prepare
cash projections, it is done on monthly basis. As a firm grows and busin
ess operations becomecomplex, cash planning becomes inevitable for
its continuing success. Cash planning protects the financial condition of
the firm by developing a projected cash s t a t e me n t from
a forecast of e xp e c t e d cash i n f l o ws a n d o u t f l o ws for
a given period. It is possible that firm may be making
adequate profits, but may suffer from the shortage of cash as its growing
needs may be consuming cash very fast.

A firm needs cash to invest in inventory, receivable and fixed

assets and to make payment for operating expenses in order to
maintain growth in sales and earnings. Ca s h p l a n n i n g is a
technique to plan and control the use of cash. It helps to
anticipate the future cash flows and needs of the firm.

50
OTHER FACTORS THAT AFFECT THE SIZE OF
CASH BALANCE

1. Availability of short-term credit

To avoid holding unnecessary large balances of cash, most

firms attempt to make arrangements at borrow money is
case of unexpected needs. With such an agreement, the
firm normally pays interest only during the period that the money
is actually used.

2. Money market rates

If money will bring a low return a firm may choose not to invest
it. Since the loss or profit is small, it may not be worth the trouble to
make the loan. On the other hand, if interest rates are very high,
every extra rupee will be invested.

3. Variation in cash flows

Some firms experience wide fluctuation in cash flows as a
routine matter. A firm with steady cash flows can maintain a fairly
uniform cash balance.

4. Compensating balance

If a firm has borrowed money from a bank, the loan agreement

may require the firm to maintain a minimum balance of cash in
its accounts. This is called compensating balance. In effect this

51
requires the firm to use the services of bank a guaranteed deposit on
which it pays no interest. The interest free deposit is the bank’s
compensation for its advice and assistance.

CASH MANAGEMENT – BASIS STRATEGIES

The management should, after knowing the cash position by means

of the cash budget, work out the basic strategies to be employed
to manage its cash.

CASH CYCLE:

The cash cycle refers to the process by which cash is used to

purchase materials from which are produced goods, which are
them sold to customers.

Cash cycle=Average age of firm’s inventory

+Days to collect its accounts receivables
-Days to pay its accounts payable.

The cash turnover means the numbers of times firm’s cash is used
during each year.
The higher the cash turnover, the less cash the firm
requires. The firm should, therefore, try to maximize the cash
turn.

52
MANAGING COLLECTIONS:

a) Prompt Billing:

By preparing and sending the bills promptly, without a time log

between the dispatch of goods and sending the bills, a firm can
ensure earlier remittance.

b) Expeditious collection of cheques

An important aspect of efficient cash management is to process the

cheques receives very promptly.

c) Concentration Banking

Instead of a single collection center located at the company

headquarters, multiple collectioncenters are established. The purpose is
to shorten the period between the time customers mail intheir
payments and the time when the company has use of the funds
are then to a concentration bank – usually a disbursement account.

d) Lock-Box System
With concentration banking, a collection center receives remittances,
processes them and deposits them in a bank. The purpose is to lock-box
system is to eliminate the time between the receipt of remittances by the
company and their deposit in the bank. The company rents a
local post office box and authorizes its bank in each of these cities
to pick up remittances in the box. Th e b a n k p i c k s u p t h e ma i l
s e ve r a l t i m e s a d a y a n d d e p o s i t s t h e c h e q u e i n t h e

53
c o mp a n y’ s accounts. The cheques are recorded and cleared for
collection. The company receives a deposits the cheque in
the company’s accounts. The cheques are recorded and cleared
for collation. The company receives a deposit slip and a lift of
payments. This procedure frees the company from handling a depositing
the cheques.

CONTROL OF DISBURSMENT

a) Stretching Accounts Payable

A firm should pay its accounts payables as late as possible

without damaging its credit standing. It should, however, take
advantages of the cash discount available on prompt payment.

b) Centralized Disbursement

One procedure for rightly controlling disbursements is to centrealse

payables in to a single account, presumably at the company’s
headquarters. Such an arrangement would enable a firm to delay
payments and can serve cash for several reasons. Firstly, it
increases transit time. Secondly, if a firm has a centralized bank
account, a relatively smaller total cash balances will be needed.

