Cash Conversion Cycle and Cash

Management
MDP Program

Dr. Saumya Ranjan Dash

Date:18-09-2019
Cash Management
• Concerned with the collection, disbursement and the management of
cash in such a way that firm’s liquidity is maintained.
• It is concerned with managing the cash flows within and outside the firm
and making decisions with respect to the investment of surplus cash or
raising the cash from outside for financing the deficit.
• Cash management is the concentration, safeguard, and investment of the
available money.

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Cash Conversion Cycle

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 Cash Conversion Cycle

Convert sales to available cash as soon as

possible and at the lowest processing cost.

Managing sales
Managing cash collections
Managing cash payments

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Cash Conversion Cycle

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Liquidity Metrics
• Cash Ratio: Measurement of a company's liquidity, specifically the
ratio of a company's total cash and cash equivalents to its current
liabilities.

• Cash Burn Rate: Burn rate is the speed at which a company is

using up its cash reserves to fund overheads. Essentially, it’s a
measure of the net-negative cash flow. To determine the burn rate
:find the difference between the starting and ending cash balances
for the period, then divide it by number of days in that period.

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Cash Burn Rate

Burn Rate measures how

quickly your cash holdings
are decreasing.

Gross Burn Rate is the

total amount of cash
you’ve spent each month.

Net Burn Rate is the

difference between cash
out and cash in.

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Cash Burn Rate

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Cash Burn Rate
Motives for Holding Cash
How to reduce your burn rate
Increase your revenue.
Reduce your payroll expenses.
Reduce your direct costs.
Reduce or defer other expenses.
Ditch unprofitable revenue streams.
Encourage cash sales.
Bill sooner and collect faster.
Pay your bills slowly.
Sell off excess inventory.
Consider using a factoring service.
Raise additional funds.

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Cash Turnover
Cash Turnover is the amount of times a company has spent through its cash during the
reporting period. We calculate cash turnover based on a company's revenues over the
average cash balance during that period. Cash Turnover is the amount of times a company
has spent through its cash during the reporting period.

Cash turnover ratio = Annual sales ÷ Average Cash Balance

For example, a business generates $10,000,000 of sales in its most

recent year. The average month-end cash balance of the firm was
$1,000,000. This means the cash turnover ratio of the organization
was 10x per year. Hence, if, there is a budgeted increase of
$1,000,000 in sales and the cash turnover ratio is 10x, that means
the company will require an additional $100,000 of cash to fund
the sales increase.
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Working Capital Turnover
The working capital turnover ratio is calculated by dividing net
annual sales by the average amount of working capital—current
assets minus current liabilities

For example, it measures how efficiently a business uses its working

capital to produce sales. A higher ratio indicates greater efficiency. In
general, a high ratio can help your company’s operations run more
smoothly and limit the need for additional funding. A high working
capital turnover ratio can potentially give you a competitive edge in
your industry. It indicates you use up your working capital more
times per year, which suggests that money is flowing in and out of
your small business smoothly.
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Cash Budget
A cash budget is a budget or plan of expected cash receipts and disbursements during the
period. These cash inflows and outflows include revenues collected, expenses paid, and loans
receipts and payments. In other words, a cash budget is an estimated projection of the
company's cash position in the future.

It also helps in analyzing budget-versus-actual variances in cash inflow and outflow. It can be
Short-Term Cash Budget, Interim-Term Cash Budget, Long-Term Budget.

The purpose of preparing the cash budget is to determine that whether the enterprise has
sufficient cash balance to meet out its short-term cash requirements or whether too much cash
is being left idle and unproductive in the organization.

The cash budget is comprised of two main areas, which are Sources of Cash and Uses of
Cash. The Sources of Cash section contains the beginning cash balance, as well as cash
receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses of
Cash section contains all planned cash expenditures, which comes from the direct materials
budget, direct labor budget, manufacturing overhead budget, and selling and administrative
expense budget. It may also contain line items for fixed asset purchases
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Cash Budget: An Example

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Burn rate Forecast

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 Optimum Cash

C = Optimum level of cash balance

A = Annual cash payments estimated
T = Cost per transaction of purchase or
sale of marketable securities
I = Interest on marketable securities
p.a. (i.e., carrying cost per rupee of
cash)

In the model, the carrying cost of holding cash-namely the interest forgone on marketable
securities is balanced against the fixed cost of transferring marketable securities to cash, or
vice- versa. The Baumol model finds a correct balance by combining holding cost and
transaction costs, so as to minimize the total cost of holding cash.
ABC Ltd. has estimated that use of Rs. 24 lakhs of cash during the next budgeted year. It
intends to hold cash in a commercial bank which pay interest @ 10% p.a. For each
withdrawal, the company incurs expenditure of Rs. 150. What is the optimal size for each
withdrawal?
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Optimum Cash
• Tarus Ltd. has an estimated cash payments of Rs. 8,00,000 for a one month
period and the payments are expected to steady over the period. The fixed
cost per transaction is Rs. 250 and the interest rate on marketable securities
is 12% p.a. Calculate the optimum transaction size.

Where,
A = Estimated monthly cash payments i.e. Rs.
8,00,000
T = Cost per transaction i.e. Rs. 250
I = Interest per annum i.e. 12% p.a. (For one
month, the rate of interest is 196 or 0.01)

Optimum transaction size = Rs. 2,00,000

Average cash balance = Rs. 2,00,000/2 = Rs. 1,00,000
Number of transactions = Rs. 8,00,000/Rs. 2,00,000 = 4 transactions
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Thank you….

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