WORKING

CAPITAL
• Excess of current assets over current liability
• CA-CL = WC
• For daily expenses like purchases, overheads etc
• Working capital plays a key role in a business just as the role of heart in
human body.
• It act as ‘grease’ to run the wheels of fixed assets.
• The efficiency of a business enterprise depends largely on its ability
to manage working capital.
 DEFINITIONS OF WORKING
CAPITAL
• “Working Capital is the excess of C.A. over current liabilities.” - H.G,
Guthmann

• “Working Capital is descriptive of that capital which is not fixed. But

the more common use of the Working Capital is to consider it as the
difference between the book value of the C.A. and current liabilities.”
- Hoglend. J. Bierman, and A. K. Mc Adams,
• “Working Capital represents the excess of C.A. over current
liabilities” - J.L. Brown and L.R. Housard.

• “Working Capital to a firm’s investment in short term assets cash

short term securities, accounts, receivables and inventories.” -
Weston the Brigham

• “Working Capital represents only the current capital assets.” -

Meal Baker Malott and Field.
 PURPOSE / NEED OF THE WORKING
CAPITAL

• To hold cash for acquiring the raw material.

• To hold work in progress for the production process.
• To hold the finished goods up to sale
• For the period receivables are being converted into cash.
• To meet day to day expenses
• To pay wages
CONCEPTS OF WORKING
CAPITAL:

– Gross Working Capital

• Total Current Assets
• WC = CA

– Net Working Capital

• WC = CA - CL
 GROSS WORKING CAPITAL
MEANS
• The total of all current assets or all short-term assets.
• Current assets here mean cash, marketable securities,
inventories and receivables.
• They are meant for a lesser period.
• They represent liquid asset.
• Gross working capital represents the liquidity position of
the organization.
• That this much of the asset they are holding for Getting
readily available as the cash in the business.
 NET WORKING
CAPITAL
• It is a broader concept.
• It works on the principle on solvency.
• Net working capital means excess of current assets
over current liabilities.
• Current assets we all know are cash, marketable
securities, receivables and stock.
• Current Asset – Current Liability = Working Capital
 IMPORTANCE OF WORKING
CAPITAL
• WC is the life blood and nerve centre of a business.
• No business can run successfully without an adequate amount of working
capital.
• The main advantages of maintaining adequate amount of working capital
are as follows:
– Solvency of the business
– Goodwill
– Easy Loans
– Cash discounts
– Regular supply of raw materials
 IMPORTANCE OF WORKING
• WC
CAPITAL
is the life blood and nerve centre of a business.
• Just as circulation of blood is essential in the human body for marinating life, working
capital is very essential to maintain the smooth running of a business.
• No business can run successfully without an adequate amount of working capital.
• The main advantages of maintaining adequate amount of working capital are as follows:
– Solvency of the business: Adequate working capital helps in maintaining solvency of the business
by providing uninterrupted flow of production.
– Goodwill: Sufficient working capital enables a business concern to make prompt payments and
hence helps in creating and maintaining goodwill.
– Easy Loans: A concern having adequate working capital, high solvency and good credit standing
can arrange loans from banks and other on easy and favourable terms.
– 4. Cash discounts: Adequate working capital also enables a concern to avail cash discounts on the
purchases and hence it reduces costs.
– Regular supply of raw materials: Sufficient working capital ensures regular supply of raw
materials and continuous production.
FACTORS AFFECTING WORKING CAPITAL
REQUIREMENTS
• Nature or Character of Business
• Size of Business/Scale of Operations
• Production Policy
• Manufacturing Process/Length of Production Cycle
• Seasonal Variation
• Rate of Stock Turnover
• Credit Policy
• Business Cycle
• Rate of Growth of Business
 FACTORS AFFECTING WORKING CAPITAL
REQUIREMENTS
• 1. Nature or Character of Business:
– The working capital requirement of a firm basically depends upon the
nature of this business.
– Public utility undertakings like electricity water supply and railways need
very limited working capital because they offer cash sales only and supply
services, not products and as such no funds are tied up in inventories
and receivables.
– Generally speaking it may be said that public utility undertakings
require small amount of working capital, trading and financial firms
require relatively very large amount, whereas manufacturing
undertakings require sizable working capital between these two
extremes.
• 2. Size of Business/Scale of Operations:
– The working capital requirement of a concern is directly influenced
by the size of its business which may be measured in terms of scale
of operations.
• 3. Production Policy:
– In certain industries the demand is subject to wide fluctuations due
to seasonal variations.
– The requirements of working capital in such cases depend upon the
production policy.
• 4. Manufacturing Process/Length of Production Cycle:
– In manufacturing business the requirement of working capital
increases in direct proportion of length of manufacturing process.
– Longer the process period of manufacture, larger is the amount of
working capital required.
• 5. Seasonal Variation:
– In certain industries raw material is not available through out the
year.
– They have to buy raw materials in bulk during the season to ensure
and uninterrupted flow and process them during the entire year.
• 6. Rate of Stock Turnover:
– There is a high degree of inverse co-relationship between the quantum of
working capital; and the velocity or speed with which the sales are
affected.
– A firm having a high rate of stock turnover will need lower amount of
working capital as compared to affirm, having a low rate of turnover.

