CHAPTER 1

INTRODUCTION
Financial management consist of Planning, Organizing, Directing and Controlling of financial
activities such as procurement and utilization of funds of enterprise. It means applying general
management principle of financial resources of the enterprise financial decision include dividend
decision, investment decision and retained earnings. The financial management is generally
concerned with procurement, allocation and control of financial resources of a concern. It
ensures optimum utilization of funds. They should utilize maximum possible way at least cost.

Financial management has to make estimation with regards to capital reqirement of the company.
This will depend up on expected cost and profit and future programmers and policies of a
concern it can made in an adequate manner which increase earning of enterprise.

Financial management occupies a significant place because it has an impact on all activities of
the firm. It is primary responsibility is to discharge the finance function successfully. Thus
financial management is an appendage of the finance function. No one can think of any business
activity in isolation from its financial implications. The management may accept or reject a
business proposition on the basis of its financial viabilities.

Short term and long term capital

Short-term capital - An asset held for a period of 36 months or less is a short-term capital
asset. The criteria of 36 months have been reduced to 24 months for immovable properties such
as land, building and house property.

  Long-term capital - An asset that is held for more than 36 months is a long-term capital asset.
The reduced period of the aforementioned 24 months is not applicable to movable property such
as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset
if held for more than 36 months as earlier. Some assets are considered short-term capital assets
when these are held for 12 months or less

Working Capital

Working capital is basically an indicator of the short term financial position of an organization
and is also a measure of its overall efficiency. Working capital is obtained by subtracting the
current liabilities from the current assets. This ratio indicates whether the company possesses
sufficient assets to cover its short term debt.

Working capital indicates the liquidity levels of companies for managing day to day expenses
and covers inventory, cash, payable, accounts receivable and short term debt that is due.
Working capital is derived from several company operations such as debt and inventory
management, supplier payments and collection of revenues.

The sources for working capital can either be long term, short term or even spontaneous.
Spontaneous working capital are majorly derived from trade credit including notes payable and
bills payable while short term working capital sources include dividend or tax provisions, cash
credit, public deposits, trades deposits, short term loans, bills discounting, inter corporate loans
and also commercial paper.

For long term working capital sources include long term loans, provision for depreciation,
retained profits and share capital. These are major working capital sources for organizations
based on their requirements.

There are several types of working capital based on the balance sheet or operating cycle view.
The balance sheet view classifies working capital into net which is current liabilities subtracted
from current assets featuring in the company’s balance sheet and gross working capital which is
current assets in balance sheet.

Working capital cycle

A positive working capital cycle balances incoming and outgoing payments to minimize net
working capital and maximize free cash flow. For example, a company that pays its suppliers in
30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days. This
30-day cycle usually needs to be funded through a bank operating line, and the interest on this
financing is a carrying cost that reduces the company's profitability. Growing businesses require
cash, and being able to free up cash by shortening the working capital cycle is the most
inexpensive way to grow. Sophisticated buyers review closely a target's working capital cycle
because it provides them with an idea of the management's effectiveness at managing their
balance sheet and generating free cash flows.

As an absolute rule of funders, each of them wants to see a positive working capital because
positive working capital implies there are sufficient current assets to meet current obligations. In
contrast, companies risk being unable to meet current obligations with current assets when
working capital is negative. While it's theoretically possible for a company to indefinitely show
negative working capital on regularly reported balance sheets (since working capital may
actually be positive between reporting periods), working capital will generally need to be non-
negative for the business to be sustainable

Reasons why a business may show negative or low working capital over the long term while not
indicating financial distress include:

 Assets above or liabilities below their true economic value

 Accrual basis accounting creating deferred revenue while the cost of goods sold is lower
than the revenue to be generated
o E.g. a software as a service business or newspaper receives cash from customers
early on, but has to include the cash as a deferred revenue liability until the service is
delivered. The cost of delivering the service or newspaper is usually lower than revenue
thus, when the revenue is recognized, the business will generate gross income.

Working capital management

Decisions relating to working capital and short-term financing are referred to as working capital
management. These involve managing the relationship between a firm's short-term assets and
its short-term liabilities. The goal of working capital management is to ensure that the firm is
able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-
term debt and upcoming operational expenses.
A managerial accounting strategy focusing on maintaining efficient levels of both components of
working capital, current assets, and current liabilities, in respect to each other. Working capital
management ensures a company has sufficient cash flow in order to meet its short-term debt
obligations and operating expenses.

Decision criteria

By definition, working capital management entails short-term decisions—generally, relating to

the next one-year period which are "reversible". These decisions are therefore not taken on the
same basis as capital-investment decisions (NPV or related, as above); rather, they will be based
on cash flows, or profitability, or both.

 One measure of cash flow is provided by the cash conversion cycle—the net number of
days from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this number effectively
corresponds to the time that the firm's cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.
 In this context, the most useful measure of profitability is return on capital (ROC). The
result is shown as a percentage, determined by dividing relevant income for the 12 months
by capital employed; return on equity (ROE) shows this result for the firm's shareholders.
Firm value is enhanced when, and if, the return on capital, which results from working-
capital management, exceeds the cost of capital, which results from capital investment
decisions as above. ROC measures are therefore useful as a management tool, in that they
link short-term policy with long-term decision making. See economic value added (EVA).
 Credit policy of the firm: Another factor affecting working capital management is credit
policy of the firm. It includes buying of raw material and selling of finished goods either in
cash or on credit. This affects the cash conversion cycle.

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for
the management of working capital. The policies aim at managing the current assets
(generally cash and cash equivalents, inventories and debtors) and the short-term financing, such
that cash flows and returns are acceptable.

 Cash management. Identify the cash balance which allows for the business to meet day
to day expenses, but reduces cash holding costs.
 Inventory management. Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials—and minimizes reordering costs—
and hence increases cash flow. Besides this, the lead times in production should be lowered
to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low
level as possible to avoid overproduction—see Supply chain management ; Just In
Time (JIT); Economic order quantity (EOQ); Economic quantity
 Debtors management. Identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be
offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and
allowances.
 Short-term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to
cash" through "factoring".

The Importance of Cash

Cash is the primary asset individuals and companies use regularly to settle their debt obligations
and operating expenses, e.g., taxes, employee salaries, inventory purchases, advertising costs,
and rents, etc.

Cash is used as investment capital to be allocated to long-term assets, such as property, plant
and other non-current assets. Excess cash after accounting for expenses often goes towards
dividend distributions.

Liquidity refers to the efficiency or ease with which an asset or security can be converted into
ready cash without affecting its market price. The most liquid asset of all is cash itself.
In other words, liquidity describes the degree to which an asset can be quickly bought or sold in
the market at a price reflecting its intrinsic value. Cash is universally considered the most liquid
asset because it can most quickly and easily be converted into other assets. Tangible assets, such
as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging
from equities to partnership units, fall at various places on the liquidity spectrum.

There are two main measures of liquidity: market liquidity and accounting liquidity.

 Market Liquidity

Market liquidity refers to the extent to which a market, such as a country's stock market or a
city's real estate market, allows assets to be bought and sold at stable, transparent prices. In the
example above, the market for refrigerators in exchange for rare books is so illiquid that, for all
intents and purposes, it does not exist.

The stock market, on the other hand, is characterized by higher market liquidity. If an exchange
has a high volume of trade that is not dominated by selling, the price a buyer offers per share
(the bid price) and the price the seller is willing to accept (the ask price) will be fairly close to
each other.

Investors, then, will not have to give up unrealized gains for a quick sale. When
the spread between the bid and ask prices grows, the market becomes more illiquid. Markets for
real estate are usually far less liquid than stock markets. The liquidity of markets for other assets,
such as derivatives, contracts, currencies, or commodities, often depends on their size, and how
many open exchanges exist for them to be traded on.

 Accounting Liquidity

Accounting liquidity measures the ease with which an individual or company can meet their
financial obligations with the liquid assets available to them the ability to pay off debts as they
come due.

