3.

) Financial Management

Question:

What will your outlook towards maintenance of liquid assets to ensure that the firm has adequate
cash in hand to meet its obligations at all times?

Ans:

Liquidity means that:

1) Firm has adequate cash to pay for the expenses

2) Firm has enough cash to make unexpected large purchases

3) Firm has cash reserve to meet emergencies at all times

For this, regular Cash flow is must and it can be done by maintaining ratio between Expenses and Profit.

-Determine the source of finance:

-> Long term finance in the form of shares is good option, it can be sold and buy back as and when
required without much loss.

-> Short term finance must be used for emergency and for higher profit expected project

-> Plan some of regular profit amount in safe way in the form of deposit, company infrastructure,
property which can be a future source of cash.

Manufacturing Cycle must be faster so that final furnished product can be sold early and get working
cash back to reduced debt interest.

Estimation of working capital to optimum level as it balances risk and returns. For this Working Capital
Policy Index (WCPI) can be calculated by the ratio of Current Assets to Fixed Asset. Higher Ratio indicates
conservative policy and low ratio indicate aggressive policy. Conservative policy gives greater liquidity
and lower risk and returns and opposite for aggressive policy. Current Ratio should be at least 2:1

CASH MANAGEMENT:

-Controlling level of cash balance by preparing cash budget monthly basis, finding alternate source of
cash, for seen situation like strike, recession, flood while preparing cash budget.

-Controlling the inflow of cash by using techniques which help in speedier collection of cash.

-Controlling outflow of cash by creating centralized system for disbursement, effective payments only on
the due dates, float system for cheque payment

-Optimum investment of surplus cash in short deposits