• 7. Credit Policy:
– The credit policy of a concern in its dealing with debtors and creditors
influence considerably the requirement of working capital.
– A concern that purchases its requirement on credit and sell its
products/services on cash require lesser amount of working capital.
• 8. Business Cycle:
– Business cycle refers to alternate expansion and contraction in
general business activity.
– In a period of boom i.e., when the business is prosperous, there is a
need of larger amount of working capital due to increase in sales, rise
in prices, optimistic expansion of business contracts sales decline,
difficulties are faced in collection from debtors and firms may have a
large amount of working capital lying idle.
• 9. Rate of Growth of Business:
– The working capital requirement of a concern increase with the
growth and expansion of its business activities.
– Although it is difficulties to determine the relationship between the
growth in the volume of business and the growth in the working
capital of a business, yet it may be concluded that of normal rate of
expansion in the volume of business, we may have retained profits to
provide for more working capital but in fast growth in concern, we
shall require larger amount of working capital.
 WHY W/C IS CALLED AS FLOATING
CAPITAL?

• Operating Cycle
• WC changes its form
ESTIMATION OF WORKING
CAPITAL
•Working Capital = Cost of Goods Sold (Estimated) * (No. of
Days of Operating Cycle / 365 Days) + Bank and Cash Balance.
INVENTORY MANAGEMENT
TECHNIQUES
 INVEN
TORY
• The dictionary meaning of Inventory is STOCK OF GOODS.
• The word inventory is understood differently by various authors.
• In accounting it may mean stock of finished goods only.
• In a manufacturing concern, it may include raw materials, work in progress and stores, etc.
• In Retail, the amount of stock present in a retail outlet and ready to be distributed.
 INVENTORY
MANAGEMENT
• Inventory Management is a Science primarily about specifying the shape
and percentage of stocked goods.
• A proper planning of purchasing, storing, and accounting should form a part
of inventory management.
• An efficient system of inventory management will determine:
1) What to purchase
2) How much to purchase
3) From where to purchase.
4) Where to Store.
• The purpose of inventory management is to keep the stock in such a way
that neither there is over- stocking nor under- stocking.
• Inventory control is the systematic control and regulation of purchase,
storage and usage of materials:
– To maintain an even flow of production;
– To avoid excessive investment in materials.
• Efficient material control reduces loses and wastages of materials that
otherwise pass unnoticed.
• Inventory control is the core of materials management.
• The need and importance of material varies in direct proportion to the
idle time cost of men and machinery and the urgency of requirements.
 WHY INVENTORY
MANAGEMENT
• To meet sales
• To continue uninterrupted production
• To reduce cost
• To keep sufficient inventory (Under – Over)
 STAGES OF INVENTORY MANAGEMENT
• Decision Stage : Co-ordination of purchasing, supplier development, guiding design
decisions, introducing new inventory and some minor changes in the production
process.
