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Cash and receivables management is important because unless the cash and receipt
management is managed effectively, monitored efficiently planed properly and reviewed
periodically at regular intervals to remove bottleneck if any the company cannot earn profits
and increase its turnover.
1.3 Objectives of the study
To meet the Cash Disbursement needs.
To know the sources of Cash Inflow and uses of Cash Outflow in Aavin Diary.
To determine how short term / current obligations of the Company are met by the
Liquidity Ratio.
To offer suggestions and recommendations to improve the cash position of Aavin

1.4 Scope and limitation of the study
Scope of the study
This study helps to take short term financial decision. It indicates the cash
requirement needed for plant or equipment expansion programmes. To find strategies
for efficient management of cash. It helps to meet routine cash requirement to finance
the transaction. It reveals the liquidity position of the firm by highlighting the various
sources of cash audits uses.

A research design is the arrangement of conditions for collection and analysis of data
in a manner that aims to combine relevance to the research purpose with economy in
The required data for the study are basically secondary in nature and data are
collected from the audited annual reports of the company.
The study was carried out in the Aavin diary.

The sources of data are from annual reports of the company from the year 2008 to 2012-
Ratio analysis
Ratio analysis is a technique of analysis and interpretation of financial
statement. It is the process of establishing and interpreting various ratios for
helping in making certain decision. It is only a means of better understanding of
financial strength and weakness of a firm. It aims at making use of quantitative
information for decision-making. It is a yardstick, which measures relationship
between two variables.
Ratios are simply a means of highlighting in arithmetical terms the
relationship between figures drawn from various financial statements. In other
words, a financial ratio is the relationship between two accounting figures
expressed mathematically. Ratio analysis is the most important method of financial
analysis. The two aspects of the financial strength of any business are the short term
and long term.
Ratio may be classified into the four categories as follows
Liquidity Ratio
a) Current Ratio
b) Quick Ratio or Acid Test Ratio
c) Absolute Liquidity Ratio
Activity Ratio or Turnover Ratio
a) Stock Turnover Ratio
b) Debtors or Receivables Turnover Ratio
c) Average Collection Period
d) Creditors or Payables Turnover Ratio
e) Average Payment Period
f) Fixed Assets Turnover Ratio

g) Working Capital Turnover Ratio
2. Cash flow statement
3. Fund flow statement
4. Trend analysis
5. Correlation
It refers to the ability of the firm to meet its current liabilities. The
liquidity ratio, therefore,

are also called 'Short-term Solvency Ratio'. These ratios
are used to assess the
Short-term financial position of the concern. They indicate the firm's
ability to meet its current obligation out of current resources.
Liquidity ratio includes :
1. Current Ratio
2. Quick Ratio or Acid Test Ratio
3. Absolute Liquid Ratio

1. Current Ratio
Current ratio may be defined as the relationship between current assets and
current liabilities. Current ratio is a measure of the firm's short-term solvency. The
basic components of this ratio are current assets and current liabilities. Current
assets are those assets the amount of which can be realized within a period of one
year. Current liabilities are those amount which are payable with in a period of one
year. The formula used for calculating current ratio can be expressed as follows:
Current Ratio=Current Assets/Current Liabilities
A current ratio of 2:1 is considered as satisfactory. A relatively high current
ratio is an indication that the firm is liquid and has the ability to pay its current
obligations in time as and when they become due. On the other hand, a relatively
low current ratio represents that the liquidity position of the firm is not good and
the firm shall not be able topay its current liabilities in time without facing
difficulties. The ratio is computed to judge the ability of the concern to meet its
current obligation.
2. Quick Ratio or Acid Test Ratio
Quick ratio, also known as Decisive Test ratio or Liquid ratio is a measure
of judging the liquidity. The term 'liquidity' refers to the ability of a firm to pay its
short-term obligation as and when they current due. Quick ratio may be defined as
the relationship between quick/liquid assets and current or liquid liabilities. Current
assets include inventories and prepaid expenses, which are not easily convertible into
cash within a short period. So for calculating quick ratio cannot take inventories and
prepaid expenses. The formula used for calculating quick ratio can be expressed as
Quick Ratio = Quick Assets/Current Liabilities
An acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all
its current liabilities. A higher ratio indicates sound financial position and vice - versa.