c) Bank Draft
Unlike an ordinary cheque, the draft is not payable on
demand. When it is presented tothe issuer’s bank for collection, the
bank must present it to the issuer for acceptance. The fundst h e n a r e
deposited by the issuing firm t o c o ve r p a ym e n t s of the

54
d r a f t . B u t s u p p l i e r s p r e f e r cheques. Also, bank imposes a higher
service charge to process them since they require special attention,
usually manual.

d) Playing the float

The amount of cheques issued by the firm but not paid for by the bank is
referred to as the “payment float”. The differences between “payment
float” and “collection float” are the net float. So, if a firm enjoys a
positive “net float”, it may issue cheques even if it means having
an ever drown account in its books. Such an action is referred to
as “playing the float”, within limits a firm can play this game
reasonably safely. T h u s ma n a g e m e n t o f c a s h b e c o me s
e s s e n t i a l a n d i t s h o u l d b e s e e n t o , t h a t n e i t h e r excessive nor
inadequate cash balances are maintained.

FLOW OF STATEMENTS

The funds flow statement analyses only the causes of changes in

the firm’s working capital position. The cash flow statement is
prepared to analyze changes in the flow of each only. These statements
fail to consider the changes in the firm’s total financial resources. They
do not reveals s i g n i f i c a n t i t e ms wh i c h d o n o t a f f e c t t h e f i r m’ s
c a s h o r wo r k i n g c a p i t a l p o s i t i o n , b u t considerably influence
the financing position and asset mix of the firm. For example,
ordinary shares issued to acquire some asset, say land, affect the
financing and asset mix of the firm. For e xa m p l e , o r d i n a r y s h a r e s
i s s u e d t o s t a t e m e n t wi l l n o t i n c l u d e t h i s t r a n s a c t i o n a s i t
does

55
n o t i n v o l ve a n y c h a n g e i n c a s h o r wo r k i n g c a p i t a l . A c o m p r
e h e n s i v e s t a t e m e n t o f c h a n g e s i n financial position
would disclose or working capital. A comprehensive statement
of changes in financial position would disclose this information
along with information on cash or working capital changes. The
statement of changes in financial position is an extension of the funds
flow statement or the cash flow statement. It is more informative and
com apprehensive in indicating the changes in the firm’s financial
position. However, the analysis of changes in the firm’s cash
position or working capital is still very significant. Therefore, to
get better insights, a firm may prepare a comprehensive, all –
inclusive, statement of changes in financial position incorporating
changes in the firm’s cash and working capital positions. In the
following sections, we illustrate the preparation and use of the
statement of changes in financial position involving:

 Changes in the firm’s working capital position

 Changes in the firm’s working capital position

 Changes in the firm’s total financial resources.

FUNDS FLOW STATEMENT

The statement of changes in financial position, prepared to determine

only the sources and u s e s o f wo r k i n g c a p i t a l b e t we e n d a t e s o f
t wo balance sheets, is k n o wn as the funds
f l o ws t a t e me n t . W o r k i n g c a p i t a l i s d e f i n e d a s th e d i f f e r e n c e
b e t we e n c u r r e n t a s s e t s a n d cu r r e n t liabilities. Working capital
determines the liquidity position of the firm. A statement reporting the
56
changes in working capital is useful in addition to the financial
statements.

CASH FLOW STATEMENT

An analysis of cash flows is useful for short-run planning. A firm needs

sufficientcashto pay debts maturing in the future, to pay interest and oth
er expenses and to pay dividends toshareholders. The firm can make
projections of cash inflows and outflows for the near future to determine
the availability of cash. This cash balance can be matched with the firm’s
need for cash during the period, and accordingly, arrangements
can be made the deficit or invest the surplus cash temporarily.

A historical analysis of cash flows provides insight to prepare

reliable cash flow projections for the immediate future. A statement of
changes in financial position on cash basis. Commonly known as the
cash flow statement, summarizes the causes of changes in cash
position between dates of the two balance sheets. It indicates
the sources and uses of cash. The cash flow statement is similar to the
funds flow statement except that it focuses attention on cash
(immediate or near term liquidity)instead of working capital or
funds (potential or medium term liquidity). Thus, this
statementa n a l ys e s c h a n g e s i n n o n -
c u r r e n t a c c o u n t s a s we l l a s c u r r e n t a c c o u n t s ( o t h e r t h a n c
a s h ) t o determine the flow of cash.

