CASH MANAGEMENT

Cash management is the corporate process of collecting and managing cash, as well as using it
for short-term investing. It is a key component of a company's financial stability and solvency.
Corporate treasurers or business managers are frequently responsible for overall cash
management and related responsibilities to remain solvent.
Cash management involves not only avoiding insolvency, but also reducing the average length
account receivables (AR) are outstanding, increasing collection rates, selecting appropriate short-
term investment vehicles, and increasing cash on hand to improve a company's cash position and
profitability.

Successfully managing cash is an essential skill for small businesses, because they typically have
less access to affordable credit and have a significant amount of upfront costs to manage while
waiting for receivables. Wisely managing cash enables a company to meet unexpected expenses,
and to handle regularly occurring events such as payroll.

Cash Conversion Cycle

The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes
for a company to convert its investments in inventory and other resources into cash flows from
sales. Also called the Net Operating Cycle or simply Cash Cycle.

This metric takes into account how much time the company needs to sell its inventory, how much
time it takes to collect receivables, and how much time it has to pay its bills without incurring
penalties.

It is one of several quantitative measures that helps evaluate the efficiency of a company's
operations and management. A trend of decreasing or steady CCC values over multiple periods
is a good sign, while rising ones should lead to more investigation and analysis based on other
factors. One should bear in mind that cash conversion cycle applies only to select sectors
dependent on inventory management and related operations.

Formula of Cash Conversion Cycle

Inventory conversion period (days) + Average Collection period (days) – Payables deferral period
(days) =Cash Conversion Cycle (days)

Cash Budget
A cash budget is an estimation of the cash inflows and outflows for a business over a specific
period of time. This budget is used to assess whether the entity has sufficient cash to operate.
Companies use sales and production forecasts to create a cash budget, along with assumptions
about necessary spending and accounts receivable. If a company does not have
enough liquidity to operate, it must raise more capital by issuing stock or by taking on debt.
Cash and Marketable Securities
Cash is usually referred to currency but in a business entity cash often mean currency and
demand deposits in addition to very safe, highly liquid marketable securities that can be sold
quickly at a predictable price and thus be converted to bank deposits. Therefore, “cash” as
reported on balance sheets generally includes short-term securities, which are also called “cash
equivalents.”
2 categories of marketable securities:

 Operating Short-term Securities- which are held primarily to provide liquidity and are
bought and sold as needed to provide funds for operations.
 Other Short-term Securities- which are holdings in excess of the amount needed to
support normal operations.
Currency
Most business today hold substantial amount of currency but the importance of currency has
decreased over a period of time due to the rise of other payment mechanisms such as; debit card,
credit cards etc. Each business held a certain amount of currency to support its operations.
16-6b Demand Deposits Demand (or checking) deposits are far more important than currency for
most businesses. These deposits are used for transactions—paying for labor and raw materials,
purchasing fixed assets, paying taxes, servicing debt, paying dividends, and so forth.
The following techniques are used to optimize demand deposit holdings:
1. Hold marketable securities rather than demand deposits to provide liquidity. When the firm
holds marketable securities, the need for demand deposits is reduced. For example, if a large bill
requiring immediate payment comes in unexpectedly, the treasurer can simply call a securities
dealer, sell some securities, and have funds deposited in the firm’s checking account that same
day. Securities pay interest whereas demand deposits do not, so holding securities in lieu of
demand deposits increases profits.
2. Borrow on short notice. Firms can establish lines of credit under which they can borrow with
just a telephone call if and when they need extra cash. Note, though, that they may have to pay
fees for those commitments; and the cost of those fees must be considered when deciding to use
borrowing capacity rather than securities to provide liquidity.
3. Forecast payments and receipts better. The better the firm can forecast its cash inflows and
outflows, the smaller its needs for funds to meet unexpected requirements. Therefore, improving
inflow/outflow forecasts lessens the need to hold liquid assets and thus reduces the required
amount of working capital. The cash budget is the key tool used to improve cash forecasts.
4. Speed up payments- A collection system is the set of banking arrangements and processing
procedures used to process customer payments and gather incoming cash. A firm’s collection
system affects the timing of cash inflows. Firms generally attempt to speed up cash collections by
reducing collection float. Collection float is the time interval between when the maker mails a
check and when the funds are available for the receiving firm to use.
Collection float has three components:
1. Mail float. The time between when a check is mailed and when it is received by the
payee or a processing site
2. Processing float. The time between when the payee or processing site receives a check
and when it is deposited at a financial institution
3. Availability float. The time interval between when the check is deposited and when the
firm’s account is credited with the collected funds

Marketable Securities
Marketable securities held for operations are managed in conjunction with demand deposits—
the management of one requires coordination with the other. Firms also purchase marketable
securities as cash builds up from operations and then sell those securities when they need cash.
Marketable securities are investments that mature in a year or less. They generally are classified
as short-term investments (although balance sheet accounting differentiates securities with
original maturities of three months or less as cash equivalents and those maturing in a year or
less as short-term investments).