3. Absolute Liquid Ratio
This ratio analyses the position of cash in current assets. Absolute liquid assets
include cash in hand and cash at bank and marketable securities or temporary
investments. It is also known as cash position ratio. The formula used for calculating
absolute liquid ratio can be expressed as follows:
Absolute Liquid Ratio= Absolute Liquid Assets/ Current Liabilities
[Absolute Liquid Ratio= Cash& Bank + Marketable Securities/Current
The acceptable norm for this ratio is 50% or 0.5:1 or 1:2 i.e. Re.l worth
absolute liquid assets are considered adequate to pay Rs.2 worth current l iabilities in
time asall the creditors are not expected to demand cash at the same time and then
cash may also be realized from debtors and inventories.
These ratios are calculated on the bases of 'cost of sales' or sales, therefore,
these ratios are also called as 'Turnover Ratio'. Turnover indicates the speed or
number of times the
Capital employed has been rotated in the process of doing business. Higher
turnover ratio indicates the better use of capital or resources and in turn leads to
higher profitability.
It includes the following
1. Working Capital Turnover Ratio
Working Capital Turnover ratio indicates the velocity of the utilization of net
working capital. This ratio measures the efficiency with which the working capital is
being used by a firm. A higher ratio indicates efficient utilization of working capital
and low ratio indicates other inefficient utilization of working capital.
The ratio is computed to test the efficiency with which the net working capital
is utilized. In other words, this ratio indicates whether working capital is efficiently
used in making sales. This ratio can be calculated as

Working Capital Turnover Ratio= Sales/ Net Working Capital
An increasing ratio indicates that working capital is more active than it has
been in the past while a decreasing ratio indicates that the company is using working
capital less economically
2. Inventory Turnover Ratio
Inventory turnover ratio also known as stock velocity is normally calculated as
sales/average inventory or cost of goods sold/average inventory. It would indicate
whether inventory has been efficiently used or not. The purpose is to see whether only
the required minimum funds have been locked up in inventory. This ratio helps in
understanding the time taken for clearing the stocks. In other words, Inventory
Turnover Ratio indicates the number of times the stock has been turned over during
the period and evaluates the efficiency with which a firm is able to manage its
Inventory Turnover Ratio=Net Sales/ Average Inventory
A high inventory turnover ratio is indicative of good inventory management
because more frequently the stocks are sold; the lesser amount of money is
required to finance the inventory. A lower inventory turnover ratio suggests an
inefficient inventory management because a low inventory turnover ratio implies over-
investment in inventories, dull business, and poor quality of goods, stock
accumulations, accumulation of obsolete and slow moving goods and low profit as
compared to total investments. A higher turnover does not always bring high net
income or profit. Sometimes high turnover may be obtained by lowering the selling
price but that will not increase the profit. However, a high ratio is better than a low
3. Debtors Turnover Ratio
Debtor's turnover ratio indicates the velocity of debt collection of firm. In
simple words, it indicates the number of times average debtors are turned over during a
year. Debtor's turnover ratio is also known as Debtors velocity or Receivables
Turnover ratio. The liquidity position of the firm depends on the quality of debtors to

a great extend. It measures how fast debts are collected. The ratio is used to analyze
the operational efficiency of the concern. It is calculated by the following formula:
Debtors Turnover Ratio = Net Credit Sales/ Average Debtors
Trade Debtors = Sundry Debtors + Bills Receivables and Accounts
Average Debtors = Opening Debtors + Closing Debtors/ 2
But when the information about opening and closing balance of trade debtors
and credit sales is not available, then the debtors' turnover ratio can be calculate by
dividing the total sales by the balance of debtors (inclusive of bills receivables). It is
calculated by the following formula:
Debtors Turnover Ratio = Total Sales / Debtors
Debtors' velocity indicates the number of times the debtors are turned over
during a year. Generally, the higher the value of debtors turnover the more
efficient is the management of debtors/ sales or more liquid are the debtors. Similarly,
low debtors turnover ratio implies inefficient management of debtors/sales and less
liquid debtors.
4. Creditors Turnover Ratio
In the course of business operations, a firm has to make credit purchases
and incur short - term liabilities. A supplier of goods, i.e., creditors, is naturally
interested in finding out how much time the firm is likely to take in repaying its trade
creditors. In other words
Creditors turnover ratio shows that the time given to the firm by the creditors to make
payment for the credit purchases. Creditors Turnover Ratio is also known as
Creditors Velocity or Payable Turnover Ratio. This ratio can be calculated by the
following formula:
Creditors Turnover Ratio = Creditors Purchases/ Average Accounts Payable
If the information about credit purchases is not available, the figure of total
purchases may .be taken as the numerator and the creditors include sundry creditors