57
 UTILITY OF CASH FLOW ANALYSIS

A Ca s h f l o w a n a l y s i s i s a n i m p o r t a n t f i n a n c i a l t o o l f o r
t h e m a n a g e me n t . I t s c h i e f advantages are as follows.

1. Helps in efficient cash management

Cash flow analysis helps in evaluating financial policies and

cash position. Cash is the basis for all operation and hence a
projected cash flow statement will enable the
management to plan and coordinate the financial operations properly. Th
e management can know how muchcash is needed from which source it
will be derived, how much can be generated, how much can be utilized.

2. Helps in internal financial management

Cash flow analysis information about funds, which will be
available from operations. This will helps the management in
repayment of long-term debt, dividend policies etc.,

3. Discloses the movements of Cash

Cash flow statement discloses the complete picture of cash
movement. The increase in and decrease of cash and the
reasons therefore can be known. It discloses the reasons for low
cash balance in spite of heavy operation profits on for heavy cash
balance in spite of low profits.

58
4. Discloses success or failure of cash planning
The extent of success or failure of cash planning be known by
comparing the projected cash flow statement with the actual cash
flow statement and necessary remedial measures can be taken.

Measurement of Current Ratio

The current ratio is the ratio of total current assets

to total current liabilities. It is calculated by dividing current
assets by current liabilities.

The current assets of a firm, as already stated, represent those

assets which can be, in ordinary course of business, converted
into cash within a short period of time, normally not exceeding one
year and include cash and bank balances, marketable securities,
inventory of raw materials, semi-finished (work-in- progress) and finished
goods, debtors net of provision for bad and doubtful debts, bills
receivable and pre-paid expenses. The current liabilities defined
as liabilities which are short-term maturing obligations to be met, as
originally contemplated, within a year, consist of trade creditors,
bills payable, banks credit, provision for taxation,
dividends payable and outstanding expenses.

Acid-Test or Quick Ratio

As observed above, one defect of the current

ration is that it fails to convey any information on the
composition of the current assets of a firm. A rupee of cash is
considered e q u i va l e n t to be rupee of i n ve n t o r y or
r e c e i va b l e s . B u t i t i s n o t s o . A r u p e e o f c a s h i s m o r e
59
readily available (i.e. more liquid) to meet current obligations
than a rupee of , say, inventory. This impairs the usefulness of
the current ratio. The acid-test ration is a measures of liquidity
designed to overcome this defect of the current ratio. It is often
to convert its current assets quickly into cash in order to meet its
current liabilities. Thus, it is a measure of quick or acid liquidity.

The acid-test ratio is the ratio between quick current assets and
current assets by the current liabilities.

Inventory Turnover Ratio

The cost of goods sold means, sale minus gross profit, the average
inventory refers to the simple average of the opening and closing
inventory. The ration indicates how fast inventory is sold. A high
ratio to good from the view point of liquidity and vice versa. A
low ratio would signify that inventory does not sell fast and stays
on the shelf or in the ware-house for a long time.

MOTIVES FOR HOLDING CASH

The term cash with reference to cash management is used in two

senses. In a narrow sense it is used broadly to cover currency
and generally accepted equivalents of cash such as cheques,
drafts and demand deposits in banks. The broader view of cash
also includes near-cash assets, such as marketable securities and
time deposits in banks. The main characteristics of these is that they
can be readily sold and converted into cash. They serve as a
reserve pool of liquidity that provides cash quickly
when needed. They also provide a short-term investment outlet

60
for excess cash and are also useful
for meeting planned outflow of funds. W e em p l o y
t h e t e r m c a s h management in the broader sense. Irrespective
of the form in which it is held, a distinguishing feature of cash, as
an asset, is that it has no earning power. If cash does not earn any
return, why is it held by firms? There are four primary motives for
maintaining cash balances: (i) Transaction motive; (ii) Precautionary
motive; (iii) Speculative motive; and (iv) Compensating motive .

