Presented by Sneha Sahu (45) Rupali Thenge (55) Nilesh I sal (15) Sameer Borde (05) Hema Sayam (4 7)
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Presented bySneha Sahu (45)
Rupali Thenge (55)
Nilesh Isal (15)
Sameer Borde (05)Hema Sayam (47)
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Individual and business processes receipts and
payments in a more organized and efficient
manner
Cash management trust
Arranged in an accounting department
Investment professional handles
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Transaction motive
Precautionary motive
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Speculative motive
Compensating motive
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Meeting payment schedules
Minimizing funds committed to cash balance
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Synchronization of cash flows
Short costs
Excess cash balance costs
Procurement and management
Uncertainty and cash management
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To minimize
o Fixed cost of transactions
o
Opportunity cost of holding
A position when cash balance is in most ideal
proportion
o To invest
o Sufficient liquidity for future needs
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To determine the optimum amount of transaction cash
under conditions of certainty
Objective - To minimize the sum of the fixed costs of
transactions and the opportunity cost of holding cash
balances
There are 2 costs associated with this model:
a) Cost of converting marketable securities into cash
b) Opportunity cost
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Cost of converting marketable securities into cash
Total conversion cost per period = T*b
C
Where,
b = cost per conversion
T = total cash needs for the time period involvedC = Value of marketable securities sold at each
conversion
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Opportunity Cost
Total conversion cost per period = i * C
2
Where,
i = interest rate that could have been earned
C/2 = Average cash balance
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Total Cost is expressed as
b [T/C] + i [C/2]
To minimize the cost, the model attempts to determine the
optimal conversion amount, that is, the cash withdrawal which
costs the least.
C = sqrt (2bT / i)
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To determine the optimum amount of transaction cash
under conditions of uncertainty
The objective is to determine the optimum cash balance
level which minimizes the cost of cash management
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Symbolically,
C = b * E (N) + i * E (M)
t
where b = the fixed cost per conversion
E (M) = the expected average daily cash balance
E (N) = the expected no of conversions
t = no of days in the period
i = the lost opportunity costs
C = total cash management costs
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MO model assumes that cash balances randomly fluctuate
between upper bound (h) and lower bound (l)
When the cash balances hit the upper boundo Too much cash and company should buy marketable
securities to bring cash balances back to the optimal
bound (z)
When the cash balances hit zero
o They must be return to the optimum bound z by
selling/converting securities into cash
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Days of the Month
Lower Limit
Upper Limit
z
Sell Securities
Buy Securities
h
l
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According to MO model, the optimal cash balance z can be
expressed as
z = Sqrt (3*b*r2 / 4 * i)
where r2 = the variance of daily changes in cash balances
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1. Short-term cash forecasting or Cash Budgeting² few days
to 1 year.
Methods³1) Receipts & payment method
2) P & L method
3) Balance sheet method
2. Long-term cash forecasting³2 to 5 years
Method² Adjusted net income method
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DEFINITION:
Cash budget is an estimate of cash receipts and
disbursement for a future period of time
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1. Receipts and payments Method.
2. Adjusted Profit and Loss Method.3. Projected Balance Sheet Method.
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1. Receipts and Payment method
Receipts include
Total sales Interest & dividends Assets
Stocks and debentures
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Payment includes:
Creditors
Payment for wages
Dividends paid
Capital expenditure- purchase of assets
Repayment of loans
Overhead expenses
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RECEIPTS --- PAY MENT= Cash or Cash
Balance Deficit
If cash deficit then manager will have to arrange a
Bank Overdraft
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1. Actual payment to be made next month
2. Actual timings of payment
Ex.-If the collection from sales is available only after 15th of the month, then enough cash balance must be maintained for
meeting payments for the first 15 days.
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Adjusted Net Income method:
It estimates the firms need for cash at some future date andindicates whether the need can be met from internal sourcesor not.
Sources of funds- Expenses
Net income after taxes --Capital expenditure
Non cash charges --Increase in C.A
(Depreciation, Ammortisation) --Repayment of borrowing
Sale of equity shares --Dividend payment
Increase of borrowings
SOURCE ² EXPENSES =surplus/Deficit
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Speedy Cash Collections
a. Encouraging the customers
b. Conversion of payments into cash
Prompt Payment by Customers
a. Prompt billing
b. Practice of offering cash discounts
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Early Conversion of Payments into Cash
a. Transit or mailing time (postal float)
b. Lethargyc. Bank float
d. Deposit float
Decentralised Collection
a. Concentration Banking
b. Lock-Box System
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Ready Cash Segment
Controllable Cash Segment
Free Cash Segment
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Safety
Liquidity
Yield
Maturity
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1) Fixed Deposits with Banks
2) Treasury Bills
3) Mutual Fund Scheme
4) Commercial Paper
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5) Certificates of deposits
6) Inter-Corporate Deposits
7) Ready Forwards
8) Bill Discounting
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Do Nothing
Make Ad Hoc Investment
Ride the Yield Curve
Develop Guidelines
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Utilize Control Limits
Manage with a Portfolio Perspective Define the efficient frontier
Select the optimal portfolio
Follow a Mechanical Procedure
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