• Sourcing Stage : Make or buy decision, procurement facilities etc.
• Production Planning Stage : Preparation of master schedule, calculation
of inventory requirements etc.
• Stage of Ordering : Placing the orders, follow-up, packaging and transportation.
• Receiving Stage : Receiving the items, inspection of inventory, quality problems etc.
• Inventory Control : Determination of economic lot sizes, safety margins
and
inventory costs.
 KEY INVENTORY TERMS
• Safety Stock:
– Safety stock or the buffer stock is an ideal quantity of material that has to
be always maintained and it is drawn only in the emergency situation.
• Lead Time:
– It is the time lapse between placement of an order and receipt of items
including their approval by quality control department.
– This is counted on past experiences.
– Procurement of material has a long lead time .
• Reorder Level:
– It indicates that level of material stock at which it is necessary to take
the steps for the procurement of further lots of material.
– The reorder level is slightly more than minimum stock level to guard
against abnormal use of item and abnormal delay in supply.
– Reorder level= Maximum lead time × Maximum uses
 COST OF
INVENTORY
• Ordering cost
– Order placing cost
– Order Proceedings
• Carrying cost
– Storage, insurance, risk of damage, Depreciation, Price fall
• Stock out cost
– Out of stock, immediate purchase, customer value
INVENTORY MANAGEMENT
TECHNIQUES
• EOQ
• ABC ANALYSIS
• VED ANALYSIS
• JIT
 EOQ - ECONOMIC ORDER
QUANTITY.
• EOQ is a quantity of inventory which can reasonably be ordered economically
at time.
• In determining this point, ordering costs and Carrying Costs are taken into
consideration.
– Ordering costs are basically the cost of placing an order.
– Carrying cost includes costs of storage facilities and loss of value through
physical deterioration, cost of obsolescence.
• The balancing point is known as Economic Order Quantity.
• Economic Order Quantity is one of the techniques of inventory control
which minimizes total holding and ordering costs for the year.
• Definition of EOQ :- EOQ is essentially an accounting formula that
determines at which the combination of order, costs and inventory
carrying cost are at the least.
C = Annual Consumption / use of material
O = Cost of order placing
I = Annual Carrying Cost
 ADVANTAGES
• Each material can be procured in the most economical quantity.
• Purchasing and inventory control personnel automatically devote
attention to the items that are needed only when required.
• Positive control can easily be exerted to maintain total inventory
investment at the desired level simply by manipulating the planned
maximum and minimum value.
• Minimizes Storage and Holding Costs
• Specific to the Business
 DISADVANTAGE
• Complicated Math Calculations
• Based on Assumptions
• The orders are raised at irregular intervals which may not be
convenient to the suppliers
• In case the lead time is very high supply of inventory may interpret
• EOQ may give you an order quantity which is much below the supplier
minimum, and there is always a chance that the ordering level for an
item has been reached but not noticed in which case a stock out may
occur; and
• The items cannot be group and ordered at a time since the recorder
points occur irregularly
 ABC ANALYSIS

