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CASH MANAGEMENT

Prof. (Dr.) Paresh Shah


FCMA., Ph.D. (Finance).,
F.D.P.(IIMA)
Financial Management 2nd Edition
By Paresh Shah
Biztantra

Meaning

Cash management thus is concerned with the


managing of:

Cash flows into and out of the firm;


Cash flows within the firm; and
Cash balance held by the firm at a point of time
by financing deficit or investing surplus cash.

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Facets Of Cash Management


In planning the cash management, the twin objectives
of liquidity and profitability have to be kept in mind.
The facets of cash management for which the
management has to evolve strategies are as
follows:

Cash Planning
Managing the Cash Flows
Optimum Cash Level
Investing Idle Cash
Financial Management 2nd Edition
By Paresh Shah
Biztantra

Principles Of Cash Management


The objectives of cash management can be
stated as below:
Accelerate the cash collection.
Delay the cash payments.
Investment of available excess cash.
Maintenance of minimum cash balance.

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Maintaining An Optimum
Cash Balance
To answer these questions, two models of
optimum cash balance are discussed in the
following paragraphs:
Baumol Model
Miller ~Orr Model

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Motives For Holding Cash

The transaction motive


The Precautionary motive
The Speculative motive
The Compensatory motive
The following factors influence the firms decision to keep
the transaction and precautionary cash balances.

Expected net cash flows


Possible deviations
Maturity structure liabilities.
Borrowing capacity to borrow funds at short notice
The preference of management
The efficient planning and control of cash.
Financial Management 2nd Edition
By Paresh Shah
Biztantra

Accelerating Cash Collection


Concentration Banking
This is a means of accelerating the flow of funds of a firm
by establishing strategic collection centres.
The system of concentration banking saves mailing and
processing time and thereby reduces the financing
requirements.

Lock Box System


The lock box system is usually done on a regional basis.
The company rents a local post office box. Customers are
given instructions to mail remittances in this box several
times a day, and deposit the cheques in the companys
account.
Financial Management 2nd Edition
By Paresh Shah
Biztantra

Managing The Cash Flows


Accelerating Cash Collection
Controlling Disbursements

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Controlling Disbursements
Trade credit
delaying disbursements results in maximum
availability of funds.

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Playing The Float


The float is the difference between the total
amount of cheques drawn and the actual
amount shown in the bank account.

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Determining The Optimum


Cash Balance
The firm needs cash to meet its various obligations,
i.e. purchase raw materials, in order to pay wages,
pay dividend, interest, taxes, etc.
The firm should keep sufficient cash to meet these
obligations as and when they become due.
Thus, the firms liquidity position should be good so
that such dues may be settled in time.
In other words, the firm can maintain a sound
liquidity position by maintaining adequate cash
balance
Financial Management 2nd Edition
By Paresh Shah
Biztantra

Minimum Bank Balance


When the firm uses the bank credit as its source of
finance, the firms minimum cash balance needs to be
determined and has to be related to banks minimum
compensating balance requirements, because at the
time of providing credit to the firm, the bank may
impose on the firm condition to maintain minimum
balance in its accounts.
The firm has to determine its appropriate level of cash
balance keeping in view the banks requirements.
Financial Management 2nd Edition
By Paresh Shah
Biztantra

Cash Budget
Cash budget is a schedule to record cash inflows and outflows over a
period of time in order to locate the timing and magnitude of cash
surplus and cash shortage.
Some factors which cause a variation between the Proforma Income
Statement and the Statement of Cash Inflows and Cash Outflows are
discussed below:
Sales shown in the income statement may not be realized fully as cash until in a
subsequent period.
Payment to suppliers of materials as an expense in income statement may not
involve actual cash payments within the same period.
Cash receipts from sales of fixed assets are not considered in the income
statement as they are not an operating income, but this actually increases the
availability of cash.
Charges against profit such as amortization of patent, goodwill, etc., do not
require a cash expenditure.

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Cash Forecasting
Cash forecasts are essential to prepare cash
budgets

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Short-term forecasts

Receipts and Disbursements Method


Adjusted Net Income Method

The two objectives of the adjusted net income


approach are:

To project the firms need for cash on a future date;


and
To know whether the firm can generate enough cash
internally to meet this cash need.

Financial Management 2nd Edition


By Paresh Shah
Biztantra

Long-term Cash Forecasting


The major Advantages of preparing long-term
forecast are:
It indicated the firms future requirements, particularly its
working capital requirements.
By showing the cash outflows and inflows involved in
capital project, it assists in evaluating those projects.
It can be used to evaluate the impact of capital expenditure
decisions like project developments, plants acquisitions on
the firms future financial conditions, etc.

Financial Management 2nd Edition


By Paresh Shah
Biztantra