CHAPTER7 CASH MANAGEMENT CASH MANAGEMENT Cash is one

CHAPTER-7 CASH MANAGEMENT

CASH MANAGEMENT � Cash is one of the current assets of a business. It is needed all time to keep a business going because shortage of cash will hamper the operations of a concern & excess of it will be unproductive. � For some person cash means only money in the form of currency(cash in hand). � For other , cash means both cash in hand & cash at bank. � For some other it is cash in hand, cash at bank & near cash assets & marketable securities which can be easily convertible in to cash

MOTIVES FOR HOLDING CASH • TO MEET DAY TO DAY OPERATIONS. • TIME LAG BETWEEM RECIEPTS & PAYMENTS • INVESTMENTS IN MARKETABLES SECURITIES TRANSACTION MOTIVES PRECAUTIONARY MOTIVES • TO MEET VARIOUS CONTIGENCIES • VARIATION S IN ESTIMATIONS • FOR EMERGENCY TRANSACTIONS • FOR AVAILING PROFITABLES OPPORTUNTIES • FOR AVAILING DISCOUNT • TO TACKLE WITH THE SUDDEN RISE IN PRICE SPECULATIVE MOTIVES

Operating or Cash Cycle 1. 2. 3. Conversion of cash into inventory Conversion of inventory into Receivables Conversion of Receivables into Cash

OPERATING CYCLE Phase 3 Receivables Phase 2 Cash Phase 1 Inventory

CASH MANAGEMENT �Cash management has assumed importance because it is the most significant of all the current assets. Cash management deals with the following ü Cash inflows &outflows ü Cash flows within the firm ü Cash balances held by the firm at a point of time.

FACETS/STRATEGIES IN CASH MANAGEMENT Cash planning B. Cash forecasts & budgeting (1) receipts & disbursements method (2) adjusted net income method A.

CORPORATE DEFINITION OF CASH MANAGEMENT �The effective planning, monitoring and management of liquid / near liquid resources including: • Day-to-day cash control • Money at the bank • Receipts • Payments • S-T investments and borrowings 8

CASH MANAGEMENT ENVIRONMENT BANKER’S PERSPECTIVE 9

BANK DEFINITION OF CASH MANAGEMENT � The effective planning, monitoring and management of liquid / near liquid resources including: • • Provision of bank accounts Deposit / withdrawal facilities Provision of information regarding bank accounts and positions Money transfers and collection services Investment facilities Financing facilities Pooling and netting 10

CASH MANAGEMENT PROCESS Managing Liquidity 11

CASH CONVERSION � We need to consider control in all areas of working capital to maximise return, reduce cost. � Some areas are not controlled by the Finance Function – Stock/inventory � Some areas have shared control – payables and receivables � Some areas are controlled by the Finance Function – short term borrowing and investment 12

MANAGING CASH FLOWS METHODS OF ACCELERATING CASH INFLOWS v v PROMPT PAYMENTS BY CUTOMERS QUICK CONVERSION OF PAYMENT IN TO CASH DECENTRALISED COLLECTIONS LOCK BOX SYSTEM METHODS OF SLOWING CASH OUTFLOWS Ø Ø Ø PAYING ON LAST DATE PAYMENTS THROUGH DRAFTS ADJUSTING PAYROLL FUNDS CENTRALISATION OF PAYMENTS INTER BANK TRANSFER MAKING USE OF FLOAT

Float Any delay in the process of converting materials and labour to receipt of payment involves cost, float cost. � Similarly, any delay in making payments will also give rise to float but this time to our advantage Ø Definition of float The time lost between a payer making a payment and a beneficiary receiving value Ø Cost of Float principle amount due x no of days x cost of funds 360 or 365 14

DETERMINE OPTIMUM CASH BALANCE 1. CASH BUDGET 2. CASH MANAGEMENT MODELS (A) WILLIAM J. BAUMOL’S MODEL (B) MILLER & APPROACHE S TO DETERMINE OPTIMAL CASH BALANCE

Cash Conversion Cycle Formulas for three time periods are necessary to calculate the cash conversion cycle.

INVESTMENT OF SURPLUS FUNDS TREASURY BILLS NEGOTIABLE CERTIFICATES OF DEPOSITS READY FORWARDS BADLA FINANCING INTER- CORPORATE DEPOSITS BILL DISCOUNTING INVESTMENT IN MARKETABLES SECURITIES MONEY MARKET MUTUAL FUNDS

MANAGEMENT OF MARKETABLE SECURITIES SAFTY RETUR N OR YEILD MANAGEMENT OF MARKETABLE S SECURITIES LIQUIDITY & MARKETABILITY MATURIT Y

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