FINANCIAL MANAGEMNENT

CASH MANAGEMENT

Presented By• Subhashni Jaiswal• Ayushi Gupta• Hriday Bora• Chiranjivi R• Phanindra Reddy• Junaid Ali

(GROUP 10)

WHAT IS CASH? It is the money which a firm can disburse

immediately without any restrictions. The term cash include coins, currencies and checks

held by the firm in balance in its bank account. It includes near-cash assets, such as marketable

securities and time deposits in banks.

Cash

NARROW SENSE

Cash in hand i.e.currency

notes & coins

BRODER SENSE

Cash & its equipment i.e. Cash at Bank,

Short term investment

CASH MANAGEMENT Cash management is concerned with the

managing of: cash flows into and out of the firm, cash flows within the firm, and cash balances held by the firm at a point of time

by financing deficit or investing surplus cash

Business Operations

Information and control

Cash Payments

DeficitSurplus

BorrowInvest

Cash Collection

FOUR FACETS OF CASH MANAGEMENT

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

MOTIVES FOR HOLDING CASH Transaction motive Precautionary motive Speculative motive

TRANSACTION MOTIVESIt refers to the holding of cash required by a firm to carry its day to day business transactions in the ordinary course of business.

PRECAUTIONARY MOTIVE The precautionary motive of holding cash is to meet

the unpredictable cash obligations of a firm. A cushion to meet unexpected contingencies.

Floods, strikes and failure of imp customers Unexpected slowdown in collection of accounts

receivable Sharp increase in cost of raw materials Cancellation of some order of goods

SPECULATIVE MOTIVE This refers to maintaining cash balance ,the firm to take

advantage of investing in profit –making opportunities and which is typically outside the normal course of business.

Helps to take advantage of: An opportunity to purchase raw materials at reduced

price Make purchase at favorable prices Delay purchase on anticipation of decline in prices Buying securities when interest rate is expected to

decline

CASH PLANNING Cash Flow Planning is when a business forecasts

short & long term business expenses against the projected incoming cash.

It allows us to anticipate trouble by creating a cash flow cushion, for unexpected expenses.

A method that an insured can use to control the premium payments that they must make on their policies.

CASH FORECASTING AND BUDGETINGCASH BUDGET Summary statement of the firm’s expected cash

inflows and outflows over a projected time periodCASH FORECASTS Estimate of the timing and amounts of cash inflows

and outflows over a specific period

SHORT-TERM CASH FORECASTSThe important functions of short-term cash forecasts

To determine operating cash requirementsTo anticipate short-term financingTo manage investment of surplus cash.Short-term Forecasting Methods The receipt and disbursements methodThe adjusted net income method.

THE RECEIPT AND DISBURSEMENTS METHOD The virtues of the receipt and payment methods are:

It gives a complete picture of all the items of expected cash flows.It is a sound tool of managing daily cash operations.

This method, however, suffers from the following limitations:

1. Its reliability is reduced because of the uncertainty of cash forecasts. For example, collections may be delayed, or unanticipated demands may cause large disbursements.

2. It fails to highlight the significant movements in the working capital items.

THE ADJUSTED NET INCOME METHOD The benefits of the adjusted net income

method are: It highlights the movements in the working

capital items, and thus helps to keep a control on a firm’s working capital.

It helps in anticipating a firm’s financial requirements.

The major limitation of this method is: It fails to trace cash flows, and

therefore, its utility in controlling daily cash operations is limited.

LONG-TERM CASH FORECASTING The major uses of the long-term cash forecasts are:

It indicates as company’s future financial needs, especially for its working capital requirements.

It helps to evaluate proposed capital projects. It pinpoints the cash required to finance these projects as well as the cash to be generated by the company to support them.

It helps to improve corporate planning. Long-term cash forecasts compel each division to plan for future and to formulate projects carefully.

FEATURES OF INSTRUMENTS OF COLLECTION IN INDIA

CLEARING mutual settlement of claims among member banks agreed time and place as per instruments drawn

Clearing can be classified asi. Counter clearingii. Non – MICRiii. Magnetic Ink Character Recognitioniv. Cheque Truncation System

TYPES OF RETURN CHEQUES:◦ INWARD OR PAYING BRANCH

When a particular branch receives instruments, which are on themselves and sent by other member bank for collection is treated as Inward Clearing of that branch.

◦ INWARD RETURNWhich are presented by collecting bank to other banks for payment but it has been returned and unpaid by them due to specified reason through the clearing house.

◦ OUTWARD OR COLLECTING BRANCHWhen a particular branch receives instruments drawn on the other bank within the clearing zone and sends those instruments for collection through the clearing arrangement is considered

◦ OUTWARD RETURNInstruments which are return by paying bank due to specified reason through the clearing house.

IMAGE CLEARING SYSTEM

BAUMOL’S MODEL The firm is able to forecast its cash needs with certainty. The firm’s cash payments occur uniformly over a period of

time. The opportunity cost of holding cash is known and it does not

change over time. The firm will incur the same transaction cost whenever it

converts securities to cash.

Baumol's model for cash balance

ASSUMPTION The firm is able to forecast its cash with certainty. The firm’s cash payment occur uniformly once a

period of time. The opportunity cost of holding cash is known and it

does not change over time. The firm will incur the same transaction cost

whenever it converts securities to cash.

TYPES OF COST Holding Cost or opportunity costHolding Cost = k (C/2)k = Opportunity Cost, C/2 = Average cash balance

Transaction CostTransaction Cost = c(T/C)

Total cost Total Cost = k(C/2)+c(T/C)

Optimum cash balance

C*= √2cT/k

COST TRADE-OFF: BAUMOL'S MODEL

THE MILLER–ORR MODEL It provides for two control limits–the upper control limit

and the lower control limit as well as a return point. If the firm’s cash flows fluctuate randomly and hit the

upper limit, then it buys sufficient marketable securities to come back to a normal level of cash balance.

Similarly, when the firm’s cash flows wander and hit the lower limit, it sells sufficient marketable securities to bring the cash balance back to the normal level

LOWER CONTROL LIMIT=(3/4 x transaction cost X variance of cash flows )1/3

interest rate

Upper Limit= Lower Limit + 3ZReturn Point= Lower Limit + Z

Average Cash Balance = Lower Limit +4/3 Z

Symbolically (Z)= ( 3/4 x cσ²/i )1/3

MANAGING CASH COLLECTIONS AND DISBURSEMENTS

Accelerating Cash CollectionsDecentralised CollectionsLock-box System

Controlling DisbursementsDisbursement or Payment Float

ACCELERATING CASH COLLECTIONS Decentralised Collections

Number of collection centres Collection centres will collect cheques from customers and

deposit in their local bank accounts They will deposit the funds to a central bank

Lock-box System Collection centers are established considering the

customer locations and volume of remittances At each Centre the firm hires a post office box Remittances are directly picked from the bank whom the

firm gives the authority

INVESTING SURPLUS CASH IN MARKETABLE SECURITIESSelecting Investment Opportunities:

Safety, Maturity, andMarketability.

SHORT TERM INVESTMENTS OPPORTUNITIES

Treasury bills Commercial papers Certificates of deposits Bank deposits Inter-corporate deposits Money market mutual funds