True 1. The cash conversion cycle measures a firm’s financing gap in terms of time.
False 2. Increases in the cash conversion cycle will lower the firm’s short-term financing needs.
True 3. If the cash conversion cycle is shorter, then the firm’s investment in inventories and
receivables will be smaller
False 4. Activities that decrease the cash conversion cycle will increase the firm’s need to obtain
financing.
True 5. A cash budget is a tool the treasurer uses to forecast future cash flows and estimate future
short-term borrowing needs.
False 6. To construct a cash budget, two sets of information are needed: estimated cash inflows
and estimated cash outflows.
True 7. The estimated cash inflows are affected by the sales forecast and customer payment
patterns.
True 8. A cash budget is a tool the treasurer uses to forecast future cash flows and estimate future
short-term borrowing needs

D 1. The length of time it takes for the initial cash outflows for goods and services to be realized
as cash inflows from sales is called
a. Product life cycle
b. Manufacturing cycle
 c. Vicious cycle
d. Cash conversion cycle
C. 2. An objective of cash management is to
a. Maximize the cash balance to avoid the risk of illiquidity.
b. Minimize the cash balance to maximize the return from idle cash.
c. Invest cash for a return while retaining sufficient liquidity to satisfy future needs.
d. Reserve as much cash as possible for potential investment opportunities
A. 3. In cash management, the difference between the bank balance for a firm’s account and the
cash balance that the firm shows on its own books is called.
a. Float.
b. Bank charges
c. Interest income
d. Reconciling item
D. 4. Which of the following items is not a marketable security?
a. Treasury Bills
b. Commercial Papers
c. Central Bank Certificate of Indebtedness (CBCIs)
d. Convertible bonds
A. 5. When managing cash and short-term investments in marketable securities, the treasurer of
a corporation is primarily concerned with
a. Liquidity and safety
b. Maximizing the rate of return
c. Maximizing risk
d. Tax avoidance
C. 6. If the average age of the accounts payable is 15 days, the average age of accounts receivables
is 60 days and the average age of inventory is 10 days, the number of days in the operating cash
conversion cycle is
a. 70 days
b. 85 days
c. 55 days
d. 60 days

D. 7. For a manufacturing firm, the most direct way of preparing cash budget requires
incorporation of the following, except
a. Sales projection and credit terms
b. Collection percentages and other cash receipts
c. Estimated purchases and payment terms and other cash disbursements
d. Projected net income and depreciation expenses
A. 8. Statement 1 - The cash conversion cycle measures a firm’s financing gap in terms of time.
Statement 2 - Increases in the cash conversion cycle will lower the firm’s short-term financing
needs.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Neither of the statements are correct.

Problems:
1. Onor Corporation had income before tax of P100,000 for the year. Included in this amount was
depreciation expense of P20,000, bond discount amortization of P18,000 and the amount paid for
the salaries and wages of P30,000.
Required:
1. What is the company’s estimated cash flow for the year?
Answer key:
Income before tax P100,000
Add non-cash items:
Depreciation 20,000
Amortization 18,000 38,000
Net Cash Flow P138,000

2. Annabelle Corporation is engaged in a multi-level marketing business that presently requires

all sales agents to mail checks to its Manila office. An average of 3 days is required for mailed
checks to be received, one day for Annabelle Corporation to process them and three days to clear
through its banks.
The company’s treasurer proposed a change in the system, where the checks will no longer be
mailed to Manila office. Instead, checks collected will be deposited on-line in any branch of the
company’s depository bank, and the deposit slips, as well as the other pertinent documents will
be sent by fax or e-mail to the Manila office on the same day. The original deposit slips and other
documents will be submitted by the sales agents to Manila when they attend the Sales Agents,
Monthly Meeting.
The new system will eliminate the mailing float and the processing time. Annabelle Corporation
has an average daily collection of P50,000.
Required:
1. If the new system is implemented the average cash balance will increased by?
Answer key:
Average daily collection P50,000
X Float reduction (3 days mailing float + 1
day processing time) 4 days
Increase in average cash balance P200,000

https://www.investopedia.com/terms/c/cash-management.asp
https://www.investopedia.com/terms/c/cashconversioncycle.asp
https://www.investopedia.com/terms/c/cashbudget.asp

http://cmaprepcourse.com/wp-content/uploads/2015/08/part-2-SU6-SU15rev2.pdf
Management Advisory Services, 2016 Edition by Rodelio S. Roque
Fundamentals of Financial Management 12th Edition, Eugene F. Brigham & Joel F. Houston