In the example above, the rare book collector's assets are relatively illiquid and would probably
not be worth their full value of $1,000 in a pinch. In investment terms, assessing accounting
liquidity means comparing liquid assets to current liabilities, or financial obligations that come
due within one year.

There are a number of ratios that measure accounting liquidity, which differ in how strictly they
define "liquid assets." Analysts and investors use these to identify companies with strong
liquidity. It is also considered a measure of depth.

Cash and Liquidity Management

Cash and liquidity management is a sub-function of treasury management that aims to convert

sales to available cash as soon as possible and at the lowest processing cost.

It’s a crucial component in treasury operations; operations which are concerned with maximizing
the benefits of surplus funds and minimizing the cost of shortfalls through careful investment and
considered borrowing.

Cash management

Cash management, also known as treasury management, is the process that involves collecting
and managing cash flows from the operating, investing, and financing activities of a company. In
business, it is a key aspect of an organization’s finance.

Cash management is important for both companies and individuals, as it is a key component of
financial stability.

Financial instruments involved in cash management contain money market funds, Treasury bills,
and certificates of deposit.

Companies and individuals offer a wide range of services available across the financial
marketplace to help with all types of cash management. Banks are typically a primary financial
service provider. There are also many different cash management solutions for both companies
and individuals seeking to get the best return on cash assets or the most efficient use of cash.
Cash management is a broad term that refers to the collection, concentration, and disbursement
of cash. The goal is to manage the cash balances of an enterprise in such a way as to maximize
the availability of cash not invested in fixed assets or inventories and to do so in such a way as to
avoid the risk of insolvency. Factors monitored as a part of cash management include a
company's level of liquidity, its management of cash balances, and its short-term investment
strategies.

In some ways, managing cash flow is the most important job of business managers. If at any time
a company fails to pay an obligation when it is due because of the lack of cash, the company is
insolvent. Insolvency is the primary reason firms go bankrupt. Obviously, the prospect of such a
dire consequence should compel companies to manage their cash with care. Moreover, efficient
cash management means more than just preventing bankruptcy. It improves the profitability and
reduces the risk to which the firm is exposed.

Cash management is particularly important for new and growing businesses. Cash flow can be a
problem even when a small business has numerous clients, offers a product superior to that
offered by its competitors, and enjoys a sterling reputation in its industry. Companies suffering
from cash flow problems have no margin of safety in case of unanticipated expenses. They also
may experience trouble in finding the funds for innovation or expansion. It is, somewhat
ironically, easier to borrow money when you have money.

It is only natural that major business expenses are incurred in the production of goods or the
provision of services. In most cases, a business incurs such expenses before the corresponding
payment is received from customers. In addition, employee salaries and other expenses drain
considerable funds from most businesses. These factors make effective cash management an
essential part of any business's financial planning. Cash is the lifeblood of a business. Managing
it efficiently is essential for success.

When cash is received in exchange for products or services rendered, many small business
owners, intent on growing their company and tamping down debt, spend most or all of these
funds. But while such priorities are laudable, they should leave room for businesses to absorb
lean financial times down the line. The key to successful cash management, therefore, lies in
tabulating realistic projections, monitoring collections and disbursements, establishing effective
billing and collection measures, and adhering to budgetary restrictions.

What Does Cash Management Involve?

Cash management deals with all aspects of working capital management and involves many
different tasks. The roles and responsibilities of this department include:

 Forecasting the cash requirements of the business and preparing budgets.

 Establishing necessary banking relationships and providing working capital finance
security.
 Managing the credit collection.
 Ensuring that shortfalls are avoided or minimized and that the business can always meet
its financial obligations.
 Releasing trapped cash
 Extracting liquidity from working capital
 Releasing working capital

Importance of cash management

Just like a ‘no cash situation’ in our day to day lives can be a nightmare, for a business it can be
devastating.  Especially for small businesses, it can lead to a point of no return. It affects the
credibility of the business and can lead to them shutting down.  Hence, the most important task
for business managers is to manage cash. Management needs to ensure that there is adequate
cash to meet the current obligations while making sure that there are no idle funds. This is very
important as businesses depend on the recovery of receivables. If a debt turns bad (irrecoverable
debt) it can jeopardize the cash flow.  Therefore, cash management is also about being cautious
and making enough provision for contingencies like bad debts, economic slowdown, etc.
Functions of cash management

In an ideal scenario, an organization should be able to match its cash inflows to its cash outflows.
Cash inflows majorly include account receivables and cash outflows majorly include account
payables. Practically, while cash outflows like payment to suppliers, operational expenses,
payment to regulators are more or less certain, cash inflows can be tricky. So the functions of
cash management can be explained as follows :

Inventory management

Higher stock in hand means trapped sales and trapped sales means less liquidity.  Hence, an
organization must aim at faster stock out to ensure movement of cash.

Receivables Management

An organization raises invoices for its sales. In these cases, the credit period for receiving the
cash can range between 30 – 90 days. Here, the organization has recorded the sales but has not
yet received cash for the transactions. So the cash management function will ensure faster
recovery of receivables to avoid a cash crunch. If the average time for recovery is shorter, the
organization will have enough cash in hand to make its payments. Timely payments ensure lesser
costs (interests, penalties) to the organization. Receivables management also includes a robust
mechanism for follow-ups. This will ensure faster recovery and it will also assist the business to
predict bad debts and unforeseen situations.

Payables Management

While receivables management is one of the primary areas in the cash management function,
payables management is also important. Payables arise when the organization has made
purchases on credit and needs to make payments for the same within a fixed time.  

An organization can take short-term credit from banks and financial institutions. However, these
credit facilities come at a cost and therefore, an organization must ensure that they maintain a
good liquidity position; this will help in timely repayments of debts.  
Forecasting

While planning investments, the managers need to be very careful as they need to plan for future
contingencies and also ensure profitability. For this, they must use efficient forecasting and
management tools. When the cash inflows and outflows are efficiently managed it gives the firm
good liquidity.

Short-term investments

Avoiding cash crunch, insolvency and ensuring financial stability are the main criterias of cash
management. But it is equally important to invest the surplus cash in hand wisely. Despite being
a liquid asset, idle cash does not generate any returns. While investing in short-term investments
an organization must ensure liquidity and optimum returns. Therefore, this decision needs to be
taken with prudence.  Here, the quantum/amount of investment needs to be calculated and
decided carefully. This caution is necessary because an organization cannot invest all the
available funds. Businesses need to reserve cash for contingencies (cash in hand) too.

Other functions

Cash management also includes monitoring the bank accounts, managing electronic banking,
pooling and netting of assets, etc. So the cash management for treasury can also be a core
function. Although for large corporates this function is managed by softwares, small businesses
have to monitor it manually and ensure liquidity at all times. To add, large businesses have
access to credit facilities at competitive rates. For small businesses that access is not available.
Therefore cash management is vital for them. However, even large corporations need to monitor
their systems time and again to avoid a situation of bankruptcy.
 Objectives of Cash Management

Cash management means optimal cash maintain in a business. If an excess is taken in a business,
it is harmful because it does not grow profit. Contrary if the cash is taken deficit position them
the liquidity crises exists. It is a key component of a company’s financial stability and solvency.

In order to ensure you meet the objectives of an effective cash management policy, the financial
manager must ensure that the company meet the payment schedule and also minimize idle funds
committed to cash balances.

(a) To make payment: firm needs cash to meets its routine expenses including wages, salary,
taxes etc. Following are the main advantages of adequate cash…

 To prevent a firm from being insolvent.

 The relation of the firm with the bank does not deteriorate.
 Contingencies can be met easily.
 It helps the firm to maintain good relationships with suppliers.

(b) To minimize cash balance: the second objective of cash management is to minimize cash
balance.

(c) Meeting cash balances: the financial manager must ensure he has enough cash in hand to
pay suppliers, creditors, employees, shareholders, banks etc. Most financial managers at times go
a step further and keep even more than required. This can be the result of various factors such as
–

 Enhancing the company reputation – settling payments on time keeps creditors and
suppliers happy.
 Taking advantage of trade discounts by paying your debts on time.
 Stronger negotiating power when dealing with suppliers.
 Unexpected cash requirements can be met with no problem at all.

