Cash and Marketable Securities Management

Motives for Holding Cash: In spite of the fact that cash does not earn substantial returns for the business but still a firm holds cash with the following motives: 1. Transaction Motive: Transaction motive refers to holding of cash to meet routine cash requirements to finance the transactions, which a firm carries on in its ordinary course of business. E.g. Cash payments, which are to be made for purchases of raw materials, payment of wages, operating expenses, etc. Precautionary Motive: A firm has to hold cash for purposes, which cannot be anticipated or predicted. E.g. Flood, strikes, for settlement of bills prior to due date, increase in cost of raw materials, unexpected slowdown in collection of accounts receivables, etc. Speculative Motive: In order to take advantage of opportunities which present themselves at unexpected moments and which are outside the scope of normal course of business. E.g. making purchases at favourable prices, an opportunity to purchase raw materials at a reduced price on payment of immediate cash, to speculate on interest rate movements, etc. Compensating Motive: Banks provide a variety of services to business firms such as clearance of cheques, supply of credit information, transfer of funds, etc. In case of some of these services, banks charge commission or fee while for others they seek indirect compensation. Business firms are required to maintain a balance of cash at the bank in order to compensate banks for providing certain services and loans. This balance cannot be used for transaction purposes. The banks themselves can use this amount to earn a return in order to compensate themselves for the services rendered to the business firms. Such balances are called compensating balances.

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Marketable Securities: Marketable Securities consists of investments that are readily marketable and are expected to be converted into cash within a year. Types of Marketable Securities: 1. Term Deposits with scheduled banks. 2. Treasury Bills. 3. Certificates of deposit. 4. Commercial papers. 5. Mutual fund scheme. 6. Inter-corporate deposits. 7. Bill discounting. 8. Ready forward deal. 9. Gilt-edged securities. 10. Municipal bonds. Basic Objectives of Cash Management: 1. To meet the cash disbursement needs of the firm on a continuous and regular basis as per the payment schedule. 2. To minimise the funds held in the form of cash balance, which remains idle and is in the non-earning asset and the firm will have to forego profits.

cash flows from or payments. A cash flow statement is mandatory in India. in order to manage the situations of cash shortages. changes in financial position prepared based on funds defined as cash or cash equivalents. To meet unexpected cash expenditure. 5. A cash budget is a device. Operating activities. which helps in generating returns on such otherwise idle cash balances lying in the company’s accounts. Cash management helps to keep the bank overdraft limit under control and thus reducing the interest payment on overdrafts. presented in the annual report as per AS3. bi-monthly (fortnightly). annually at the end of the accounting monthly. Distinction between: Cash budget and Cash Flow Statement: (1) (2) Cash Budget Cash Flow Statement A cash budget is futuristic. (3) (4) (5) (6) (7) Importance of Cash management: 1. 4. a statutory format given by ICAI. 5. 6. A cash budget is not mandatory in India.e.Objectives of Cash Management: 1. but normally it is prepared statement can also be prepared from the monthly. Good relation with bank. Proper cash management helps in improving the profitability of the firm and thus results in good image and reputation of the firm. 3. quarterly. To prevent bankruptcy. weekly. To lead a strong credit rating. Proper cash management helps in order to maintain adequate cash balance as per the company’s policy. projected accounts. A cash flow statement is historical. which helps to A cash flow statement is a statement of plan and control the use of cash. There is no statutory format of cash A Cash flow statement has to be budget in India. 2. A cash budget is used as a planning tool A cash flow statement is used for for future cash management. A cash budget is divided into two parts A cash flow statement is divided into cash inflows or receipts and cash outflows three main parts i. Cash management helps in identifying the surplus cash and investing them in marketable securities. . Cash management helps indentifying the points of shortfalls. analysing the movement of cash equivalents during the past one accounting year. Good relation with trade creditors and suppliers. even though a projected cash flow annual basis. 4. To maintain balance level. half-yearly or an year. 2. Investing activities and Financial activities. 3. A cash budget may be prepared on a A cash flow statement is prepared daily. and to plan and arrange adequate cash balances.