• It means Always Better Control

• Under this the inventory is classified into 3 categories
viz.
• A, B and C.
• These categories are based upon the inventory value and
cost significance .
• Items of High value and small in no. are termed as A.
• Items of moderate value and moderate in no. are termed as B.
• Items of small value and large in no. are in category C
• ABC analysis is widely used for unfinished good, manufactured
products, spare parts, components, finished items and
assembly items.
 ITEM A
• Small in number, but consume large amount of
resources
• Must have:
– Tight control
– Rigid estimate of requirements
– Strict & closer watch
– Low safety stocks
– Managed by top management
 ITEM B
• Intermediate
• Must have:
– Moderate control
– Purchase based on rigid requirements
– Reasonably strict watch & control
– Moderate safety stocks
– Managed by middle level management
 ITEM
C
• Larger in number, but consume lesser amount of
resources
• Must have:
– Ordinary control measures
– Purchase based on usage estimates
– High safety stocks
• ABC analysis does not stress on items those are less
costly but may be vital
• Item A:
– Items categorized under A are goods that register the highest value in terms of
annual consumption. It is interesting to note that the top 70 to 80 percent of the
yearly consumption value of the company comes from only about 10 to 20
percent of the total inventory items. Hence, it is crucial to prioritize these items.
• Item B:
– These are items that have a medium consumption value. These amount to about
30 percent of the total inventory in a company which accounts for about 15 to 20
percent of annual consumption value.
• Item C:
– The items placed in this category have the lowest consumption value and
account for less than 5 percent of the annual consumption value that comes
from about 50 percent of the total inventory items.
• The cost of each item is multiplied by the no. used in a given period and
then these items are tabulated in descending numeric value order.
 ABC - STEPS
1. Find out future use of each item of stock in terms of physical quantities for
the review forecast period.
2. Determine the price per unit for each item.
3. Determine the total project cost of each item by multiplying its expected
units to be used by the price per unit of such item.
4. Beginning with the item with the highest total cost, arrange
different items in order of their total cost as computed under step (iii)
above.
5. Express the units of each item as a percentage of total costs of all items.
6. Compute the total cost of each item as a percentage of total costs of all
items.
 ADVANTAGES OF ABC ANALYSIS
• It ensures a closer and a more strict control over such items, which
are having a sizable investment in there.
• It releases working capital, which would otherwise have
been locked up for a more profitable channel of investment.
• It reduces inventory-carrying cost.
• It enables the relaxation of control for the ‘C’ items and thus makes
it possible for a sufficient buffer stock to be created.
• It enables the maintenance of high inventory turn over rate.
 DISADVANTAGES OF ABC ANALYSIS
• Proper standardization & codification of inventory items needed.
• Considers only money value of items & neglects the importance of
items for the production process or assembly or functioning.
• Periodic review becomes difficult if only ABC analysis is recalled.
• When other important factors make it obligatory to concentrate on
“C” items more, the purpose of ABC analysis is defeated.
VED ANALYSIS
• In VED analysis, the inventory is classified as per the functional
importance under the following three categories:

• Vital (V)
• Essential (E)
• Desirable(D)
• Vital-
– Items without which treatment comes to standstill: i.e. non- availability
can not be tolerated. The vital items are stocked in abundance , essential
items and very strict control
• Essential-
– Items whose non- availability can be tolerated for 2-3 days, because similar
or alternative items are available. Essential items are stocked in medium
amounts, purchase is based on rigid requirements and reasonably strict
watch.
• Desirable-
– Items whose non –availability can be tolerated for a long period. Desirable
items are stocked in small amounts and purchase is based on usage
estimates.
 VED
ANALYSIS
• VED ranking may be done on the basis of the shortage costs
of materials, which can be either quantified or qualitatively
expressed.
• The fundamental question behind VED analysis is: what items
could your business not operate without?
• In most manufacturing environments there are a few
components without which production will grind to a halt.
• Failing to order those items on time is clearly an expensive mistake.
• In VED method (vital, essential, and desirable), each stock items is
classified on either vital, essential or desirable based on how critical the
item is for providing health services.

• The vital items are stocked in abundance , essential items are stocked in
medium amounts and desirable items we socked in small amounts .