Elements of Cash Management

Cash management is made up of four elements: (1) forecasting, (2) mobilizing and managing the
cash flow, (3) maintaining banking relations, and (4) investing surplus cash.

Forecasting can be defined as the ability to calculate, predict, or plan future events or conditions
using current or historical data.

A cash budget monitors how much money will be available for investment, when it will become
available, and for how long.

Cash mobilization involves techniques used to assemble funds and make them readily available
for investment

Maintaining good relations with banks, savings and loan associations, investment bankers,
commercial paper dealers, and security analysts is an important part of cash management.

Bankers prefer compensating balances to fee payments because deposits are the main source of a
bank's loanable funds.

A cash budget should provide an estimate of the organization's cash requirements for disburse-
ment by months, weeks, or days.

The most attractive instruments are securities supported by the full faith and credit of the federal
government.

Other relatively risk-free securities are: time deposits, time certificates of deposit (CDs),
commercial paper, banker acceptances, and repurchase agreements.

Cash Management Application

The Cash Management application maintains bank transactions, reconciles your bank accounts,
and stores bank account balance information. You can use the Cash Management application to:
Define bank accounts, transaction types, and payment formats that you can use in the Accounts
Payable, Accounts Receivable, and Cash Management applications. If you use Cross Border
Payments, define payment categories, charge codes, and payment form codes. You define
relationships between general ledger companies and bank accounts that let you control
transaction processing and posting to the general ledger.

Define reconciliation tolerances that let you establish reconciled amounts that can be more or
less than the issued amount of a transaction.

Define a transaction code that automatically reconciles transactions upon entry. This feature
reduces the volume of transactions that require reconciliation.

Choose from a variety of reconciliation options, including multiple entry and reconciliation
screens.

Transfer funds between bank accounts.

Enter cash receipts and itemize the deposits by category.

Interface payment information from a non-Lawson application or create payments for one-time
payments without having to create several Accounts Payable vendors

Interface receipts or returned payment information from a non-Lawson application or create

receipts for one-time receipts without having to create several Accounts Receivable customers

List transaction history by bank account. You can access account balance detail for specified
date ranges and selected report parameters.

Display account balance and transaction information.

Interface with the Accounts Payable and Accounts Receivable applications to maintain bank
account balances and reconcile accounts payable, accounts receivable, and other bank
transactions.
Techniques of cash management

The role of finance and treasury in sustaining and creating value is changing substantially. The
traditional guardianship and risk management roles of finance and treasury are being continually
revised. At the same time, finance is being asked to become more effective and efficient in
supporting core needs across the enterprise.

In terms of cash management, this means enabling a continuous and accurate reporting of the
cash position, providing responsive forecasting data and handling payment transactions more
efficiently, as well as managing and evaluating financial risks with greater precision.

Current Trends and Developments

In the context of cash management, there is an increased convergence of cash, liquidity, risk and
trade management. Therefore, cash management is not only related to ensuring solvency and
handling of payment transactions, but also involves risk management and working capital
management alongside the entire financial supply chain (purchase-to-pay, order-to-cash, etc).

Furthermore, efficient cash management is expected to significantly improve both the

profitability and growth of a company. As a result of globalisation and the competitive
environment, companies are seeking more sophisticated cash management solutions and
focusing on standardised processes and strengthening internal controls, which will lead to a
higher degree of centralisation of cash management activities. The ongoing centralisation of
corporate cash management activities is no longer restricted to larger corporates but is also on
the agenda of small and mid-sized companies.

Research, conducted by the IBM Institute for Business Value, in co-operation with the Wharton
School and the Economist Intelligence Unit, confirmed the trend of transition from decentralised
to centralised cash management functionalities on a global – or at least regional – level among
more than 1,200 CFOs and senior finance professionals.

The research also found that the most successful finance organisations have an enterprise-wide
common data definition, a standard chart of accounts, standard common processes and globally
mandated standards. By adopting enterprise-wide processes and data standards, finance
organisations can start to simplify enabling systems and delivery models and establish
governance to create an integrated finance organisation for greater efficiency. The criteria for
developing an integrated finance organisation will also have an impact on organisational cash
management structures (shared service centres, payment factories, in-house banks, etc), as well
as on IT developments.

The introduction of the single euro payments area (SEPA) has also encouraged the trend towards
centralised cash management activities on a pan-European level, e.g. through payments factories,
even if the SEPA Credit Transfers (SCT) volumes remain marginal and are currently behind
market expectations. This development will happen gradually as there is a long transition period
where SEPA formats and domestic formats will exist in parallel. Plus, not all local payment
instruments are within the scope of the SEPA initiative.

Traditional Cash Management Elements

Liquidity planning and forecasting

The ongoing liquidity squeeze and impact of the credit crunch have resulted in corporates
intensifying their liquidity management efforts, effectively making liquidity management a high
priority. Therefore, many companies are seeking an appropriate approach to improve their
liquidity management, especially by means of improving adequate liquidity forecasting models.
Due to improvements in IT and advances in forecasting techniques, an increasing number of
companies are beginning to rely on professional treasury information systems instead of using
manual spreadsheets.

A short-term liquidity plan and medium-/long-term liquidity forecasts are closely linked and
follow in a timely sequence. Corporates should aim for an automated and integrated IT solution
that supports the entire liquidity planning and forecasting process.

Liquidity planning and forecasting also requires the evaluation of a corporate’s banking
relationships and account structures in order to achieve efficient liquidity management. The
implementation of a payments factory and an in-house bank also aids efficiency and, in addition,
can provide meaningful financial reporting.
Finally, efficient liquidity management also affects the effectiveness of risk management. The
higher the accuracy of liquidity forecast, the more stringent risk management procedures can be
developed.

Refinancing and financial assets

A greater number of companies prefer centralised refunding of their capital requirements. This
leads to an optimised refunding in terms of volume, diversification possibilities,
refinancing/interest costs and improved results of external ratings. In addition, centralised
refunding management can lead to a reduced administration workload and increased
transparency regarding financial assets.

Bank relationship management

Corporates should not just re-evaluate their banking relationships because of SEPA, but also in
the context of an increased number of bank mergers. International corporates are advised to
establish professional bank relationship management procedures. Advanced bank relationship
management is not restricted to a secure and auditable banking structure that can be efficiently
administered, but also includes some risk management components in order to indicate potential
risks prevailing with banking partners. Furthermore, efficient bank relationship management
should support business relations to individual banks in order to avoid a liquidity squeeze in the
case of mergers or a banking crisis.

Recent Cash Management Elements

As mentioned before, many corporates are moving their payments to centralised payments
factories to realise economies of scale and handle their payments more effectively. The potential
benefits derived from centralising the accounts payable process are the main driver for
corporates to establish a payments factory that provides a centralised platform for straight-
through processing (STP) of payments and streamlines the entire payment process.

In addition to the establishment of a payment factory, many corporates are also thinking about
centralising their accounts receivables management. Centralised collection management can be
very helpful, particularly for companies with a large volume of direct debits.
A combined approach of centralising, not only the accounts payables but also the accounts
receivables management, will bring out further synergies, e.g. greater accuracy in evaluating the
current cash position and future liquidity forecast, thus enabling a comprehensive cash
management function that will streamline all transaction processes and bank communications.

Important Challenges for Treasurers in Relation to Cash Management

As a result of the aforementioned developments in the cash management area, there is growing
demand for cash pooling solutions. Cash pooling is still a complex technique for many
corporates, considering different legal and tax regulations across India. Depending on the
country, there are still some barriers hindering the free movement of funds. The introduction of
SEPA will intensify corporates’ need to implement appropriate cash pooling structures. SEPA, of
course, also has an impact on streamlining the number of bank accounts across SEPA countries.

Cash pools are often managed and controlled by the corporate treasury or finance department.
Typically standard processes are implemented, a high level of automation exists and, depending
on the volume, cash pooling is integrated into the internal payments factory and in-house bank.