Transaction Motive

An important reason for maintaining cash balances is the transaction

motive. This refers to the holding of cash, to meet routine cash
requirements to finance the transaction which a firm c a r r i e s o n i n t h e
o r d i n a r y c o u r s e o f b u s i n e s s . A f i r m e n t e r s i n t o a va r i e t y o f
t r a n s a c t i o n s t o a c c o m p l i s h i t s o b j e c t i ve s wh i c h h a ve t o b e
paid for in the form of cash. For e xa m p l e ,
c a s h payments have to be made for purchases, wages, operating expe
nses, financial charges, likeinterest, taxes, dividends, and so on.
Similarly, there is a regular inflow of cash to the firm from sales
operation, returns on outside investments, etc. these receipts
and payments constitute a continuous two-way flow of cash. But the
inflows (receipts) and outflows (disbursements) do
not perfectly coincide or synchronise, i.e. they do not exactly match. At ti
mes, receipts coincide or o u t f l o ws wh i l e , at other times,
p a ym e n t s e xc e e d i n f l o ws . To e n s u r e t h a t s i t u a t i o n i n
wh i c h disbursements are in excess of the current receipts, it must have
and adequate cash balance. The requirement of cash balances to meet
routine cash needs is known as the transaction motive and such cash
balances are termed as transaction balances. Thus, the transaction
61
motive refers of the holding of cash to meet anticipated obligations
whose timing is not perfectly synchronized with cash receipts. If the
receipts of cash and its disbursements could exactly coincide in
the normal course of operation, a firm would not need cash for
transaction purposes. Although a major part of transaction balances
are held in cash, a part may also be in such marketable
securities whose ma t u r i t y c o n f o r m s t o t h e t i m i n g o f t h e
a n t i c i p a t e d p a ym e n t s , s u c h a s p a ym e n t , o f t a xe s , dividends,
etc.

Precautionary Motive

In addition to the non-synchronizations of anticipated cash

inflows and outflows in the ordinary course of business, a firm may
have to pay cash for purposes which cannot be predicted or anticipated.
The unexpected cash needs at short notice may be the result of:(i)
floods, strikes and failure of important customers;(ii) Bills may be
presented for settlement earlier than expected; (iii) Unexpected slow
down in collection of accounts receivable;(iv) Cancellations of some
order for goods as the customer is not satisfied;(v) Sharp increase in
cost of raw materials.

The cash balances hold in reserve for such random and

unforeseen fluctuations in cash flows are called as precautionary
balances. In other words, precautionary motive of holding cash implies
the need to hold cash to meet unpredictable obligations. Thus,
precautionary cash balance serves to provide a cushion to meet
unexpected contingencies. The more unpredictable the cash
flows, the larger the need for such balances. Another factor
which has a bearing on the level of such cash balances is the

62
availability of short-term credit. If a firm can borrow at short notice to pay
for unforeseen obligations, it will need to maintain a relatively small
balance and vice-versa. S u c h c a s h b a l a n c e s a r e u su a l l y h e l d i n
t h e f o r m o f ma r k e t a b l e s e c u r i t i e s s o t h a t t h e y e a r n a re turn.

Speculative Motive

It refers to the desire of a firm to take advantage of o

p p o r t u n i t i e s w h i c h p r e s e n t t h e ms e l ve s a t u n e x p e c t e d m o
m e n t s a n d wh i c h a r e t yp i c a l l y o u t s i d e t h e n o r ma l c o u r s e o f
business. While the precautionary motive is defensive in nature, in that,
firms must make provisions to tide over unexpected contingencies, the
speculative motive represents a positive and aggressive approach.
Firms aim to exploit profitable opportunities and keep cash in reserve to
do so. The speculative motive helps to take advantage of:

(i) an opportunity to purchase raw materials at a redu

c e d p r i c e o n p a y m e n t o f immediate
cash;( i i ) a c h a n c e t o s p e c u l a t e o n i n t e r e s t r a t e m o v e me n t s
b y b u yi n g s e c u r i t i e s wh e n interest rates are expected to decline;(iii)
delay purchases of raw materials on the anticipation of decline in prices;
and(iv) to make purchases at favorable prices.

Compensation Motive

Yet another motive to hold cash balances is to compensate

banks for providing certain services and loans. Banks provide a
variety of services to business firms, such as clearance of cheque,
supply o f c r e d i t i n f o r ma t i o n , t r a n s f e r o f f u n d s , e t c . wh i l e f o r
s o me o f t h e s e r vi c e s b a n k s c h a r g e a commission or fee, for

63
others they seek indirect compensation. Usually clients are
required to maintain a minimum balance of cash at the bank.
Since this balance cannot be utilized by the firms for transaction
purposes, the banks themselves can use the amount to earn a
return. To be compensated for their services indirectly in this
form, they require the clients to always keep
a bank balance sufficient to earn a return equal to the cost of services. S
uch balances are compensating balances.