• Vital and essential items are always in stock which means a minimum
disruption in the services offered to the people.
 ADVANTAG
ES

• It is useful for monitoring and control of stores and spares inventory

by classifying them into three categories.
• Determine the criticality of an item and its effect on production and
other services.
• It is useful for controlling and maintain the stock of various types.
 JUST-IN-TIME
MANAGEMENT
• Just-in-time (JIT) manufacturing originated in Japan in the 1960s and
1970s; Toyota Motor Corp.
• The method allows companies to save significant amounts of money
and reduce waste by keeping only the inventory they need to produce
and sell products.
• This approach reduces storage and insurance costs, as well as the cost
of liquidating or discarding excess inventory.
 JIT
• JIT inventory management can be risky.
• If demand unexpectedly spikes, the manufacturer may not be able to
source the inventory it needs to meet that demand, damaging its
reputation with customers and driving business toward competitors.
• Even the smallest delays can be problematic; if a key input does not
arrive "just in time," a bottleneck can result.
 MATERIALS
REQUIREMENT
PLANNING
• This method is sales-forecast dependent, meaning that
manufacturers must have accurate sales records to enable accurate
planning of inventory needs and to communicate those needs with
materials suppliers in a timely manner.
• Inability to accurately forecast sales and plan inventory acquisitions
results in a manufacturer's inability to fulfill orders.
 OTHER
TECHNIQUES

• FSN
• LIFO
• FIFO
• HIFO
• NIFO
 RECEIVABLE
MANAGEMENT OR
ACCOUNTS RECEIVABLE
MANAGEMENT
 RECEIVABLES

• Receivables represent amounts owed to the firm as a result of

sale of goods or services in the ordinary course of business.
• Receivables are also known as accounts receivables,
trade receivables, customer receivables or book debts.
• The purpose of maintaining or investing in receivable is
to meet competition, and to increase the sales and profits.
 COST OF MAINTAINING
RECEIVABLES
• Cost of financing receivables
• Administrative cost
• Opportunity cost
• Cost of collection
• Bad debts / Default Cost
• 1. Cost of Financing, Receivables. When goods and services are
provided on credit then concern's capital is allowed to be used by
the customers. The receivables are financed from the funds
supplied by shareholders for long term financing and through
retained earnings. The concern incurs some cost for collecting
funds which finance receivables.

• 2. Cost of Collection. A proper collection of receivables is essential

for receivables management. The customers who do not pay the
money during a stipulated credit period are sent reminders for
early payments. Some persons may have to be sent for collecting
these amounts. In some cases legal recourse may have to be taken
for collecting receivables. All these costs are known as collection
costs which a concern is generally required to incur.
FACTORS INFLUENCING THE SIZE OF
RECEIVABLES
• Size of credit sales
• Credit policies
• Terms of trade
• Expansion plans
• Relation with profit
• Credit collection efforts
• Habits of customers
 RECEIVABLES
MANAGEMENT
Receivables Management is the process of making decisions relating
to investment in trade debtors.

The objective of receivables management is to take a sound decision

as regards investment in debtors
 RECEIVABLE
MANAGEMENT
• Accounts receivable management incorporates is all
about ensuring that customers pay their invoices.
• Good receivables management helps prevent
overdue payment or non-payment.
• It is therefore a quick and effective way to strengthen
the company’s financial or liquidity position.
 A GOOD RECEIVABLES
MANAGEMENT
• Determining the customer’s credit rating in advance
• Frequently scanning and monitoring customers for credit risks
• Maintaining customer relations
• Detecting late payments in due time
• Detecting complaints in due time
• Reducing the total balance outstanding (DSO)
• Preventing any bad debt in receivables outstanding
DIMENSION OF RECEIVABLES
MANAGEMENT