Implementation steps

During the implementation or optimisation of a cash pooling structure, companies have to

consider several internal and external aspects:

Company-internal aspects: company strategy (e.g. expansion-orientated), inter/national

organisation or structure, internal policy in respect of capital, dividend and inter-company loans,
and bank relationship management strategy.

External aspects: several legal and tax requirements (e.g. arm’s length principle), bank services,
costs, foreign exchange risks, inter/national cash pooling specifications, regulatory reporting, and
national capital controls.
Types of Cash Management Services

The menu of cash management services offered by banks abroad is indeed diverse and tempting.
The services broadly fall under collection services, disbursement services, information and
control services, services related to electronic data interchange (EDI), commercial web banking
services, sweep services, fraud detection solutions, global trade solutions and investment
solutions. Collection Services accelerate receipt of payments from sales and quickly turn them
into usable cash in accounts. Disbursement Services make efficient payments by reducing or
eliminating idle balances in company’s accounts. Information and Control Services receive the
data and provide the management capability needed to monitor company cash picture, control
costs, reconcile and audit bank accounts, and reduce exposure to fraud. Financial Electronic Data
Interchange (EDI) is a computerised exchange of payments between a company’s business and
its customers and vendors. Commercial Web Banking Services give a wide range of services
from any Internet connection, which can help streamline banking process quickly and efficiently.
Sweep Services maintain liquidity and increase earnings without having to actively monitor
accounts and move money in and out of them. Information reporting solutions assist companies,
which need to receive account data that is timely, precise, and easy to access and interested in
initiating online transactions. Investment solutions help to minimise excess balances and
maximise return on available funds.

Cash Management Services - Indian Scenario

It is apposite to review the Indian scenario in this regard. As you are well aware, banks’ desire
for funds has lost under the onslaught of the current slowdown. Despite the offer of very soft
terms corporates are refusing to borrow, while bank deposits have been ballooning. Compelled to
service the burgeoning liabilities, but unable to lend hastily and allow their non-performing
assets (NPAs) to grow, bankers are forced to compete for the handful of safe bets among their
borrowers. Banks chose to use the opportunity to refocus their activities, seeking clearly defined
identities in terms of services and customer segments. Most of them concentrated on cleaning up
their books by peeling down their NPAs. All of them attempted freezing of costs, improving
operational efficiencies, and boosting productivity. The strategy of the banks, which performed
well, is to use fee-based services to maintain earnings growth. With interest rates falling, non-
interest income was, unsurprisingly, the fastest-growing component of the banks’ total income.
Fee-based activities will complement though not substitute the core business of lending.

It is gratifying to note that a number of banks in India are offering wide-ranging cash
management services to their corporate clients. All the three categories of
banks  viz.,  nationalised banks, private banks, and foreign banks operating in India are active in
the cash management segment. SBI, PNB, ICICI Bank, GTB, HDFC Bank, Centurion Bank and
Vysya Bank, are some of the active Indian banks in this segment. Citi Bank, Standard Chartered
Bank, ABN Amro Bank, BNP, ANZ Grindlays and HSBC are the foreign banks operating in
India, which are prominent among the cash management services providers. Currently, the
turnover of cash management services in Indian market is estimated over Rs.25,000 crore per
month. State Bank of India alone is estimated to handle over Rs.12, 000 crore per month through
its product called SBI-FAST. Indian banks are offering services like electronic funds transfer
services, provision of cash related MIS reports, cash pooling services, collection services, debit
transfer services, guaranteed credit arrangements, sweep products, tax payment services,
receivables and payables management. Foreign banks operating in India are offering regional
and global treasury management services, liquidity management services, card services,
electronic banking services, e-commerce solutions, account management services, collection
management services, cash delivery management services and investment solutions. Going by
the gamut of these services, the cash management services offered to Indian corporates are
comparable to what their counterparts are getting in advanced countries. Banks realised that if
they do not offer the services required by corporate customers it would result in a net loss of
clientele, returns and goodwill. Banks in India need to continuously monitor international trends
in innovations taking place in providing cash management services and swiftly offer similar
services to their corporate clients.
Cash pooling techniques

In general, cash pooling allows companies to combine their credit on cash pooling techniques.

a) Cash concentration

Cash concentration is an automatic transfer of account balances from clearly defined sub-
accounts to a cash pool master account on a value date basis. Cash pooling can be structured
domestically or cross border depending on the corporate structure. There could be several
individual specifications for the sub-accounts, for example minimum balance held on the
account, minimum amount for transfer or fixed days for regular money transfer. In case of zero
balancing, the account balances of the sub-accounts will have a zero balance and the liquidity
position will be available on the cash pool master account.

Target balancing is similar to zero balancing except that the target balance, as a minimum level
of liquidity, will remain available on the participating sub-accounts. Target balancing is often
used to avoid difficult and more expensive credit line issues, or because of local regulations.

b) Notional pooling or interest compensation

Notional pooling has the same aim as zero balancing except that there is no physical transfer of
liquidity from the sub-accounts to a cash pool master account. All participating accounts are only
combined virtually for the purpose of interest or charge calculation, whereby balances are
automatically offset, thus reducing the difference between high interest on debit balances and
low interest on credit balances.

The accrued interest is paid on the net balance position and the results are compensated.
Therefore, notional pooling can also be called interest compensation.

The accrued interest can either be posted to one of the involved bank accounts or to a separate
interest account. Depending on individual agreements, the accrued interest is usually allocated
back to each of the sub-accounts of the involved subsidiaries in proportion to its contribution to
the process of offsetting.

Regional Aspects
The implementation of efficient cash pooling structures differs from region to region.
Furthermore, a single currency pooling structure can be much easier implemented compared to a
multi-currency pooling. Taking a closer look at Europe and Asia/Far East, the situation can be
summarised according to our experiences as follows:

 National cash pooling structures

The implementation of a national cash pool, e.g. in Germany, does not create a great challenge at
the present time.

 European pooling structures

After the introduction of the euro in 1999 and as a result of the SEPA initiative, the forced
harmonisation of tax and legal requirements is at an advanced stage. Therefore, pan-European
cash pooling structures could be implemented, in most cases, very efficiently. In central/eastern
Europe there are still some hurdles but the development of the cash pooling services in this
region is strongly promoted by Austrian banks. In several countries cash pooling can be realised,
for example the Czech Republic, Hungary, Poland, Slovakia, etc. Nevertheless, the feasibility of
each cash pooling initiative needs to be analysed case by case.

 Asia/Far East cash pooling

To date, in most cases, it is a challenge to integrate companies in Asia/Far East into a corporate’s
cash pooling structure. Comprehensive tax and legal requirements, as well as prevailing capital
controls and inherent foreign exchange rate risks, often prevent these companies from
participating in cash pooling. In Asia, business is still local and regulated, which puts restrictions
on what corporates can do. Yet, on the other hand, things are beginning to change very rapidly.

Cash Management Technology and Infrastructure

The consistent realization of cash management techniques requires adequate business processes
and technologies. The characteristics of an integrated finance organization, such as common data
definitions and globally mandated standards, can also help to establish a global treasury
platform, consolidating various cash management and payment transaction applications and
centralizing all cash management activities.
The implementation of a global treasury platform, for example based on SAP, covers all cash
management related business processes and functionalities (cash management, in-house banking,
banking communication management and liquidity planning) and leads to:

Increased efficiency and transparency along the entire financial supply chain through STP and
standardization.

Accelerated cash reporting and payment processes resulting from in-house banking and
payments factory structures.

Streamlined transaction processes and banking communication across the group of companies
leading to cost savings and an optimised interest management.

Increased data consistency, integrity and reliability in terms of the cash position and liquidity
forecast as a consequence of the harmonised infrastructure and business processes.

Improved exposure management by providing treasury with accurate and timely cash flow and
exposure information.

Increased data integration, and therefore automation, regarding the collection of forecast and
transactional data.

Decreased organisational complexity and process duplication resulting from standardised and
automated business processes.