Compensating balances are also required by some loan agreements

between a bank and its customers. During periods when the supply
of credit is restricted and interest rate during the period when the
loan will be pending. The compensating cash balances can take
either of two forms: (i) an absolute minimum, say, Rs 5 lakhs,
below which the actual bank balance will never fall; (ii) a
minimum average balance, say, Rs. 5 lakhs over the month. The first
alternative is more restrictive as the average amount of cash held
during the month must be above Rs.5 lakhs by the amount of
transaction balance. From the firm’s view point this is obviously dead
money. Under the second alternative, t h e b a l a n c e c o u l d f a l l t o
z e r o o n e d a y p r o vi d e d i t wa s Rs . 1 0 l a k h s s o me o t h e r d a y
wi t h t h e average working to Rs. 5 lakhs.

Of the four primary motives of holding cash balances the two

most important are the transactions motive and the compensation
motive. Business firms normally do not speculate and need not have
speculative balances. The requirement of precautionary balances can be
met out of short –term borrowings.

64
CASH MANAGEMENT: TECHNIQUES/ PROCESSES

The basic strategies of cash management have been outlined in

the preceding section.
Ith a s b e e n s h o wn t h a t t h e s t r a t e g i c a s p e c t s o f e f f i c i e n t c a s
h ma n a g e me n t a r e : ( 1 ) efficient inventory management, (2)
speedy collection of accounts receivable, and (3) delaying payments on
accounts payable. The main elements of an efficient management of
inventory are discussed
ins o m e d e t a i l . T h e r e a r e s o m e s p e c i f i c t e c h n i q u e s a n
d p r o c e s s e s f o r s p e e d y c o l l e c t i o n o f receivables from
customers and slowing disbursements. We discuss them in the present
section.

Speedy Cash Collections

In managing cash efficiently, the cash inflow process

c a n b e a c c e l e r a t e d t h r o u g h systematic planning and
refined techniques. There are two broad approaches to do this.
In the first place, the customers should be encouraged to pay as
quickly as possible. Secondly, the payment from customers should
be converted into cash without any delay.

65
 CHAPTER 4: DATA ANALYSIS AND DATA
PRESENTATION

It is also known as “working capital ratio” .It is a measures of short-term

financial strength of the
business and shows whether the business will be able to meet it’ s
current liabilities as when
they mature.

Current Assets including assets which can be converted in to cash

easily and itself like market
securities debtors, inventory, prepaid expenses etc.

Current Liabilities included creditors, bills payable, accrual expenses,

short term bank loan,
income tax liabilities and long term debt maturity in current year. In short
it can be said as all
obligations within a year are included in current liabilities.

Current ratio is a measure of the firm’s short term solvency. It indicates

the availability of
current assets in rupee of current liabilities. As a conventional rule, a
current ratio should be or
slightly more. It focuses the strong of weak position of the company.

66
YEARS CURRENT RATIO
2017-18 1.61:1
2016-17 2.19:1
2015-16 1.77:
2014-15 2.14:1
2013-14 .96:1

Series 1
2.5

1.5

Series 1
1

0.5

0
2012-13 2011-12 2010-11 2009-10 2008-09

INTERPRETATION:
It is generally believed that 2:1 ratio shows a comfortable working capital
position. The tendon
committee appointed by RBI had wide recommended a current ratio of
2:1.
Company has maintained this ration and increased it year by year. A
current ratio is 1.61 in the
current year. But in the other year the ratio is nearer to 1:2 so we can
say that the company
having comfortable working capital position.

67
ACID-TEST RATIO

The measure of absolute liquidity may be obtained only cash and bank balance as well as
only
ready marketable security with liquid liabilities. This is every existing standard of liquidity
and it
is satisfaction if the ratio is 1.50:1.

YEARS ACID-TEST RATIO

2012 - 13 1.08:1
2011 - 12 1.38:1
2010 - 11 1.05:1
2009 - 10 1.15:1
2012 - 13 1.58:1

INTERPRETATION:

Acid-test ratio is near to one in current year that is 1.08 as compare to

1.38 in the previous year.
Over all the acid-test ratio of last five year is very satisfactory so we can
conclude that the
absolute liquidity of the Bata India Ltd is in favor.