Forming of credit
policy

Formulating
and Executing credit
executing policy
collection
policy
 FORMING OF CREDIT
POLICY
• Quality of trade accounts or credit standards
• Length of credit period
• Cash discount
• Discount period
 EXECUTING CREDIT
POLICY
• Collecting credit information
• Credit analysis
• Credit decision
• Financing investments in receivables and factoring
 FORMULATING AND EXECUTING
CREDIT POLICY
• The collection of amounts due to the customers is very important.
• The concern should devise procedures to be followed when accounts
become due after the expiry of credit period.
• The collection policy be termed as strict and lenient.
• A strict policy of collection will improve more efforts on collection.
• This policy will enable early collection of dues and will reduce
bad debt losses.
 PROBLEM – SOLUTION
MODEL
Particulars Policy A Policy B Policy C
Credit Period XXX XXX XXX
Projected Sales XX XX XX
Less XX XX XX
Variabl XXX XXX XXX
e Cost XX XX XX
(Cont XXX XXX XXX
ributi XXXX XXXX XXXX
on = XX XX XX
Sales
- VC)
Less
Fixed
Cost
( Pro
fit )
Cost of sales =
VC+FCSolution: Select the policy which has highest net return
Investment In
 PROBLEM – SOLUTION
Particulars
MODELCurrent Policy A B C D
Credit Period 30
Projected Sales 50
Less Variable Cost 80% of 50 = 40
(Contribution = Sales - VC) 10
Less Fixed Cost 5
( Profit ) 5
Cost of sales = VC+FC 40+5 = 45
Invest. In Drs = Cost of Sales x Cr. Period/360 45 x 30/360 = 3.75
Profit 5
Less cost of funds in debtors at 20% 20% x 3.75 = 0.75
Net Return 4.25
CASH AND MARKETABLE SECURITIES
MANAGEMENT
 CASH
MANAGEMENT
• Cash is an important component of current assets and is
most essential for business operations.
• Cash is the basic input needed to keep the
business running on a continuous basis.
• It is also the ultimate output expected to be realised by
selling the service and product manufactured by the firm.
 CASH
MANAGEMENT
• Cash management has assumed importance because it is the
most significant of all the current assets.
• It is required to meet business obligations and it is
unproductive when not used.
• Cash management deals with the following:
– Cash inflows and outflows
– Cash flows within the firm
– Cash balance held by the firm at a point of time.
 MEANING AND DEFINATION
OF CASH
• In the words of P. V. Kulkarni:
“Cash in the business enterprise may be compared to the blood of
the human body; blood gives life and strength to the human body,
and cash imparts life and strength to the business organisation”.

• According to J. M. Keyens:
“It is the cash which keeps a business going. Hence every enterprise
has hold necessary cash for its existence”.
 MOTIVES FOR
HOLDING CASH

• The Transaction Motives

• The Precautionary Motive
• The Speculative Motive
• The Compensating Motive
 1.
TRANSACTION
– ItMOTIVE
is a motive for holding cash or near cash to meet routine cash
requirements to finance transaction in the normal course of
business. Cash is needed to make purchases of raw materials, pay
expenses, taxes, dividends etc.

2. Precautionary motive
– It is the motive for holding cash or near cash as a cushion to meet
unexpected contingencies. Cash is needed to meet the unexpected
situation like, floods strikes etc.
3. SPECULATIVE
MOTIVE
– It is the motive for holding cash to quickly take advantage of
opportunities typically outside the normal course of business. Certain
amount of cash is needed to meet an opportunity to purchase raw
materials at a reduced price or make purchase at favorable prices.