Proper cash management helps to repay the bank loan instalments on time and maintain good relations and high credit standing with the bankers. This translation results in the cash budget. earthquakes. 7. Proper cash management helps to maintain its reputation with the government agencies by timely payment of income tax. Proper cash management prevents the business firm from facing the problem of bankruptcy. etc. Cash Budget: The operating budget is usually prepared in terms of revenues and expenses. 2. Proper cash management helps to manage the business enterprise even in the case of slowdown in collection of accounts receivables from the debtors. which has sufficient cash to take advantage of cash discount on its account payable. but not too much. 14. It identifies the period when there might be either shortage or an abnormally large cash requirement. advance tax. . It helps to arrange needed funds on the most favourable terms and prevents the accumulation of excess funds. It pinpoints the period when there is likely to be excess cash. cash on hand during the year ahead. to formulate dividend policy. It enables a firm. it must be translated into terms of cash inflows and cash outflows. 11.6. the net cash position (surplus or deficiency) of a firm as it moves from one budgeting subperiod to another. Cash Budget as a Management Tool: Cash Budget is a device to help a firm to plan and control the use of cash. sales tax. heavy rains. 9. Proper cash management helps to make instant cash payments to the suppliers and avail of the facilities of cash discounts. to pay obligations when due. profession tax. 3. The financial manager uses the cash budget to make plans to ensure that the organisation has enough. For financial planning purposes. payment of salaries and wages. Proper cash management helps to face any natural calamities or unforeseen situations such as destruction of goods due to floods. In other words. 12. etc. 4. It is a statement showing the estimated cash inflows over the planning horizon. to plan financing of capital expansion and to help unify the production schedule during the year so that the firm can smooth out costly seasonal fluctuations. Proper cash management helps to maintain adequate cash balances in order to meet its transaction motives. To co-ordinate the timings of cash needs. etc. 13. and thus maintain the firm’s goodwill in the business circles. such as payment to suppliers of materials. Proper cash management helps to take advantage of speculative opportunities. deposit of provident fund. 10.. 8. Purpose of Cash Budget: 1. Proper cash management helps to strike a balance between liquidity and profitability for the firm.

000 4.40.000 16.000 3.10.66.3. Selling expenses : 1 Month c.68. prepare Cash Budget for the period from 1 st March to 31st August when the opening cash balance was Rs.000 1.000 12.00.000 3.000 Selling Expenses 14.60. Other Cash Expenses Total Payments [B] Net Receipts [A-B] Add: Opening Balances Closing Balances Month1 XX XX XX XX XXXX XX XX XX XXXX XXXX XX XXXX Month2 XX XX XX XX XXXX XX XX XX XXXX XXXX XX XXXX Month3 XX XX XX XX XXXX XX XX XX XXXX XXXX XX XXXX (All figures in Rs. Period of credit allowed to suppliers and to customers 1 month.400 10. d.600 14.000 in March payable on delivery in April. Any other Cash Receipts Total Receipts [A] Payments 1.000 13.20.000 32. Month January February March April May June July August Sales 3.66.000 10.000 11. Wages : 1 Month ii.60.000 15.000 22.36.30.000 32.800 11. b. Factory expenses : 1 Month iii.000 9. Cash Purchases 2.36. e.60.000 1.000 21.000 34.64.00.000 1.000 19.000 19.000 payable in 2 instalments in May and July.000 24.000 33.000 Purchases 1.000 4.000 3.00. Machinery purchased for Rs.000 36. Administration expenses : 1 Month iv.40.000 9. .000 11.000 5.800 14.Proforma of Monthly Cash Budget: Cash Budget for the period_____to _____ Particulars Receipts 1.000 3.400 10.000 Wages 30.000 34. 40.000 Factory Expenses 20.000 1.000. From the following. 1.000 13.52.000 1. Investment Income 4. Cash Sales 2.000 1.200 16. Collection from debtors for credit sales 3.200 Administration Expenses 10. Building purchased in April Rs.000 a. Suppliers (creditors) for credit purchases 3. Lag in payment of: i.000 24.000 3.) Month4 XX XX XX XX XXXX XX XX XX XXXX XXXX XX XXXX Problems: 1. Commission of 3% on sales payable two months after sales.

000 3. Prepare the cash budget as required. iv.000 p. .000 27. 10.October 2004 50. 5.000 Purchases 38.m. 2. 4. If there is cash deficiency. (payable one month in advance) General expenses Rs. 5.034 and any short fall is to be met with through temporary loans.000 December 2004 40. Cash in hand on 1. Expenses include depreciation of Rs. 1.). 30% sales are for cash and debtor are realised in 2 months period equally.000 11.000 May 2005 50. 1. Other expenses are: Salaries Rs. i.000 Other information: 1.2. One-month credit is available from creditors for purchases. 3. Prepare cash budget from the following information: Month December 2005 January 2006 February 2006 March 2006 Sales 58.000.000 Expenses 9.000 November 2004 40.000 March 2005 40.000 February 2005 50.000 per month. All other expenses are incurred on first of next month.000 7.000 82.000 Wages 11.’ is to prepare cash budget for January to April 2005 with monthly based on the following estimates: Sales during past 3 months (in Rs. Suppliers are to be paid 50% in month of purchase AND 50% in following month. amount is to be borrowed in multiples of Rs.000 p.000 ii.000 5.m.000 98.12.000 Other expenses 7.2005 was Rs.000 24. 11. 3. Cost of goods sold is 70% of sales. and repay likewise in event of surplus of cash available.000 26.000 And next month January 2005 50. 500 p.000 8.000 21.000 June 2005 50.000. ‘Indifferent Company ltd. (payable in same month) Company policy is to maintain cash balances of Rs. 35.000 and is to remain unchanged.000 97. Stock level is at Rs. (payable in same month) Commission 10% of sales (payable one month after sale) Rent Rs.m.000 14.000 6. 2. Sales collection is as under: In month of sales40% Next month40% Following Month20% iii.000 4.000 April 2005 40.

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