and bills payable. In this case, Creditors Turnover Ratio can be calculated by the
following formula
Creditors Turnover Ratio = Purchases/ Total Creditors
The ratio indicates the velocity with which the creditors are turned over in
relation to purchases. Generally, higher the creditors velocity better it is or otherwise
lower the creditors velocity, less favorable the results.
5. Average Collection Period
The average collection period represents the average number of days for
which the firm has to wait before its receivables are converted into cash. Average
collection period is a measure of receivables turnover. This ratio shows the credit and
collection policies of the firm and the effectiveness of collection policies. It is
calculated as follows:
Average Collection Period = Days in a year (365)/ Debtors Turnover Ratio
It measures the quality of debtors. Generally, the shorter the average
collection period the better is the quality of debtors. A short collection period implies
quick payment by debtor.
Similarly, a higher collection period implies an inefficient collection
performance, which in turn adversely affects the liquidity or short term paying
capacity of a firm out of its current liabilities. Moreover, longer the average collection
periods, larger are the chances of bad debts.
6. Average Payment Period
This ratio represents the average number of days taken by the firm to pay to its
creditors. For calculating the average disbursement period, the number of days in a
year is divided by the creditors' turnover ratio. It can be calculated as follow
Average payment Period = Days in a year / Creditors Turnover Ratio
In the study, it is assumed that whole purchases are on credit basis. Generally,
lower the ratio, the better is the liquidity position of the firm and higher the ratio, less
liquid is the position of the firm. However, a higher payment period also implies

greater credit period enjoyed by the firm and consequently larger the benefit reaped
from credit suppliers. This will also lead to lesser discount facilities and higher prices
for the credit purchases.

Limitation of the study
1. The analysis is based on figures present in the internal records only.
2. It consumes more time and requires lots of expenditure. More time is needed
to do this study.
3. This study is limited to the consumption pattern of the various user
4. This study is limited to five years only. i.e. 2008-2009 to 2012-2013
5. The data collected for computation has been in quantitative terms rather than
qualitative as it involves cost aspect.

A tight cash management policy leads to a rise in the financial transaction costs
of the firm. As suggested by Briggs and Singh (2000), if a firm decides to hold small
amounts of cash, it has to have access to the money and capital markets or sell assets.
The cost of both these options would induce a company to use these alternatives
sparingly. On the other hand, if a firm holds more cash than necessary, it will incur the
opportunity costs of money. The transaction models assume that a firm follows a cash
management policy which tries to minimize these costs, or maximize the profits from
cash management. In addition to this inventory theoretic approach, the other theories
presented in the monetary theory are the production, wealth, and agency theories based
on the theory of the firm. Financial theory considers the cash management problem in the
framework of the valuation and capital structure of a firm.
As we will see, there have been many attempts to model the cash management
problem. This is not an easy task on a theoretical level because of its complicated nature
in practice, too. The management of cash flows requires careful analysis and
coordination of many interacting factors. A cash manager must make interrelated
decisions about the allocation of monetary assets while simultaneously keeping up with
institutional financial constraints, such as those affecting average cash balances and cash
management costs. Because of the complexity of the decision processes of cash

management, the survey research tries to increase awareness of the practical issues of
cash management.
The basic behavioral models presented in monetary theory can also be seen as a
background for the many subsequent normative models which have been developed for
cash management planning and decision-making purposes. Such normative models
generally try to optimize the split between cash and marketable securities based on the
firms needs for cash, the predictability of these needs, the interest rate on marketable
securities, and the cost of a transfer to cash and vice versa.

Monetary theoretic approach to cash management
Monetary economists are interested in the cash management of firms. The
objective has been to describe the mechanism of the demand for money by firms,
because it differs from the behavior of other economic agents. Researchers have tried to
find a stable relationship between the quantity of money and its determinants in order to
forecast demand for money. A narrow definition of cash management consists of
financial transactions, which means the purchasing or selling of financial securities or
borrowing or repaying of capital. Many behavioral models describe especially the
behavior of these operations.