4. Compensating motive
– It is a motive for holding cash to compensate banks for providing
certain services or loans. Banks provide variety of services to the
business concern, such as clearance of cheque, transfer of funds etc.
• The speculative Motives:
• The financial manager would like to take advantage of
unexploited opportunities.
• Some reserve of money is always essential to enable the firm
to take advantage of cash when such opportunities arise.
• The speculative motives helps to take advantage of:
– An opportunity to purchase raw materials at a reduced
price on payment of immediate cash.
–A chance to speculate on interest rate movements by
buying securities when interest rates are expected to decline.
– Delay purchases of raw materials on the anticipation of
decline in prices.
– To make purchases at favourable prices
– Any other opportunity.
• Yet another motive to hold cash balances is to compensate banks
for providing certain services and loans.
• Banks provide a variety of services to business firms, such as
clearence of cheque, supply of credit information, transfer of
funds, and so on.
• While for some of these services banks charge a commission or fee,
for others they seek indirect compensation.
• Usually clients are required to maintain a minimum balance of cash
at the bank.
• Since this balance cannot be utilised by firms for transaction
purposes, the banks themselves can use the amount to earn a
return. Such balances are compensating balances
 OBJECTIVES OF CASH
MANAGEMENT
• The basic objectives of cash management are as follows:

1) To meet the cash disbursement needs (payment schedule) and;

2) To minimise funds committed to cash balance

These are conflicting and mutually contradictory and the task of cash
management is to reconcile them
 TO MEET THE CASH DISBURSEMENT NEEDS
(PAYMENT SCHEDULE)
• In the normal course of business, firms have to make payments of
cash on a continuous and regular basis to suppliers of goods,
employees and so on.
• At the same time, there is a consist inflow of cash through
collections from debtors.
• Cash is, therefore, aptly described as the ‘oil to lubricate the ever-
turning wheels of business: without it the process grinds to a stop.‘
• A basic objective of cash management is to meet the payment
schedule, that is to have sufficient cash to meet the cash
disbursement needs of a firm
 TO MINIMISE FUNDS COMMITTED TO CASH
BALANCE
• In minimizing the cash balances, two conflicting aspects have to be
reconciled.
• A high level of cash balances will,
– ensure prompt payment together with all the advantages.
– But it also implies that large funds will remain idle, as cash is a
non- earning asset and the firm will have to forego profits.
• A low level of cash balances,
– on the other hand, may mean failure to meet the payment schedule.
• The aim of cash management, therefore, should be an
optimal amount of bank balances.
 CASH MANAGEMENT
TECHNIQUES
• Cash management will be successful only if cash collections are
accelerated and cash disbursements, as far as possible are
delayed.
• The following methods of cash management will help::

A. Speedy Cash Collections / Accelerating Cash Inflows

B. Slowing Disbursements.
 METHOD OF
ACCELERATING CASH
INFLOWS
1. Prompt Payment by Customers
2. Quick conversion of Payment into cash
3. Decentralized Collections
4. Lock Box System
1. Prompt Payment by Customers. In order to accelerate cash
inflows, the collections from customers should be prompt. This
will be possible by prompt billing.

2. Quick conversion of Payment into cash. Cash inflows can be

accelerated by improving the cash collecting process. Once the
customer writes a cheque in favour of the concern the collection
can be quickened by its early collection.

3. Decentralized Collections. A big firm operating over wide

geographical area can accelerate collections by using the system of
decentralised collections. A number of collecting centres are
opened in different areas instead of collecting receipts at one
place.
4. Lock Box System. Lock box system is another technique of reducing
mailing, processing and collecting time. Under this system the firm
selects some collecting centres at different places. The places are
selected on the basis of number of consumers and the remittance to be
received from a particular place.
• The firm hires a Post Box in post office and the parties are asked to send
the cheques on that post box number. A local bank is authorised to
operate the post box.
METHODS OF SLOWING CASH
OUTFLOWS

1. Paying on Last Date

2. Adjusting Payroll Funds
3. Centralisation of Payments
4. Inter-bank Transfer
5. Making use of Float
1. Paying on Last Date. The disbursements can be delayed on
making payments on the last due date only. If the credit is for
10 days then payment should be made on 10th day only.

2. Adjusting Payroll Funds. Some economy can be exercised on

payroll funds also. It can be done by reducing the frequency of
payments. If the payments are made weekly then this period
can be done to a month.
3. Centralisation of Payments. The payments should be
centralised and payments should be made through drafts or
cheques. When cheques are issued from the main office then
it will take time for the cheques to be cleared through post.

