yCash is the important current asset for the business operations yIt is a basic input needed to keep the

business running yIt is also the ultimate output expected to be realized by sale yFirm should keep sufficient cash, shortage will disrupt the manufacturing operations while excess will remain idle yTerm cash includes coins, currency, cheques held by the firm, balances in bank accounts. Sometimes nearcash items like- marketable securities or bank time deposits

Cash Management is concerned with the managing of yCash flows into and out of the firm yCash flow within the firm yCash balances held by a firm

Business Operations

Cash Collections Deficit Surplus Borrow Invest

Information & Control

Cash Payments Cash Management Cycle

In order to resolve the uncertainty about cash flow prediction and lack of synchronization between cash receipts and payments it is required to develop appropriate strategies for cash management yCash Planning- tool- cash budget yManaging the cash flow-tool- cash budget+cash flow statements yOptimum cash level yInvesting Surplus Cash

Motives for holding Cash yTransaction Motive yPrecautionary Motive yThe speculative Motive

Cash Forecasting and Budgeting-Cash budget Time horizon- differ from firm to firm- daily, weekly, or monthly

Cash forecasts are needed to prepare Cash Budgets Short Term yTo determine operating cash requirements yTo anticipate short-term financing Long Term yThree/five or more years It can be used for yNew product development

yTo manage investment of yPlant acquisition surplus cash

Carefully & skillfully designed cash forecast helps a firm toySelect securities with appropriate maturities and reasonable risk yAvoid over and under investing yMaximize profits by investing idle money Multi divisional firm use it a tool to coordinate the flow of funds between their various divisions.

Uses of forecasts are

a) Planning reductions of short & long term debt b) Scheduled payments in connection with capital expenditure programmes c) Planning forward purchase of inventories d) Checking accuracy of long range cash forecasts e) Taking advantage of cash discounts offered by suppliers f) Guided credit policies

Most commonly used methods of short-term cash forecasting are The receipt & disbursement method
For a period of week-month

The adjustment net income method Few months to a year

Tracing of w.c flows
Projected cash flow statements based on proforma financial statements

Cash in flow estimations Operating cash flow

Cash sales & Collection

Non op cash flow

Financial cash flow

Sale of old Borrowing & assets ,int & issuance of securities dividend

Cash out flows estimations

Operaitng Capital expenditure Contractual payments Discretionary payments

Repayments of loans,int,taxes

Ordinary profit

Operating Outflows-Cash purchase,payments of payables, adv. To suppliers, wages& salaries & other op. exp.

Managing Cash Collections & Disbursements Accelerating Cash Collections

y Decentralised Collections /Concentration banking/ large no of bank accounts. y To minimise the time lag for mailing between customer to firm yFunds to concentrate bank by E trfs yUseful tool to reduce float(cheques sent by customer but not yet collected)

yLock base system yNo of collection centers yP.B also hired yLocal banks collect the cheques from post taxes

Cash Collection instruments in Features Instrument 1- Cheque

Pros
y No charge yPayable through clearing

Cons
yCan bounce yCollection times can be long

yCan be discounted yCollection charge of after receipt Rs 2/- per Rs. 1,000/- with a max of Rs 1,000/-

yLow discounting charge @ 3.50 Rs per Rs 1,000. yRequires custome limits which are inter-changeable with OD limit

2- Drafts

y Payable in local clearing yChances of bouncing are less

yCost Rs. 2/- per 1000 upto max Rs.1,000/yBuyers are debited on day or one. yNot payable through clearing

3-

yGoods are not Documentary released till bills payment is made or yCollection cose rs.4.5 per Rs. 1,000, bill is accepted max of Rs1,000 yLow discounting charge of Rs. 3 per yLong delays Rs. 1,000/-

4- Trade bills y No change except

yProcedure is relatively stamp duty(approx. Re cumbersome 0.50 per Rs. 1,000 yBuyers are reluctant to accept the due to date yCan be discounted discipline yDiscipline of payment on due date yOperating charge yGood credit control as yTransit period interest goods are released on yNegotiation charge payment or acceptance of bill yNeed bank lines to open LC ySetter forced to meet delivery schedule yStamp duty on because of expiry date. issuance of bills.

5- Letters of credit

Controlling Disbursements y firm should make payments using credit terms to the fullest extent yMaximum use of trade credit When firms actual bank balance is greater then as shown in firms book difference is known as disbursement or payment float. Determining the optimum cash balance

Baumois model

The miller-orr model

Investing surplus cash in marketable Securities

Choosing among alternative investment Firm should examine three basic features

Safety

Maturity

Marketability

Risk Return Period Interest Convertability in principal cash

Following short term opportunity are available to companies in India to invest their temporary cash surplus yTreasury Bills (TBs) yShort term Govt. securities ySelling at a discount and purchasing at par on maturity yMore liquid yNo default risk yCommerc ial Papers (CPs) yUnsecured securities yIssued by highly creditworthy large companies yIssued with maturity of 3 months to 1 year yLiquidity is not a problem

yCertificat es of Deposits (CDs) yBank Deposit

yIssued by banks yAcknowledge FDs for specified period of time

yTemporary cash in bank deposited for a fixed period of time yInt depends upon maturity period yDefault risk is quite low in India.

yInter corporate deposit (ICDs)

yPopular short term investment alternative yRisk is high but returns are attractive

yMoneymarket Mutual funds (MMMFs)

yFocuses on TBs, CPs,CDs or call money yMinimum lock in period 30 days yAttractive yields,usually 2% above than on bank deposits of same maturity. yRecent origin in India yRecently offered by - Kothari pioneer - UTI - IDBI