DEBTORS TURNOVER RATIO

This ratio shows the proportion of sales to average receivables. It shows

the efficiency of the
collection policy of the firm. The higher the ratio, the less satisfactory
position of the firm.
Higher ratio indicates weak collection policy of the firm.

YEARS DEBTORS TURNOVER RATIO

2012 - 13 31.21:1
2011 - 12 22.60:1
2010 - 11 29.92:1
2009 - 10 19.50:1
2008 - 09 16.82:1

68
 Series 1
35

30

25

20

Series 1
15

10

0
2012-13 2011-12 2010-11 2009-10 2008-09

INTERPRETATION:

We know that the higher Debtor’s turnover ratio is not good for
the firm. In the year 2012-13 it is
31.21:1 but in the previous year it was 22.60:1. So some
improvement is needed.

CREDITOR’S TURNOVER RATIO :

Creditor’s turnover ratio shows the proportion of purchase to account

payable number of days
within which we make payment to our creditors for credit purchases
estimated the creditors ratioif this ratio is higher it means company has
to check whether company is making payment within

69
credit period available. If it is making payment before the due date
means the company is not
taking full advantage of it credit period and if company making the
payment the period that
indicates that the company is not taking the benefit of discount allowed.

YEARS CREDITOR’S TURNOVER RATI

2012 - 13 3.33:1
2011 - 12 4.62:1

2010 - 11 5.47:1
2009 - 10 5.49:1
2008 - 09 3.96:1

Series 1
6

3
Series 1

0
2012-13 2011-12 2010-11 2009-10 2008-09

INTERPRETATION:

Higher Ratio of creditor turnover forces the company to check that

payment is made with in
credit period properly or not. The creditors’ turnover ratio is 3.33 in 2012-
13 as compare to
2011-12 the ratio is 4.62 which is higher than the other years.

70
INVENTORY TURNOVER RATIO

This ratio is also known as “stock turnover ratio”. The number of times
the average stock is
turnover during the year is known as stock turnover. It is computed by
deciding the sales by the inventory. The ratio is important in joining the
ability of management which it can move the
stock.

YEARS INVENTORY TURNOVER RATIO

2012 - 13 7.51 times
2011 - 12 7.17 times
2010 - 11 9.20 times

2009 - 10 8.00 times

2008 - 09 8.91 times

INTERPRETATION:

Higher the ratio more profitability the business would be. The
ratio is joining the ability of
management with which it can move the stock. Inventory
turnover ratio is highest in the year
2011-12 is 9.20 as compare to the other year but in current
year it is 7.51 which is little lower
than previous year but it is obvious that in heavy industries like
Bata India Ltd have lower ration
as compare to FMCG.

71
NET WORKING CAPITAL TURNOVER RATIO

Net working capital turnover ratio is obtained by net working capital

joining to sales. The excess
of current assets over current liabilities is called working capital. It is
found for measuring firm
liquidity. It also measures the firm potential reserve of funds.

YEARS WORKING CAPITAL TURNOVER RATIO

2012 - 13 7.60 times
2011 - 12 5.57 times
2010 - 11 9.85 times
2009 - 10 10.00 times
2008 - 09 5.83 times

INTERPETATION:

As per the balance sheet data of the creditor the working capital turnover
ratio is different for the
different years. The ratio is 7.60 in 2012 - 13and 5.57 in 2011 - 12but the
best favorable ratio is
in 2009-10which is 10 times. So it means that higher the ratio better the
working capital
condition of the company.

DEBTOR COLLECTION PERIOD

The Debt Collection shows the number of days taken to collect the debts
of credit sales. It shows
the efficiency and collection policy of the company. The ratio is
computed by dividing the
Debtor’s turnover ratio in to 365 days.

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2011 - 12 16.15 days
2010 - 11 12.20 days
2009 - 10 18.71 days
2008 - 09 20.71 days

INTERPRETATION:

The collection period is highest in 2008–09 is 20.71 days as

compare to very low in 2012-13is
only 11 days. This shows the improvement in collection policy
of the Bata India Ltd. So it is
very important for any company to collect the debs which this
company do very well.

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