4. Inter-bank Transfer. An efficient use of cash is also possible by

interbank transfers. If the company has accounts with more
than one bank then amounts can be transferred to the bank
where disbursements are to be made.
5. Making use of Float. Float is the difference between the balances
shown in company's cash book (Bank column) and balance in
passbook of the bank. Whenever a cheque is issued, the balance at
bank in cash book is reduced.
• The party to whom the cheque is issued may not present it for
payment immediately. If the party is at some other station then
cheque will come through post and it may take a number of days
before it is presented. Until the time, the cheque is not presented
to the bank for payment, there will be a balance in the bank.
• The company can make use of this float if it is able to estimate it
correctly.
 DETERMINING OPTIMUM
CASH BALANCE
• A firm has to maintain a minimum amount of cash for settling the dues
in time.
• The cash is needed to purchase raw materials, pay creditors, day to day
expenses, dividend etc.
• The test of liquidity of the firm is that it is able to meet
various obligations in time.
• Thus, a firm should maintain an optimum cash balance, neither a small
nor a large cash balance.
• Cash budget is the most important tool in cash management.
 CASH
BUDGET
• A cash budget is an estimate of cash receipts and disbursements of
cash during a future period of time.
• It is a device to plan and control the use of cash.
• It pin points the period when there is likely to be excess or shortage
of cash.
 IT
INCLUDES
• The cash receipts from various sources are anticipated.
– From sales, debts, bills receivable, interests, dividends and other
incomes and sale of investments and other assets will be taken into
account.

• The amounts to be spent on

– Purchase of materials, payment to creditors and meeting various
other revenue and capital expenditure needs should be considered
 MANAGEMENT OF MARKETABLE
SECURITIES
• The marketable securities are the short term highly liquid
investments in money market instruments that can easily be
converted into cash.
• A firm has to maintain a reasonable balance of cash to keep the
business going.
• Instead of keeping the surplus cash as idle, the firm should invest
in marketable securities so as to earn some income to the
business.
 CONT
D.
• As the amount of cash kept in the business earns no explicit
return
• The firm should hold a minimum level of cash and the excess
balance of cash may be invested in marketable securities
which earns some return as well as provide opportunities to be
converted easily into cash (through sale of securities) as and
when required.
 CONT
D.
• The management of investments in marketable securities is an
important function of financial management.
• The basic objective of investment in marketable securities is to
earn some return for the business.
• The return available is an important criterion while choosing
among the alternative securities, yet investment of surplus cash in
marketable securities need a prudent and cautious approach.
• The selection of securities should be carefully made so that cash
can be raised quickly on demand by sale of these securities.
• Important factors that should be considered while
choosing among alternative securities to be purchased:

1. Safety
2. Maturity
3. Liquidity and Marketability
4. Return or Yield
 IMPORTANT FACTORS THAT SHOULD BE CONSIDERED
WHILE CHOOSING AMONG ALTERNATIVE SECURITIES TO BE
PURCHASED:

1. Safety. Since a firm invests cash in marketable securities to earn some

return on surplus cash but with the primary motive of converting them
back into cash easily through sale of securities as and when required,
the firm will tend to invest in very safe marketable securities.
2. Maturity. The maturity of the marketable securities should be
matched with the length of time for which the surplus cash is expected
to be available.
 CONT
D.
3. Liquidity and Marketability. Liquidity refers to the ability to convert a
security into cash immediately without any significant loss of value. So
the securities selected should have ready market and may be realizable
in a very short period as and when required even before the maturity
date.
4. Return or Yield. Other things equal, a firm would like to choose the
securities which give higher return of yield on its investment. However, it
must be remembered that safety and liquidity risk are of greater
importance than the return risk in making decision about investments in
marketable securities.
THANK
YOU