MANAGEMENT OF CASH

MOTIVE FOR HOLDING C ASH

Speculative Precautionary Transaction

Trade-off
motive motive motive
•to take •Reserve to •to pay the •between
advantage of meet day-to-day bills opportunity
unexpected emergencies cost of holding
opportunities cash relative to
the transaction
cost of
converting
marketable
securities to
cash for
transactions
 OBJECTIVE OF C ASH
MANAGEMENT

• The goal:
• Have sufficient cash to
• Pay creditors
• Maintain its credit rating
• Meet unexpected cash needs
• minimize the amount of cash the firm must hold
for use in conducting its normal business
activities,
 MANAGEMENT OF C ASH

• When planning the short or long-term funding

requirements of a business, it is more important to forecast
the likely cash requirements than to project profitability
etc.
•
• Bear in mind that more businesses fail for lack of
cash than for want of profit.
 BASIC STEPS

• Establish a reliable forecasting and reporting system

• Cash Budget
• Improve and streamline mechanism of cash collection and
cash payment
• Expedite collection
• Delay payments
• Investment of surplus cash
 C ASH BUDGET

• A schedule showing cash receipts, cash disbursements, and

cash balances for a firm over a specified period of time
• It is a device to help a firm to plan and control the use of
cash.
• Useful for short term forecasting
• Budget period – varies from business to business
• Receipt & Payment Method
• Estimate Receipts
• Estimate Payments
• Surplus/ Deficit
 C ASH BUDGET ELEMENTS
Operating Cash Flow Items
Inflows/Cash Receipts Outflows/Disbursements
1. Cash sales 1. Accounts payable/Payable payments
2. Collection of accounts receivable 2. Purchase of raw materials
3. Disposal of fixed assets 3. Wages and salary (payroll)
4. Factory expenses
5. Administrative and selling expenses
6. Maintenance expenses
7. Purchase of fixed assets
Financial Cash Flow Items
Cash Inflows/Receipts Cash Outflows/Payments
1. Loans/Borrowings 1. Income-tax/Tax payments
2. Sales of securities 2. Redemption of loan
3. Interest received 3. Repurchase of shares
4. Dividend received 4. Interest paid
5. Rent received 5. Dividends paid
6. Refund of tax
7. Issue of new shares and securities
 PROBLEMS
Q1. The following information is available in respect of a firm:
(A) Balance Sheet as on March 31
Liabilities Amount Assets Amount
Accrued salaries Rs 500 Cash Rs 3,000
Other liabilities 2,500 Inventory* 8,000
Capital 65,000 Other assets Rs 70,000
______ Less: Depreciation 13,000 57,000
68,000 68,000
*Consists of Rs 2,000 minimum inventory plus Rs 6,000 of inventory scheduled to be sold next month.

(B) Sales Forecast

April Rs 10,000 July Rs 50,000
May 20,000 August 40,000
June 30,000 September 20,000
October 5,000
(C) Salary Expenses Budget
April Rs 1,500 July Rs 4,000
May 2,000 August 3,000
June 2,500 September 2,000
(D) The firm is expected to operate on the following lines:
 Other expenses approximate 12 per cent of sales (paid in the same month).
 Sales will be 80 per cent cash and 20 per cent credit. The all credit sales will be
collected in the following month and no bad debts are expected.
 All inventory purchases will be paid for during the month in which they are made.
 A basic inventory of Rs 2,000 (at cost) will be maintained. The firm will follow a
policy of purchasing additional inventory each month to cover the following
month’s sale.
 A minimum cash balance of Rs 3,000 will be maintained.
 New orders for equipment amounting to Rs 20,000 scheduled for May 1 delivery
and Rs 10,000 for June 1 delivery have been made. Payment will be made at the
time of delivery.
 Accrued salaries and other liabilities will remain unchanged.
 Gross profit margin is 40 per cent of sales.

Prepare a cash budget for 6 months (April to September). Borrowings are made in
thousands of rupees. Ignore interest.
Solution
Cash Budget (Amount in ’000 rupees)
Particular April May June July Aug. Sept
.
(A) Cash inflows:
1.Cash sales (0.80) 8 16 24 40 32 16
2.Accounts receivable collections (0.2) — 2 4 6 10 8
Total 8 18 28 46 42 24
(B) Cash outflows:
1.Inventory 12 18 30 24 12 3
2.Salary 1.5 2 2.5 4 3 2
3.Expenses 1.2 2.4 3.6 6 4.8 2.4
4.Equipment — 20 10 — — —
Total 14.7 42.4 46.1 34 19.8 7.4
(C) Net monthly cash gain or loss
by end of month (A – B) (6.7) (24.4) (18.1) 12 22.2 16.6
Cumulative cash gain or loss by end of (6.7) (31.1) (49.2) (37.2 (15) 1.6
month )
Cumulative borrowing (month-end) 7 32 50 38 15 —
 MANAGING CASH FLOWS

• Cash Management will be successful only if cash collections

are accelerated and cash payments (disbursements), as far
as possible, are delayed.
• Deficiency
• Defer payments
• Sell surplus investments
• Arrange borrowings
• Surplus
• Invest in short term marketable securities
 METHODS OF METHODS OF
ACCELERATING CASH DECELERATING CASH
INFLOWS OUTFLOWS

• Prompt payment from • Paying on the last date

customers (Debtors)
• Quick conversion of payment
into cash
• Decentralized collections
• Lock Box System (collecting
centers at different locations)
• Payment through Cheques and
Drafts
• Adjusting Payroll Funds (Reducing
frequency of payments)
• Centralization of Payments
• Inter-bank transfers
• Making use of Float (Difference
between balance in Bank Pass
Book and Bank Column of Cash
Book)
 STREAMLINE COLLECTION

• Speed up collection
Customer mails Company Deposits the Cash
cheque receives cheque cheque Available
Time

Mailing Time Processing Time Clearing Time

• Lock Box System

• Customers are advised to mail the payments to a
special post office boxes
• Cheques are collected by the local collecting banks
 C ASH MANAGEMENT SERVICES

• Payment Services
• Payable at par cheque book
• At par facility for bulk payments
• Electronic Data Transfer
• Reconciliation
• MIS
• Collection Services
• Cheque collections – local and outstation
• Providing fund in the central collection account
• Reconciliation
• MIS
INVESTING SURPLUS C ASH
 MARKETABLE SECURITIES

• Securities that can be sold on short notice without much loss of principal or
original investment
• Maturity
• Short-term

• Risk
• Low

• Liquidity
• High

• Return (Yield)
• Relatively low
 INVESTING SURPLUS C ASH

Invest in short term marketable securities with minimum default

risk, liquidity risk and interest rate risk

Inter Corporate
Certificate of Money Market
Treasury Bills Commercial Paper Deposits/ Bills
Deposits (CDs) Mutual Funds
Discounting
• Issued by Govt of • Issued by bank as • Short term papers • Short-term • Professionally
India on auction promissory notes issued by highly deposits with managed portfolios
basis having representing rated companies other companies of marketable
Duration of 91,182 specific cash • Unsecured securities
and 364 days deposits in banks • Regulated by SEBI
• Issued in bearer • Issued at a discount • Minimal risk
form for fixed maturity
• Interest not paid- • Registered or
Issued at discount bearer or demat
& redeemed at par form
• Highly liquid • Default risk low
• No credit risk • Size – Rs. one lakh
• Minimum of • Tenure – 15 days to
Rs.25,000 and in one year
multiple thereof