Reduced legacy systems and interfaces generating cost savings in the areas of purchasing,
licensing, maintenance and development.

Improved internal controls that are consistent across the globe and compliant with external
regulations.

Conclusion

The comprehensive changes in the cash management area resulting from globalisation and
ongoing centralisation, as well as the increased use of more advanced cash management
techniques, have a strong impact on the definition and role of the corporate finance and treasury
department. Furthermore, cash management activities are expected to achieve a positive value
proposition.

Cash management activities cannot be considered segregated from other financial processes but
should be integrated into the financial supply chain. This leads to an integrated finance
organisation that also has an impact on organisational cash management structures, e.g. shared
service centres, payments factories, in-house banks, collection centres, etc, and requires more
standardised and integrated business processes as well as appropriate IT solutions.

Investment decisions

The Investment Decision relates to the decision made by the investors or the top level
management with respect to the amount of funds to be deployed in the investment opportunities.

Short-Term Investments

Short-term investments, also known as marketable securities or temporary investments, are those
which can easily be converted to cash, typically within 5 years. Many short-term investments are
sold or converted to cash after a period of only 3-12 months. Some common examples of short
term investments include CDs, money market accounts, high-yield savings accounts, government
bonds and Treasury bills. Usually, these investments are high-quality and highly liquid assets or
investment vehicles.

Short-term investments may also refer specifically to financial assets—of a similar kind, but with
a few additional requirements—that are owned by a company. Recorded in a separate account,
and listed in the current assets section of the corporate balance sheet, these are investments that a
company has made that are expected to be converted into cash within one year.

How Short-Term Investments Work

The goal of a short-term investment—for both companies and individual/institutional investors—

is to protect capital while also generating a return similar to a Treasury bill index fund or another
similar benchmark.
Companies in a strong cash position will have a short-term investments account on their balance
sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash
equivalents to earn higher interest than what would be earned from a normal savings account.

There are two basic requirements for a company to classify an investment as short-term. First, it
must be liquid, like a stock listed on a major exchange that trades frequently or Treasury bonds.
Second, the management must intend to sell the security within a relatively short period, such as
12 months. Marketable debt securities, aka "short-term paper," that mature within a year or less,
such as Treasury bills and commercial paper, also count as short-term investments.

Marketable equity securities include investments in common and preferred stock. Marketable

debt securities can include corporate bonds—that is, bonds issued by another company—but they
also need to have short maturity dates and should be actively traded to be considered liquid.

Long-Term Investments

A long-term investment is an account on the asset side of a company's balance sheet that

represents the company's investments, including stocks, bonds, real estate, and cash. Long-term
investments are assets that a company intends to hold for more than a year.

The long-term investment account differs largely from the short-term investment account in that
short-term investments will most likely be sold, whereas the long-term investments will not be
sold for years and, in some cases, may never be sold.

Being a long-term investor means that you are willing to accept a certain amount of risk in
pursuit of potentially higher rewards and that you can afford to be patient for a longer period of
time. It also suggests that you have enough capital available to afford to tie up a set amount for a
long period of time.
 Chapter 2

THEORETICAL REVIEW
Functions of Cash Management

Cash management is required by all kinds of organizations irrespective of their size, type and
location. Following are the multiple managerial functions related to cash management:

 Investing Idle Cash: The company needs to look for various short term investment
alternatives to utilize surplus funds.
 Controlling Cash Flows: Restricting the cash outflow and accelerating the cash inflow is
an essential function of the business.
 Planning of Cash: Cash management is all about planning and decision making in terms
of maintaining sufficient cash in hand and making wise investments.
 Managing Cash Flows: Maintaining the proper flow of cash in the organization through
cost-cutting and profit generation from investments is necessary to attain a positive cash
flow.
 Optimizing Cash Level: The organization should continuously function to maintain the
required level of liquidity and cash for business operations.

Cash Management Strategies

Cash management involves decision making at every step. It is not an immediate solution but a
strategical approach to financial problems. Following are the strategies of cash management:

Business Line of Credit: The organization should opt for a business line of credit at an initial
stage to meet the urgent cash requirements and unexpected expenses.

Money Market Fund: While carrying on a business, the surplus fund should be invested in the
money market funds. These are readily convertible into cash whenever required and yield a
considerable profit over the period.

Lockbox Account: This facility provided by the banks enable the companies to get their
payments mailed to its post office box. This lockbox is managed by the banks to avoid manual
deposit of cash regularly.
Sweep Account: The organizations should avail the facility of sweep accounts which is a mix of
savings and fixed deposit account. Thus, the minimum balance of the savings account is
automatically maintained, and the excess sum is transferred to the fixed deposit account.

Cash Deposits (CDs): If the company has a sound financial position and can predict the expenses
well along with availing of a lengthy period, it can invest the surplus cash in the cash deposits.
These CDs yield good interest, but early withdrawals are liable to penalties.

Cash budget

A Cash budget represents the expected future cash flow of an organization over a defined period
of time. It is an estimate of the cash receipts expected in the future over the budget period, the
expenditure to be incurred in cash, and finally, the cash balance with the company at the end of
the period. However, the cash position can be ascertained more frequently, say every month, to
keep a check on the company’s performance with regards to the budget. In case of businesses
facing seasonal variations in demand, the cash budget can be made for small durations, say
weekly or monthly. This will help to achieve realistic budget goals. A company can go for a
longer period budget, say even a year, if its cash flows are relatively stable with little
fluctuations. The cash budget gives a broad view of the company’s cash requirements in the near
future. If the receipts seem to be falling short of the future expenditure, the company can plan to
raise or arrange for more cash from other sources in time. This will help it to avoid the
unpleasant situation of being short in cash and hindrance of business activities. One important
thing to be taken into account is that a cash budget includes only the transactions where actual
cash will come in or go out. For example, it will not include a credit sale for which cash or
payment has not yet been received. Also, it does not include expenses like depreciation or
amortization since no exchange of cash takes place while recording any of the two.

Cash budgets are usually viewed in either the short-term or the long-term. Short-term cash
budgets focus on the cash requirements needed for the next week or months whereas long-term
cash budget focuses on cash needs for the next year to several years.
Short-term cash budgets will look at items such as utility bills, rent, payroll, payments to
suppliers, other operating expenses, and investments. Long-term cash budgets focus on quarterly
and annual tax payments, capital expenditure projects, and long-term investments. Long-term
cash budgets usually require more strategic planning and detailed analysis as they require cash to
be tied up for a longer period of time.

It's also prudent to budget cash requirements for any emergencies or unexpected needs for cash
that may arise, particularly if the business is new and all aspects of operations are not fully
realized.

How a Cash Budget Works

Companies use sales and production forecasts to create a cash budget, along with assumptions
about necessary spending and accounts receivable collections. A cash budget is necessary to
assess whether a company will have enough cash to continue operations. If a company does not
have enough liquidity to operate, it must raise more capital by issuing stock or taking on more
debt.

A cash roll forward computes the cash inflows and outflows for a month, and it uses the ending
balance as the beginning balance for the following month. This process allows the company to
forecast cash needs throughout the year, and changes to the roll forward to adjust the cash
balances for all future months.

Importance of Cash Budget

 Helpful in Proper Planning

The cash budget helps the management in proper planning. It will know in advance the possible
cash surplus or deficit scenario in near future. In both cases, it can stay prepared in advance to
avoid sudden crisis or loss of investment opportunity. A consistent surplus budget may signal the
management to look for other investment opportunities. It can also decide to raise the scale of its
own operations.
On the other hand, a cash deficit situation can alert it to take care of its expenditures. Also, it can
timely arrange funds by way of equity or debt. Banks are unwilling to extend loans on very short
notice or may charge extra interest on the same. Management may avoid such a situation by
taking action in time. Thus, it will lead to the efficient utilization of its scarce resources.

 Helpful in Tackling Seasonal Variations

A cash budget may be overall positive. But it may still show cash deficits in certain months or
periods due to the seasonal nature of businesses. The management can carefully draft plans to
tackle these seasonal variations in advance. Proposed cash outflows can be timely curtailed or
avoided for periods of stress or low sales. It will help the company to prevent cash shortage.