Inventory theoretic approach to cash management

Numerous theories have been evinced to explain the cash management behavior
of firms. Almost all of these theories can be generalized into a proposition of the
existence of a stable relationship between a few important independent variables and the
stock of money demanded (on the theoretical background of these relationships, see e.g.
Harris 1981 and Cuthbertson 1988). The two basic transaction models most commonly
accepted in the financial literature are the deterministic Baumol-Tobin and the stochastic
Miller-Orr inventory models.
These models are presented in monetary theory and are consistent with the
theory of the firm. (Baumol 1952, Tobin 1956, and Miller and Orr 1966). Baumol
(1952) suggested that cash balances could be treated in the same way as inventories of
goods. A stock of cash is its holders inventory, and like an inventory of a commodity,
cash is held because it can be given up at the appropriate moment, serving then as its
processors part of the bargain in an exchange. The firm is presumed to hold the amount

of money, which minimizes the interest cost by holding money rather than investing it in
short-term investments and the transaction costs associated with transferring between
securities and cash.
In this framework the firm is assumed to finance its expenditures by selling
securities or by borrowing and the firm has a steady stream of expenditures but has no
receipts. In practice, the behavior is more complicated and the cash balances are the
result of the imperfect synchronization of expenditures and receipts, which are often
uncertain. This uncertainty is included in the stochastic cash management model derived
by Miller and Orr (1966). This approach permits net cash flows to fluctuate in a
completely stochastic way. Unfortunately, this feature is offset by the fact that the model
is only capable of dealing with two types of assets cash and marketable securities and
does not incorporate payables.
Both models referred to above imply that there are economies of scale in the use
of money or, equivalently, that the elasticity of the demand for money with respect to
transactions is less than one. In these models the scale operator is transactions volume,
mostly measured by sales. There are, however, also alternative measures presented in the
demand for money literature, such as wealth, production, and market capitalization. In
their model, Attanasio et al.(2002) measured transaction costs with the time costs.
The cash manager is assumed to need time to make transactions and that money
is a way of saving on transaction time, and optimal money balances are chosen in order
to trade off the time cost of transactions against the cost of holding money instead of an
interest-bearing asset yielding a nominal return per period. The cash manager chooses
money to minimize the sum of the cost of transaction time and forgone interest, subject
to a transaction technology.
Frazer (1964) concluded that the effect of increasing firm size is to reduce bank
indebtedness as a percentage of assets, weaken the precautionary motive for holding cash
relative to other assets, and transfer cash as a percentage of assets to securities.

As Scaglione and Pracheer (2002) point out, with emphasis on cash generation
and preservation, treasurers of firms will be called upon to ensure that the companys
financial objectives are being met efficiently. As a result, they should implement best
practices in treasury and financial risk management to maximize cash flow and
transparency effectively. Initially, key areas that treasurers should focus on to meet

this objective include bank management and structure, cash forecasting, financial
tools, and technology.

According to the evidence of their study, Shin and Soenen (1998) found that
1. a strong negative association exists between the firms NTC and its profitability,
2. individual firms stock returns are significantly negatively correlated with the
length of the firms NTC.
The results concerning NTC indicated that it is also closely related to the issue
of firm valuation and the creation of shareholder value.

According to Lee (2001), cash management involves the administration of
liquid assets and liabilities, and the raising of funds to finance a business. Cash-flow
control is therefore crucial to ensuring that a business remains liquid and able to meet
payment obligations. This is carried out through the effective management of cash
receipts and payments, cash balances and cash transfers between the different parts of
a business.
1. Briggs, G.P. and S. Singh 2000. Is cash king? Afp Exchange. 20:2, 32-39.
2. Harris, L. 1981. Monetary Theory. McGraw-Hill Inc.
3. Cuthbertson, K. 1988. The Supply and Demand for Money. Basil Blackwell Ltd.
4. Baumol, W.J. 1952. The transactions demand for cash: An inventory theoretic
approach. Quarterly Journal of Economics. (November), 545-556.
5. Tobin, J. 1956. The interest-elasticity of transaction demand for cash. Review of
Economics and Statistics (August), 241-247.
6. Miller, M.H. and D. Orr 1966. A model of the demand for money by firms.
Quarterly Journal of Economics. (August), 413-434.
7. Attanasio, O.P., L. Guiso, and T. Japelli 2002. The demand for money, financial
innovation, and the welfare cost of inflation: an analysis with household data.
Journal of Political Economy.110:2, 317-351
8. Lee, J. 2001. The cash management conundrum. Asiamoney. 12:2, 80-82.
9. Scaglione, A. and B. Pracheer 2002. Renewing the focus on cash preservations
considerations for a streamlined approach to cash management. Afp Exchange.
22:1, 48-50.

10. Frazer, Jr., W.J. 1964. The financial structure of manufacturing corporations and
the demand for money - some empirical findings. Journal of Political economy 72,
11. Shin, H-H. and L.A. Soenen 1998. Efficiency of working capital management and
corporate profitability. Financial Practice & Education. 8:2, 37-45.