CASH MANAGEMENT

Cash Management

Cash is the life blood of a business
enterprise.
It is of vital importance to the daily operations
of business firms.
Corporates generally hold one to four percent
of assets in cash.
Efficient cash management is crucial to the
solvency of the business since it is the focal
point of fund flows in a business.












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Cash Management
Three possible motives for holding cash
Transaction Motive: Firms need cash to meet their
transaction needs. Collection of cash is not perfectly
synchronized with disbursement of cash and
therefore
cash balance is required as a buffer.
Precautionary Motive: There could be uncertainty
about
magnitude and timing of cash inflows and cash
outflows.
Speculative Motive: Profit making opportunities may
arise
from fluctuations in commodity prices, security prices,
interest rates and foreign exchange rates. Cash rich
form
are better prepared to exploit such bargains.







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Cash Management

Opportunity Cost

Liquidity provided by cash holding is at the expense
of profits sacrificed by foregoing alternate
investment opportunities.
Finance Managers should establish reliable
forecasting and reporting system, improve cash
collections and disbursements and achieve optimal
conservation and utilization of funds.






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Cash Management

Cash Budgeting
It is the principal tool of cash management. They are
helpful in:
Estimating cash requirements.
Planning short-term financing.
Scheduling payments in connection with capital
expenditures.
Planning purchase of raw materials.
Developing credit policies and checking
accuracy of
long term forecasts.





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Cash Management

Receipts and Payments Method
It shows the timing and magnitude of expected
cash receipts and payments over the forecast
period.
It includes all expected receipts and payments
irrespective of how they are classified in
accounting.
It calls for information about estimated sales,
production plans, financing plans and capital
expenditure budget.









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Cash Management
Receipts and Payments Method
Although the cash budget conveys a picture of
precision, it is merely an estimate of future cash
flows.
In an uncertain environment it is advisable to
prepare additional cash budgets on different sets of
assumptions.
Cash forecasts can be made under three possible
scenarios: pessimistic scenario, normal scenario
and optimistic scenario.
It can then provide a better perspective on future
cash flows and facilitate the formulation of
contingency plans

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Cash Management
Evaluation

The receipt and payments method suffers from the
following drawbacks:
Its reliability is impaired by delays in collection or
sudden demands for large payments and similar
other factors.
It fails to provide a clear picture of changes in
working capital movements especially those
relating to inventories and receivables.



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Cash Management

Cash Collection and Disbursement

Float
Speeding up collection
Concentration Banking
Delaying Payments
Optimal Cash Balance










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Cash Management

Basic Principles of Good Cash Management

Develop and maintain a good cash forecasting
system.
Expedite the transfer of collection.
Develop and use sources of short term borrowing
that are flexible and readily available.
Never permit usable funds to stand idle.
Maintain good relations with bankers.
Utilize modern electronic system fully.











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Cash Management
Investment of Surplus Funds
Ready cash segment It is meant to augment the
cash resources of the firm to meet unanticipated
operational needs. Investments should be highly
liquid.
Controllable cash segment It is meant to meet the
needs of known outflows like taxes, dividends,
interest payments and repayment of borrowings.
Investments must be matched in size and maturity to
known outflows.
Free cash segment It is neither meant to augment
unforeseen current cash needs nor to meet known
future outflows. It represents surplus funds which has
to be invested in short-term instruments to generate
income.
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Cash Management
Criteria for Evaluating Investment Instruments

Safety
Liquidity
Yield
Maturity

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Cash Management
Investment Options
Fixed Deposits with Banks
Mutual Fund Schemes
Treasury Bills
G-Secs
Commercial Paper
Certificate of Deposits
Inter Corporate Deposits
Ready Forwards


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Thank you
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