Moreover, managers can know in advance the periods with a cash surplus. Sitting over idle cash
can lead to a waste of an investment opportunity. It can result in missing out on handsome profits
for the company. Also, the management may plan to repay part of its debt and reduce its interest
burden during periods with a cash surplus.

 Building Brand Value

A cash budget acts as a tool to correctly time expenditures of the company as per its cash
resources. Also, as said earlier, it gives the management time to be prepared for utilizing surplus
cash when available. It helps in timely payment for materials to suppliers, early repayment of the
debt, timely disbursement of salaries, proper streamlining of production activities to ensure
timely deliveries to customers, etc. This results in building goodwill and brand value of the
business. This in turn helps the company to grow and increase its profitability.

Cash operating cycle

The cash operating cycle (also known as the working capital cycle or the cash conversion cycle)
is the number of days between paying suppliers and receiving cash from sales.

Cash operating cycle = Inventory days + Receivables days – Payables days.

In the manufacturing sector inventory days has three components:

(i) raw materials days
(ii) work-in-progress days (the length of the production process), and
(iii) finished goods days.

However, exam questions tend to be based in the retail sector where no such sub-analysis is
required.

The longer the operating cycle the greater the level of resources ‘tied up’ in working capital.
Although it is desirable to have as short a cycle as possible, there may be external factors which
restrict management’s ability to achieve this:

Nature of the business – a supermarket chain may have low inventory days (fresh food), low
receivables days (perhaps just one to two days to receive settlement from credit card companies)
and significant payables days (taking credit from farmers). In this case the operating cycle could
be negative (ie cash is received from sales before suppliers are paid). On the other hand a
construction company may have a very long operating cycle due to the high levels of work-in-
progress.

Industry norms – if key competitors offer long periods of credit to their customers it may be
difficult to reduce receivables days without losing business.

Power of suppliers – an attempt to delay payments could lead to the supplier demanding ‘cash on
delivery’ in future (ie causing payables days to actually fall to zero rather than rising).
Cash Flow Management Techniques

Managing cash flow is a contemplative process and requires a lot of analytical thinking. The
various techniques or tools used by the managers to practice cash flow management are as
follows:

 Accelerating Collection of Accounts Receivable : One of the best ways to improve cash
inflow and increase liquid cash by collecting the debts and dues from the debtors readily.
 Stretching of Accounts Payable : On the other hand, the company should try to extend the
payment of dues by acquiring an extended credit period from the creditors.
 Cost Cutting: The company must look for the ways of reducing its operating cost to main
a good cash flow in the business and improve profitability.
 Regular Cash Flow Monitoring: Keeping an eye on the cash inflow and outflow,
prioritizing the expenses and reducing the debts to be recovered, makes the
organization’s financial position sound.
 Wisely Using Banking Services: The services such as a business line of credit, cash
deposits, lockbox account and sweep account should be used efficiently and intelligently.
 Upgrading with Technology : Digitalization makes it convenient for the organizations to
maintain the financial database and spreadsheets to be assessed from anywhere anytime.

Cash Management Models

Cash management requires a practical approach and a strong base to determine the requirement
of cash by the organization to meet its daily expenses. For this purpose, some models were
designed to determine the level of money on different parameters.

Let us now elaborate on each of these models:

The Baumol’s EOQ Model

Based on the Economic Order Quantity (EOQ), in the year 1952, William J. Baumol gave the
Baumol’s EOQ model, which influences the cash management of the company.

This model emphasizes on maintaining the optimum cash balance in a year to meet the business
expenses on the one hand and grab the profitable investment opportunities on the other side.

The following formula of the Baumol’s EOQ Model determines the level of cash which is to be
maintained by the organization:

Where
‘C’ is the optimum cash balance;
‘F’ is the fixed transaction cost;
‘T’ is the total cash requirement for that period;
‘i’ is the rate of interest during the period

The Miller – Orr’ Model

According to Merton H. Miller and Daniel Orr, Baumol’s model only determines the cash
withdrawal; however, cash is the most uncertain element of the business.

There may be times when the organization will have surplus cash, thus discouraging
withdrawals; instead, it may require to make investments. Therefore, the company needs to
decide the return point or the level of money to be maintained, instead of determining the
withdrawal amount.

This model emphasizes on withdrawing the cash only if the available fund is below the return
point of money whereas investing the surplus amount exceeding this level.

In order to manage its cash balance, the company can employ a mathematical model, one of
which is the Miller-Orr model. The Miller-Orr model helps the company to meet its cash
requirements at the lowest possible cost by placing upper and lower limits on cash balances. The
operation of the model is as follows:

(i) A company should have its desired cash level, an upper limit and lower limit on cash
balances.
(ii) (ii) When the cash balance reaches the upper limit, the company has too much cash. It
then should use its cash to buy marketable securities in order to bring the cash balance
back to its desired cash level.
(iii) (iii) When the cash balance hits the lower limit, the company lacks cash. It then sells its
securities in order to bring the cash balance back to its desired cash level.
(iv) (iv) If the cash balance lies between the upper and lower limits, there will be no
transaction in securities.

Where,
‘Z’ is the spread of cash;
‘UL’ is the upper limit or maximum level
‘LL’ is the lower limit or the minimum level
‘RP’ is the Return Point of cash
We can see that the above graph indicates a lower limit which is the minimum cash a business
requires to function. Adding up the spread of cash (Z) to this lower limit gives us the return point
or the average cash requirement.

However, the company should not invest the sum until it reaches the upper limit to ensure
maximum return on investment. This upper limit is derived by adding the lower limit to the three
times of spread (Z). The movement of cash is generally seen across the lower limit and the upper
limit.

Let us now discuss the formula of the Miller – Orr’ model to find out the return point of cash and
the spread across the minimum level and the maximum level:

Where,
‘Return Point’ is the point at which money is to be invested or withdrawn;
‘Minimum Level’ is the minimum cash required for business sustainability;
‘Z’ is the spread across the minimum level and the maximum level;
‘T’ is the transaction cost per transfer;
‘V’ is the variance of daily cash flow per annum;
‘i’ is the daily interest rate

Assumptions

The Miller-Orr model of cash management can be used if the following assumptions are met:

The cash inflows and cash outflows are stochastic. In other words, each day a business may have
both different cash payments and different cash receipts.
The daily cash balance is normally distributed, i.e., it occurs randomly.

There is a possibility to invest idle cash in marketable securities.

There is a transaction fee when marketable securities are bought or sold.

A business maintains the minimum acceptable cash balance, which is called the lower limit.

Cash Management Rules and Regulations

Cash management regulations establish rules and procedures that a school must follow in
requesting, maintaining, disbursing, and otherwise managing Title IV funds. On October 30,
2015, the Department of Education finalized new cash management rules, followed by technical
corrections in April 2016. Many of these regulations apply to all institutions, but some only
affect schools that have arrangements with banks and third-party servicers processing Title IV
credit balance refunds.

There are two types of arrangements in the final cash management rules: Tier One (T1), and Tier
Two (T2). The regulations require colleges and universities to disclose the contract establishing a
T1 or T2 arrangement on their website and provide the Department of Education with the
contract's URL. A brief description of T1 and T2 arrangements is below.

Tier One (T1) Arrangements. A higher education institution has a Tier One (T1) relationship if it
arranges for a third-party servicer to process direct payments of Title IV funds on its behalf. In
addition, to qualify as a T1 arrangement, the third-party servicer must either offer at least one
financial account under the arrangement or market an account to students, either directly or
through another entity.

Tier Two (T2) Arrangements. A school has a Tier Two (T2) relationship if it allows banks to
offer and market accounts directly to students. Any account that can be linked to a student ID
will be considered at a minimum to be an account under a T2 arrangement. However, if a school
had at least one student with a Title IV credit balance refund in each of the three most recently
completed award years, only certain provisions of the T2 regulations apply. Because of this
lower threshold, NACUBO informally refers to these arrangements as “Tier Two, Lower
Threshold” (T2-L).

