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MANAGEMENT OF CASH
Presented by: Ajit singh roll no 76 Sonia roll no 78

What is cash management?


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Cash management is concerned with the managing of: 1. cash flows into and out of the firm 2. cash flows within the firm 3. cash balances held by the firms at a point of time by financing deficit and investing surplus cash.

Facets of cash management


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1.

2.
3. 4.

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

Motives for holding cash


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Transaction motive Precautionary motive Speculative motive Compensating motive

Factors determining cash needs


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Synchronization of cash flows Short costs Excess cash balance costs Procurement and management uncertainty

Determining cash needs


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Minimizing cost cash model Baumol Model Miller-Orr model Orglers Model Cash budget

Baumol Model
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1.

2.

According to this model, 2 elements related with total cost are: Cost of converting marketable securities into cash The lost opportunity cost

Cont
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Cost of cash management: i(c/2)+(tb/c) i=interest that could ave been earned C=average cash balance t=total transaction cash needs for the period b=cost per conversion c=value of marketable securities sold at each conversion Optimal conversion amount: C= square root of 2bt/i

Miller-Orr Model
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According to this model the objective of cash management is to determine the optimum cash balance level which minimises the cost of cash management. C=bE(N)/t+iE(M) b=fixed cost of conversion E(M)=expected average daily cash balance E(N)=expected number of conversions t=number of days in the period i=lost opportunity cost C=total cash management cost

Orglers Model
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1. 2.

3.

According to this model, an optimal cash management strategy can be determined through the use of a multiple linear programming model. Construction of model include 3 steps: Selection of appropriate planning horizon Selection of appropriate decision variables Formulation of cash management strategy itself.

Example of linear programming model


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Maximise profit=a1 x1+a2 x2 Subject to B1 x1<=production B2 x2<=constraints C 1x1+C2 x2<=cash available constraint A1 x1+a2 x2>current assets requirement constraint Xi>=Oi=1, n non-negativity constraint

Cont..
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Orglers objective function is to minimise the horizon value of the net revenues from that the cash budget over the entire planning period. Using the assumption that all revenues are generated are immediately reinvestd and that any cost is immediately financed. Objective function represents the value of the net income from the cash budget at the horizon by adding the net returns over the planning period

Cash Budget
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Cash budget is the statement of the inflows and outflows of cash that is to estimate its short-term requirements

Elements of Cash budget


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1.

2.

Selection of the time period to be covered by the budget. Referred to as planning horizon. Selection of factors that have bearing on cash flows. They are: operating cash flows financial cash flows

Operating cash flow items


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Cash receipts 1. Cash flows 2. Collection of accounts recievable 3. Disposal of fixed assets

outflows 1. Accounts payable 2. Purchase of raw material 3. Wages and salary 4. Factory expenses 5. Administrative and selling expense 6. Maintenance expense 7. Purchase of fixed assets

Financial cash flows items


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Cash inflows 1. Loans/borrowings 2. Sales of securities 3. Interest received 4. Dividend received 5. Rent received 6. Refund of tax 7. Issue of new shares and securities

Cash outflows 1. income-tax 2. Redemption of loan 3. Repurchase of shares 4. Interest paid 5. Dividends paid

Basic strategies of cash management


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1.

2.
3. 4. 5. 6. 7.

Cash cycle Cash turnover Minimum operating cash Stretching accounts payable Efficient inventory production management Speeding collection of accounts receivable Combined cash management strategies

Cash management techniques


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1.

2.
3.

Speedy cash collections Prompt payment by customers Early conversion of payments into cash postal float lethargy bank float bank/clearing float deposit float

Cont
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4.

5.
6. 7. 8.

9.

Concentration banking Lock box system Slowing disbursements Centralised disbursements Float cheque kiting cheque encashment analysis Accurals

Marketable securities
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They are the securities which can be converted into cash in a short period of time. The securities must have ready market and safety of principal. The ready market should be depth and have breadth There should be little or no loss in the value of a marketable security overtime.

Selection criteria
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2.
3. 4. 5.

Financial/default risk Interest rate risk Taxability Liquidity yield

Marketable securities alternative


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3.

Treasury bills: are indian govt. obligations issued on auction basis having maturities of 91 days and 364 days and virtually no risk. CDs: are negaotiable instruments representing specific cash deposits in bank having varying maturities and yields based on size, maturity and prevailing money market conditions. Commercial papers: is a short term unsecured promissory note issued by a firm that has a high credit rating.

Cont..
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4.

5.

6.

7.

Bankers acceptances: are short term, low risk marketable securities arising from bank guarantees of business and transactions Repurchase agreements: is an agreement whereby a bank selles securities and agrees to pay them back at a specific price and time. Incorporate deposits: are short term deposits with other companies, having high degree of risk, and rate of return is between 12 to 15%. Money market mutual funds: are professionaly managed portfolios of popular marketable securities having instant liquidity, competitive yield and low transaction cost.

Cont
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8.

9.

bills discounting: during the pendency of a bill, if the seller is in need of funds he may get it discounted. Bills are trade bills arising out of genuine commercial transaction, backed by a letter of credit by banks to ensure absolute security of funds. Units: are alternatives for investing surplus liquidity because, they have a very large secondary market, and their income is taxexempt up to a specified amount.

Cash management practices in India


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Collection methods: loan collection outstanding clearing Bulk collection PDC management Electronic clearing scheme Cheque truncation Payment outsourcing Electronic banking

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