Professional Documents
Culture Documents
1. Importance of Cash
When planning the short or long-term
funding requirements of a business, it is
more important to forecast the likely cash
requirements than to project profitability
etc.
3. Precautionary motive
5. Speculative motive
7. Compensation motive
2. Cash vs Profit
Sales and costs and, therefore, profits do not
necessarily coincide with their associated cash
inflows and outflows.
Sales ($000) 75
Costs ($000) 65
Profit ($000) 10
(20) (5) 10 10
Cumulative net cash flow
Objectives of cash management
Ensure that a firm should have right quantity and right
quality from the right sources at a right place and at a
right time.
• Meeting the cash outflows (meet the obligations):
sufficient cash to make the payments schedule and
disbursements. It will help in :
A. avoiding the chances of default.
B. availing the opportunities of getting cash discounts
by making prompt payments.
C. meeting expected cash outflows without much
problem.
• Minimizing the cash balance :
A. Idle cash balance must be reduced.
FACTORS AFFECTING CASH NEEDS
1. Cash cycle : refers to the time between the payments for purchase
for purchase of raw materials & receipts of sales revenue.
2. Cash inflows and cash outflows: Cash balance is required to fill up
the gap arising out of difference in timings & quantum of inflows and
outflows.
If the inflows are appearing just at the time when cash is required for
payment, then no cash balance is required to be maintained by the
firm, but this seldom happens. Thus,
there should be synchronization between cash inflows and cash
outflows.
3. Cost of cash balance: cost of maintaining excess cash balance or to
meet the shortages of cash.
4. Other considerations: uncertainties of certain trade, staff required for
cash management
Operating cycle and Cash cycle
Sell Receive
Purchase
Product Cash
resources
On credit
Pay for
Resources
purchases
Receivable
Inventory conversion
Conversion period
period
Cash conversion
Payable
cycle
Deferral period
Operating
cycle
CASH MANAGEMENT STRATEGIES
• Cash planning
• Cash forecasts and budgeting
Receipts and Disbursements Method Adjusted Net
Income Method (Sources and Uses of Cash)
• Managing cash flows
a. methods of accelerating cash inflows
b. method of slowing cash outflows
Methods of accelerating cash
inflows
1. Prompt payments by customers
2. Quick conversion of payment into cash
3. Decentralized collections (Concentration)
4. Lock box system
Speed up collections
Customer mailing company company cash
The cheque receives the deposits available
cheque the cheque
Time
mailing processing availability
time delay
Float
Cash inflows can be improved by cash collecting
process.
2. Postal float: mailing time i.e. time taken by post
office for transferring cheque from customers
to the firm.
3. Lethargy: time taken in processing the cheque
within the organization and sending it to bank
for collection.
4. Bank float: collection time within the bank i.e.
time taken by the bank for collecting the
payment from the customer s’ bank.
Deposit float = postal + lethargy + bank
Lock box system
1. Under this system, customers are advised to mail their
payments to special post office boxes , called lock
boxes which are attending by the local collecting
banks, instead of sending them to corporate H.Q.
2. Local banks collects the cheque once or more a day
from the lock box, deposits the cheque directly into the
local bank a/c of the firm & gives the details to the firm.
3. Helps in:
A. cuts down the mailing time as the cheque
are received at a nearby P.O. instead of H.Q.
B. reduces the
processing time as the company does not have to
open the envelopes & deposits the cheque for
collection. C.
shorten the availability delay as the cheque are
typically drawn on local banks.
Float
Cash balance shown by the firm on its books is
called book / ledger balance.
Balance shown in its bank account is called
available / collected balance.
Difference between the available balance and the
ledgers balance is referred as float
H
buy
R
• sell
L