Basic Principles of Cash Management

The principles of cash management are-

1. Maintaining lower levels of inventory: Keeping a larger level of inventory can often lead
result in a scenario where cash gets unnecessarily stuck. Even the warehouse space gets occupied
unnecessarily. Companies must come up with appropriate techniques and strategies to be able to
successfully maintain lower levels of inventory.

2. Speeding up the process of cash receivables: The companies must encourage its clients and
customers to pay their dues quicker and they must offer them lucrative discounts and such other
schemes that motivate them to pay as early as possible.

Cash Management Services

Cash Management Services (CMS) ensure effective management of collections and payments
resulting in improved cash flow and enhanced liquidity. The aim of CMS is to enhance the
profitability of customers through effective liquidity management

Benefits of CMS for customers

 Effective Receivables and Payables management resulting in effective control over funds.
 Reduced working capital cycle - thereby earning interest income & reducing interest
cost.
 Efficient access to cash through Centralized Fund availability.
 Indian Corporates having geographical presence can pool everything at their Head Office
to offset the debits with the surplus monies collected from various subsidiaries.
 Timely and effective investments, transforming the treasury function as a profitcentre.
 Enhanced liquidity.
  Various MIS reports, electronic reconciliation and online customer service provide
timely access to information and funds.

CASH MANAGEMENT IN TROUBLED TIMES

Many small businesses experience cash flow difficulties, especially during their first years of
operation. But entrepreneurs and managers can take steps to minimize the impact of such
problems and help maintain the continued viability of the business. Suggested steps to address
temporary cash flow problems include:

Create a realistic cash flow budget that charts finances for both the short term (30-60 days) and
longer term (1-2 years).

Redouble efforts to collect outstanding payments owed to the company. "Bill promptly and
accurately," counseled the Journal of Accountancy. "The faster you mail an invoice, the faster
you will be paid. If deliveries do not automatically trigger an invoice, establish a set billing
schedule, preferably weekly." Businesses should also include a payment due date.

Offer small discounts for prompt payment.

Consider compromising on some billing disputes with clients. Small business owners are
understandably reluctant to consider this step, but in certain cases, obtaining some cash even if
your company is not at fault in the dispute for products sold/services rendered may be required to
pay basic expenses.

Closely monitor and prioritize all cash disbursements.

Contact creditors (vendors, lenders, landlords) and attempt to negotiate mutually satisfactory
arrangements that will enable the business to weather its cash shortage (provided it is a
temporary one). In some cases, you may be able to arrange better payment terms from suppliers
or banks. "Better credit terms translate into borrowing money interest-free," states the Journal of
Accountancy.

Liquidate superfluous inventory.

Assess other areas where operational expenses may be cut without permanently disabling the
business, such as payroll or non-strategic goods and/or services with small profit margins.

Merits of cash management

Even with the increased frequency of other forms of payment, quick-serve restaurant operations
are still largely cash-run enterprises, with cash accounting for more than 30 percent of all
transactions. But as cash flow grows, so does the risk. Over 80 percent of small and medium-size
businesses fail because they either lack, or don’t understand the need for, cash management.

Choosing the right provider that offers the right suite of solutions is more important than ever for
the success of quick-serve operations. The problem is that there is no one-size-fits-all answer.
Here are merits that your business should be getting from the cash management provider.

 Reduced risk

Cash management solutions, such as smart safes, use automation to help reduce the risk of
loss and theft by eliminating touch points in a business’ cash-handling processes.

Many cash management providers also implement a custom armored cash-in-transit pickup
and delivery schedule to make sure the operation always has the right amount of cash on
hand. Too little cash and businesses can experience crippling shortages. Too much money in
the safe can create a liability for customers and employees and increases the risk of potential
robbery. Not only does a smart safe solution keep cash secure, it also helps eliminate the
need for employee trips to the bank, further reducing the chance of either internal or external
theft.

 Streamlined processes

Not only does a reduction of touch points reduce risk, it increases operational efficiency and
cost savings. With cash management solutions in place, employees spend less time training
or having to learn complicated, often outdated cash-handling processes. Many smart safe
solutions include built-in tutorials, which free up employees’ time for tasks that are more
vital (and more profitable) to the core business. And built-in diagnostic systems help
employees troubleshoot potential issues, helping minimize safe downtime for maintenance.

 Faster access to cash and data

Transparency is one of the key benefits of cash management. Streamlined and automated
processes, and solutions such as smart safes, give businesses faster access to their cash. More
technologically driven cash management providers also offer real-time access to reporting
data and account information through online customer portals. This visibility can facilitate
better decision-making, allowing businesses to more effectively manage and scale their
operations.

 No more downtime

In the fast-paced world of quick-serves, no one can afford downtime, whether from cash
shortages, human error, or maintenance issues. Superior cash management capabilities can
help eliminate the possibility of downtime with advanced monitoring and diagnostics.
Features such as predictive maintenance and remote diagnostics reduce the need for in-
person visits from techs. Remote system monitoring and built-in wireless connectivity help
the provider stay on top of possible issues and solve problems before they happen. This helps
ensure that the whole system is up and running at optimal efficiency.

 Customizable solutions

No two operations have the same needs. And there’s certainly no one-size-fits-all cash
management solution. The right cash management provider should be able to accommodate a
business’ specific needs, whether it’s a small local chain, a larger regional operation, or a
national corporation. Designing the best system can include developing a tailor-made cash-
in-transit schedule, outfitting restaurant units with the right smart safe configuration, and
giving businesses better, quicker access to their reporting information.

 A true partnership
Ultimately, the goal of cash management is to help businesses save and make money. It’s in
the cash management provider’s best interest to make sure its customers are happy, safe, and
profitable. That involves really knowing how the business runs and asking the right
questions. The provider will then be able to offer recommendations on the best solutions for
the business operation. And service shouldn’t stop at installation. Cash management
providers should also offer outstanding customer service and support, helping solve, or even
anticipate problems, giving businesses added peace of mind.

 Save time and resources

The advisory tool is particularly relevant to companies that have many manual processes,
complex payment flows or substantial liquidity tied up in working capital.

 Get an overview of the processes

You will be assigned a cash management specialist, who will review the company's
purchasing, sales, personnel and liquidity processes. Based on the particular challenges faced
by your company, you will be presented with concrete suggestions as to how to optimise
processes and keep as much liquidity as possible in the company, creating the resources
needed for more.

Simple optimisation process

The cash management specialist will outline the characteristics of the company, identify the
challenges in the processes and come up with recommendations as to which areas can be
optimised - from extensive improvement proposals right down to minor improvements to
support current processes. It is important that there are people available with a particularly
good knowledge of the company's processes.

 A tool for optimising liquidity processes

It provides an opportunity to increase the value of your company, as it:

frees up resources from administration and routine tasks

provides an overview of debtors, creditors and liquidity across national borders and
currencies
streamlines and automates payment routines and processes

allows integration with current systems

optimises the reminder procedure

minimises funds tied up in working capital.

 A specialist will review your liquidity processes

Cash Management Optimisation takes place in your company and begins with the
company's own processes. A cash management specialist will visit and carry out a
structured review and optimisation of the company's processes in the areas of
purchasing – from ordering to receipt, approval and payment
sales – from receiving the order to completion of payment and final reconciliation
personnel – solutions for travel expense management, salaries, contracts, pensions, etc.
liquidity – working capital, foreign currency accounts, different types of financing, trade
finance products, etc.

