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Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat

Copyright © 2008, Dr Sudhindra Bhat

2 ND

17 – 1

CASH MANAGEMENT

17

Chapter

CASH MANAGEMENT



2 ND

17 – 2

CASH MANAGEMENT

Learning Objective

Give the nature of cash

List out the motives for holding cash

Discuss the objectives of cash management

Narrate the aspects of cash management

Explain the factors determining cash needs

Say cash budget, procedure, purpose of cash budget

Discuss the types of cash forecasting

Know the strategies for accelerating cash inflows, and slowing down payments

Determine optimum cash balance

Explain the models of cash management

Identify the investment avenues for investing surplus cash



2 ND

17 – 3

CASH MANAGEMENT

Nature of Cash

Cash is the medium of exchange for purchase of goods and services and for

discharging liabilities. In cash management the term cash has used in two

senses.

Narrow Sense: Under this cash covers currency and generally accepted

equivalents of cash, viz., cheques, demand drafts and banks demand deposits.

Broad Sense: Here, cash includes not only the above stated but also near cash

assets. There are Bank’s time deposits and marketable securities. The

marketable security can easily sold and converted into cash. Here cash

management is in broader sense.



2 ND

17 – 4

CASH MANAGEMENT

Catherine's business is growing and she's making a good profit. However, she never seems to have enough money to pay her bills. This month she had to pay the business

insurance premium with her credit card.

“ What is wrong with this picture? “

Here is a Here is a small storysmall story



2 ND

17 – 5

CASH MANAGEMENT

Catherine has what is known as a "cash flow Catherine has what is known as a "cash flow problem. " That means that the cash flowing problem. " That means that the cash flowing into her business is out of synch with the cashinto her business is out of synch with the cashmoving out. The result is that she is moving out. The result is that she is temporarily caught short when her bills cometemporarily caught short when her bills comedue. Catherine needs to plan ahead so she willdue. Catherine needs to plan ahead so she willknow whether or not she will have enough know whether or not she will have enough cash available when she needs it.cash available when she needs it.

This is not a story Larsen & Toubro in FY 99

the company showed a net profit before tax of Rs.441 crores. But after

considering changes in working capital, the cash generated from operations was a

mere Rs. 36 crores. To sustain its growth, the company had to invest Rs. 632 crores in

fixed assets - leading to a negative free cash flow (even before considering

dividends and investments).

ACC in FY 2002

made Rs.137.5 cr where as the cash generated from operating activity was Rs.

483.98 which shows their good WCM which gave them cash balance of Rs.27.49cr

Telco in FY 2002

Made a Loss of Rs. 48914cr but cash generated from operations were actually

2863.4cr.

Excel BooksExcel Books11 – 6 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat


CASH MANAGEMENT

“Cash Pays No Interest”

Why do Individuals & Corporations hold billions of dollars in cash?

Why don’t we take all cash & invest in interest bearing securities?

- “cash” gives you more liquidity than securities, You can use it to buy things.



CASH MANAGEMENT



2 ND

17 – 8

CASH MANAGEMENT

What is cash

Cash is ready money in the bank or in the business.

It is not inventory, it is not accounts receivable and it is not property. These might

be converted to cash at some point in time,

But it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to

meet the payroll. Profit growth does not necessarily mean more cash.



2 ND

17 – 9

CASH MANAGEMENT

Motives for holding Cash

Transaction Motive

Precautionary Motive

Speculative Motive

Compensating Balance



2 ND

17 – 10

CASH MANAGEMENT

Does that mean it doesn’t matter how much cash you hold?“no”,

as a financial manager you need to hold cash balance upto the point where marginal value of the liquidity is equal to value of interest foregone.

Cost of holding cash

Opportunity cost – the opportunity cost of excess cash held in currency or bank

deposits is the interest income that could be earned in the next best use, such as

investment in marketable securities.

The firm has to therefore weigh the cost of holding cash with the benefits of holding it.



CASH MANAGEMENT



2 ND

17 – 12

CASH MANAGEMENT

Cash Cycle

Information & control

collections

Payments

Borrow or invest

Understanding Float

Float – difference between cash balance recorded in the cash account and the cash

balance recorded at the bank

Disbursement float :

Generated when a firm writes checks

Available balance at bank – book balance > 0

Collection float :

Checks received increase book balance before the bank credits the account

Available balance at bank – book balance < 0

Net float = disbursement float + collection float



CASH MANAGEMENT

Cash Collection

Payment Payment Payment CashMailed Received Deposited Available

Mailing Time Processing Delay Availability Delay

Collection Delay



CASH MANAGEMENT



2 ND

17 – 15

CASH MANAGEMENT

Collections Pre authorized Payment arrangement

Float

Order Processing Float Buyer Float Deposit Float

Lock – Box System Decentralized collections



2 ND

17 – 16

CASH MANAGEMENT

One of the goals of float management is to try and reduce the collection

delay. There are several techniques that can reduce various parts of the

delay.

Controlling Disbursements Disbursement Float

Zero- Balance Account

Controlled Disbursement Account

Electronic Fund Transfer





2 ND

17 – 18

CASH MANAGEMENT

Credit Management: Key Issues

Granting credit increases sales

Costs of granting credit

Chance that customers won’t pay

Financing receivables

Credit management examines the trade-off between increased sales and the costs

of granting credit

Cash flow from granting credit

Credit Sale Check Mailed Check Deposited Cash Available

Cash Collection

Accounts Receivable



CASH MANAGEMENT

Collection Policy

Monitoring receivables

Keep an eye on average collection period relative to your credit terms

Use an aging schedule to determine percentage of payments that are being

made late

Collection policy

Delinquency letter

Telephone call

Collection agency

Legal action



CASH MANAGEMENT



2 ND

17 – 21

CASH MANAGEMENT

Case for Class Discussion

Case 1 :

BHATT ENTERPRISES CASE :

CASH FORECASTING AND INVESTING

Case 2 :

BAJAJ ELECTRONICS CASE :

CASH FORECASTING

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Economy & Finance

cash opportunity

cash assets

cash available

cash needssay cash budget

cash account

cash managementthis

term cash

cash managementcost