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CASH MANAGEMENT

MOTIVES FOR HOLDING CASH Transaction motive

Precautionary

motive Speculative motive Compensation motive

OBJECTIVES OF CASH MANAGEMENT Meeting the payments

schedule Minimizing funds committed to cash balances

FACTORS DETERMINING CASH NEEDS


Non

synchronization of cash flows Cost associated with the shortfall of cash (Transaction & borrowing cost, Loss of
trade discount, Cost of fall in firms credit rating, Penalty rates of banks when compensatory balance is not maintained)

FACTORS DETERMINING CASH NEEDS


Excess

cash balance cost Procurement and management costs Precautionary cushion

FUNCTIONS OF CASH MANAGEMENT DEPT.


Cash

management Currency management Sourcing of funds Negotiations with bankers

CASH BUDGET
A

management tool that throws light on the net cash position of a firm

STRATEGIES OF CASH MANAGEMENT


Minimize

the CASH CYCLE and maximize the CASH TURNOVER of the firm

STRATEGIES OF CASH MANAGEMENT

Stretching accounts payable: Pay accounts payable as late as possible without damaging the firms credit standing Efficient inventory-production management: causes a decline in the operating cash requirements and hence a saving in operating cost

STRATEGIES OF CASH MANAGEMENT


Speeding

collection of accounts receivable: collect accounts receivable as quickly as possible without losing future sales because of high-pressure collection techniques. Average collection period can be reduced by changes in:

Credit terms Credit standards Collection policies

TECHNIQUES/PROCESSES OF CASH MANAGEMENT

SPEEDY CASH COLLECTIONS:

Prompt payment by customers:


Prompt Billing Enclosed self-addressed envelope Offer trade discounts

TECHNIQUES/PROCESSES OF CASH MANAGEMENT

SPEEDY CASH COLLECTIONS:

Early conversion of payments into cash:


Reduction in time lag between posting of the cheque by the customer and the realization of money by the firm. In other words, reduce DEPOSIT FLOAT: Postal Float Lethargy Bank Float

TECHNIQUES/PROCESSES OF CASH MANAGEMENT

SPEEDY CASH COLLECTIONS:

Decentralized collections:
Concentration Banking: A system of decentralized billing and multiple collection points Drop Box System: At various prominent locations, box opened & cheques deposited into bank account by firms employee Lock Box System: Hiring of a post office box, box opened & cheques deposited into bank account by banks employee

TECHNIQUES/PROCESSES OF CASH MANAGEMENT

Slowing Disbursements:
Avoidance of early payments: If the firm pays its accounts payable before the due date it has no special advantage Centralized disbursements: Delays payment: It involves transit time Avoids holding of minimum balance at branches, if payment is decentralized

TECHNIQUES/PROCESSES OF CASH MANAGEMENT

Slowing Disbursements:
Playing the float: Although a cheque has been issued, cash would be required later when the cheque is presented for encashment. Firms resort to CHEQUE KITING (arrange for funds in the account after the cheque has been issued) Paying from a distant bank Cheque encashment analysis

DETERMINING THE OPTIMUM CASH BALANCE

Trade-off between risk and return

INVESTMENT OF SURPLUS CASH

FACTORS TO BE CONSIDERED:
Security & safety Liquidity & marketability Yield & impact of taxes Maturity period should match the funds requirement of the firm

INVESTMENT OF SURPLUS CASH

Marketable/near cash securities:


Treasury bills (Obligations of the Govt. Issued at a discount). Return is difference between purchase price & par value Negotiable certificate of deposits (CD) (Deposit in banks for a fixed period earning a fixed rate of interest. Secondary market exists for the CD)

INVESTMENT OF SURPLUS CASH

Marketable/near cash securities:

Commercial Papers (short-term unsecured promissory note sold by large corporate firms to raise cash. Can be purchased at a discount or can carry interest. Can be made payable to the order of the investor. No secondary market exists)

INVESTMENT OF SURPLUS CASH

Marketable/near cash securities:


Inter-corporate deposits (Attractive returns 10-12%. Withdrawal only at intervals of 30 days. High degree of risk involved) Bill Discounting (Purchase/discount of bills of exchange drawn by seller on the buyer) Call market (funds borrowed/lent overnight/one-day/notice periods up to 14 days. Call rates are highly volatile