Limitations of cash management

 Cash management ignores the accrual concept of accounting
 It is historical in nature that is, it rearranges the current information which is provided in
the profit and loss statement and the balance sheet.
 It is not a substitute for a profit and loss statement.
 It ignores non-cash transactions
 Management of the cash requires the specified skills of the person managing it.
 It is a time-consuming process.
 Chapter 3
Data Analysis

COMPANY PROFILE
Name of company – State Bank Of India

Place of business – Mumbai

Establishment year - 1 July 1955

Vision - BE THE BANK OF CHOICE FOR TRANSFORMING INDIA

Mission – COMMITED TO PROVIDING SIMPLE, RESPONSIVE AND INNOVATIVE

FINANCIAL SOLUTION

Branches – 22141

Type of business -  Treasury, Corporate/ Wholesale Banking, Retail Banking and Other
Banking Business

Products and services offered - Savings account, credit cards, fixed deposits, personal loan, home
loan, business loan, debit card, loan against property, car loan, gold loan, mudra loan, retail
banking and wealth management.

Turnover and financial data –Revenue - ₹368,010.6492 crore (US$52 billion

Operating income - ₹75,105.2876 crore (US$11 billion)

Net income - ₹11,439.4023 crore (US$1.6 billion) 

Total assets -  ₹4,197,492.3443 crore (US$590 billion)

Total equity - ₹250,167.6630 crore (US$35 billion)

Key Personnel – Shri Dinesh Kumar Khara – Chairman

Shri C.S Setty – Managing Director

Shri Ashwini Bhatia – Managing Director

Shri Swaminathan J- Managing Director

Shri Ashwini Kumar Tewari – Managing Director

Mergers or expansions - State Bank of Bikaner & Jaipur, State Bank of Mysore, State Bank of
Travancore, State Bank of Patiala, State Bank of Hyderabad; and the Bharatiya Mahila Bank.

Awards and recognition – Best Transaction Bank Of India, The Best Trade Finance Bank, Green
Bond Pioneer Award, Mobile Banking Initiative Of The Year

CASE STUDY (STATEBANK OF INDIA)

Ground Realities:

The ABC Ltd. is a FMCG Company. The company has presence in more than 15 cities
and has its head quarter in Mumbai. The company has Depots at these cities. And each depot has
some turnover every month, the name of Cities, the monthly turnover of the each depots and
number of retailers in each cities are as follows:

Sr. No. Cities Monthly Turnover No. of Retailers

(Rs. In Crores)

1 Mumbai 1.5 200

2 Delhi 1.25 180

3 Calcutta 1.00 175

4 Madras 0.75 180

5 Ahmadabad 0.75 150

6 Bangalore 0.70 160

7 Hyderabad 1.00 155

8 Pune 0.50 140

9 Jaipur 0.60 150

10 Indore 0.75 120

11 Cochin 0.50 130

12 Agra 0.50 120

 13 Jalandhar 0.40 110

14 Jammu 0.10 115

15 Nagpur 0.10 135

16 Lucknow 0.10 140

The requirements of the ABC Ltd. are as follows:

All money should be ABC Ltd. a/c at Delhi.

All money should on the next day basis.

Details of cheques deposited at different location on daily basis:

Location

No. of cheques deposited

Cheque number

Cheque amount

Date of deposit

Clearing date

Retailer name/code

Returned cheques

Date

Reason

Location

Amount
Courier pick-up service at each location.

Monthly reports of each location about sales, collection, expenditures etc.

Other MIS reports

ANALYZING PROCESS:

These are the conditions and facts of the organisation. This is the case of STATE BANK OF
INDIA CMS. This is regarding how the bank makes deal with the company.

The STATE BANK OF INDIA will analysis the location of the company. The ABC Ltd.
has sixteen locations in the country. This is not always possible to have the branches at each
location of the client for the banks. In this case, we are taking the assumptions as follows:

In 10 locations of the company, the bank has its own presence.

In 2 locations of the company, the bank has tie-up with correspondent bank

And in remaining 4 locations, the bank has no presence as well as no tie-up with any other bank.

How the bank makes allocation of the different instruments?

The bank broadly categorized the instruments into two types:

Local Cheque Collections (LCC)

LCC are the cheques, which are drawn and deposited at the same location. Eg. A Cheque drawn
at Jaipur must be deposited at Jaipur only.

The LCC is again categorized into two types:

LCC BRN:

A local Cheque which is drawn and deposited at the same location where the bank has its own
presence.
LCC COR:

A local Cheque which is drawn and deposited at the same location where the bank doesn’t have
its own presence but has tie up with correspondent Bank.

Upcountry Cheque Collections (UCC)

The UCC are the cheques, which are drawn and deposited at different locations. Eg. A Cheque
drawn at Jaipur is deposited at Delhi.

The UCC is again categorized into two types:

UCC BRN:

An upcountry Cheque which is drawn at one location and deposited at another location where the
bank has its own presence.

UCC COR:

An upcountry Cheque which is drawn at one location and deposited at another location where the
bank has tie-up with correspondent Bank.

UCC ONW:

An upcountry Cheque which is drawn at one location and deposited at another location where the
banks neither have its own presence nor have tie-up with correspondent bank.

PRICING:

Pricing is competitive; varies from centre to center. It also varies from instruments to
instruments.

Special pricing can be worked out taking into account the volume of funds & the centres. The
pricing part of the CMS is very complex. Normally, the STATE BANK of INDIA takes into
account the following factors while going for pricing:
Bank In Funds/ Out of Funds & Correspondent Bank Charges:

When Cheque is deposited in the bank it passes through the clearing house. In India, clearing is
done through RBI, SBI and PSU banks. The RBI has presence in 15 cities in India while SBI has
938 locations in India including its associates. Other cities where clearing house is not there, the
clearing is done through Correspondent Bank, mostly these are PSU Banks or Co-operative
Banks.

Suppose I deposit the Cheque on day 0, then the time taken by the clearing houses to debit the
bank account would be different. The SBI has to debit its customer’s account on the next day
basis irrespective of days to clear.

Day when the Clearing Bank Days for which Bank In Fund/Out
Cheque will be bank is out of Fund
credited fund

Day1 RBI 0 Not out of funds

Day2 SBI 1 1 Day out of funds

Day3 Correspondent Bank 1 1 Day out of funds

In this case, the bank charges interest on the money which it gives in form of “Credit
against Uncleared Cheque”, to the company. When it comes to the Correspondent bank, the bank
has to pay extra charges to these banks.

Overheads:

The bank takes into account the overheads charges, which it occurs in the process. The o/hs
charges include salary, administration charges, maintenance etc.

Margin:
After including the transaction and other overheads charges, the bank gets the cost of transaction.
On this the bank adds its margin for being in the business.

In pricing, other elements like courier charges return cheques etc. also considered. Pricing in

CMS in generally negotiable between the company and the Bank.

Features of STATE BANK OF INDIA CMS:

Exclusive CMP desks with infrastructure

Debit Transfers

Courier pick-up at branches

No collection a/cs needed at branches

Customized Reports

Transmission of data through Internal LAN system

Direct credit to accounts

Benefits to Customers:

Centralized Control of cash

Cost reduction

Enhanced Liquidity

Interchange of Information between treasury & operating units

Reduced excess cash balance

Cash forecasting & scheduling

Effective control over disbursements

Timely & effective investments

CHAPTER 4

Research Design
 A research design is a framework and blueprint for conducting the marketing research
project. It details the procedure necessary for obtaining the information needed to
structure and solve marketing research problems. In simple words it is the general planof
how you will go about your research.

 TITLE OF THE STUDY

The present study titled as ‘A PROJECT REPORT ON CASH MANAGEMENT ’. The study is
made with special reference to the types, advantages, limitations, analysis and interpretations.

 OBJECTIVES OF THE STUDY

The following are the objectives of present study :
 To study cash management in detail
 To understand how cash is being managed by SBI
 To suggest methods for improving cash management
 To know the liquidity, solvency, profitability position of the company
 DATA AND METHODOLOGY
For the purpose of study of Cash Management only secondary data is used. Secondary
data is collected from the internet, annual report of company, company’s website and the
competitor’s websites

 SCOPE OF THE STUDY

The scope of study of cash management is limited to collecting financial data published
in the annual report of the company every year.

 LIMITATIONS OF THE STUDY

Only secondary data is issued
The allotted time is 5 weeks for the study was relatively insufficient, keeping in mind
long durations it can take at times, to close a particular corporate deal