Liquidity Management

 refers to the ability of the firm to pay it's bill on

time or otherwise meet it's current obligations.
The cash inflows of the firm come
from various which are briefly
described as follows:

1. Cash Sales. The percentages of cash derived from

sales vary from company to company industry to
industry.
2. Collection of Accounts Receivables. The credit policies
and the pattern of company sales determine the
frequency and volume of collections from
receivables.
3. Loans. Loans from banks and other creditors may
be availed of by management mostly on it's own
initiative. The timing and amount of cash receipts
derived from loans depend largely on the borrowing
firm.
4. Sales of assets. Assets are sometimes sold by the
company for various reasons. Obsolescene is one of
those.
5. Ownership Contribution. Additional contributions
from the owners are sometimes tapped to improve
the liquidity posture of the firm.

6. Advances from Customer. Manufacture's, at times,

require cash advances from customers as soon as an
order is made and before production is started. This
is not unusual especially if the objects of sale are
capital goods like airplanes and ships. The number of
years required in the manufacturing process justifies
whatever cash advances are required from
customers.
Cash Management

 Idle cash earns nothing and even if it is kept

in a bank, the interest it earns is minimal.
 If sufficient amounts of profits must be
attained, cash should be invested.
 Sufficient cash must be maintained,
however, to cover the firm’s expenditures.
To effectively manage cash, five
major approaches are suggested.
These are follows:

 Exploit techniques of money mobilization to

reduce operating requirements for cash;
 Expend. major efforts to increase the precision
and reliability of cash flow forecasting;
 Use maximum efforts to define and
quantify the liquidity reserve needs
of the firm.
 Develop explicit alternative sources
of liquidity; and
 Search aggressively for more
productive uses of surplus money
assets.
Money Mobilization

 Some companies maintain branches

and agencies in distant places.
 Those that serve customers directly
may find that they are also serving
customers from far-flung areas.
 These two conditions are characterized
by remittances w/c take several days
before they are converted into usable
cash balances.
 Check payments, for instance, are sent
through the mail. When these checks are
received, they are deposited in the bank.
These checks will only be cleared for the
company's use after several days.
Checks issued by customer's from distant
areas require longer clearing period.
This time lag stated briefly, consist of
two identifiable periods:

 Themail traveling time of the check

payment.
 The check clearing time.
 To shorten the time lag, some companies
open accounts with banks located in the far
flung areas where the company's branches are
located. These banks serve as the collecting arm
of the companies.
In most cases, this improvement reduces to half
the number of days spent between actual
payment made by the client and the availability
of such payment for use by the firm.
 Improved Cash Flow
Forecasting
A cash flow forecast with a high degree of
precision and reliability provides the firm
with realistic approaches to planning and
budgeting.
 This advantages of cash excess and cash
shortages are eliminated if not minimized.
 The advantages brought by an
improved cash flow forecast are
the following:

 Surplus funds are more fully invested,

 Alternative methods of meeting the
outflows can be explored; and
 The creation of special reserves for major
future outlays will be minimized.
 Defining and Quantifying the
Liquidity Reserve Needs of the Firm

Firms are faced with a number of uncertainties

and contingencies w/c may require cash reserves. To
be protected against the worst possibilities, a very
large reserve of cash will be needed. The idea is to
avoid unnecessary losses or expenditures brought
about by liquidity problems. The holding of cash
reserves, however, entails cost. The management is
left w/ striking a reasonable balance between the
two requirements.
Several steps are necessary to
accomplish this objective. These are
the following;

 Identification of contingencies requiring protection;

 Assessment of the probabilities of the contingencies
occurring;
 Assessment of the probabilities of the contingencies
occurring at the same time; and
 Assessment of the probable amount of cash required if
each of the contingencies happens.
 be carried for the contingency, the firm will be penalized with eight
thousand pesos in the form of lost income w/c could have been
otherwise earned by the idle cash reserve.
If the probability of the strike happening is placed at 50%, the
expected values of the option may be computed as follows:

Option Penalty Probability Expected Value

No reserve P1,000,000 50% P500,000
With cash reserve P800,000 50% P400,000
Carrying a cash reserve in this case is more economical to the firm
because it carries a lower penalty expected value.
 Thank You!!!
Prepared by:
REBECCA SACLAY S.