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FINANCIAL ACCOUNTING
PROJECT
ON
‘TOPIC: CASH MANAGEMENT’

Submitted to: Submitted by:

Prof. Saumya Desai Rishabh Manawat
Financial Accounting 20200401076
UWSL, Gandhinagar. B.B.A(Hons.) L.LB.(Hons.)
Semester: 3 Year: 2021-22
Section: ‘A’
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TABLE OF CONTENTS

PAGE NO.

1. TABLE OF CONTENTS 2
2. INTRODUCTION 3
2.1 FINANCIAL ACCOUNTING 3
2.2 IMPORTANCE OF FINANCIAL ACCOUNTING 3
2.3 OBJECTIVES 3
3. CASH MANAGEMENT 4
3.1 TYPES 4
3.2 IMPORTANCE 4
3.3 OBJECTIVES 5
3.4 FUNCTIONS 5
3.5 DIFFERENT TYPES OF CASH MANAGEMENT TOOLS 6
3.6 CASH MANAGEMENT MODELS 7
3.6.1 BAUMOL’S EOQ MODEL 7
3.6.2 MILLER-ORR’ MODEL 7
3.7 CASH MANAGEMENT STRATEGIES 9
3.8 CASH FLOW MANAGEMENT TECHNIQUES 9
3.9 EXAMPLE 10
3.10 ADVANTAGES AND DISADVANTAGES 11
3.11 LIMITATIONS 11
4. CONCLUSION 11
5. REFERENCES 12
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INTRODUCTION

The purpose of this project is to study Cash Management which is a field in Financial
Accounting. Before looking into Cash Management and its types, uses, implementations, and
various aspects we need to know what Financial Accounting is? Prior knowledge of financial
accounting will help us in a better understanding of this concept.

FINANCIAL ACCOUNTING

The American Institute of Certified Public Accountants (AICPA) defines accounting as:

"The art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions, and events which are, in part at least of financial character, and
interpreting the results thereof."

IMPORTANCE OF FINANCIAL ACCOUNTING

Financial accounting is important for businesses because it helps them keep track of their
financial transactions. In turn, they can make sound decisions on how to allocate their
resources. In addition, financial accounting helps you communicate your business finances to
outside parties such as creditors and investors. The financial statements generated provide all
the necessary information to other parties, which will either encourage or discourage them from
partnering with your business.

Financial accounting makes a company’s financial standing available for people on many
different levels. Any company, but especially larger companies, has many different
transactions, gains, losses, and other monetary changes throughout a business period. Financial
accounting puts all of this information into one location and makes it easier to understand.
Financial accounting also includes performing essential calculations from this information.

MAIN OBJECTIVES OF FINANCIAL ACCOUNTING

They are as follows:

➢ Safeguarding of Interest of Various Stakeholders.

➢ Helps in the Measurement of Profit and Loss of Business.
➢ Presentation of Historical Financial Records.
➢ Focus on External Transaction of Business.
➢ To present the financial position of the Business.
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CASH MANAGEMENT

Cash Management refers to the collection, handling, control, and investment of the
organizational cash and cash equivalents, to ensure maximum liquidity and maximum
profitability. It refers to the proper collection, disbursement, and investment of cash.

Money is the lifeline of the business, and therefore it is essential to maintain a sound cash flow
position in the organization.

TYPES

Different types of cash management techniques are:

1. Cash Flow from Operating Activities: It is found on an organization’s cash flow

statement, and it does not include cash flow from investing.
2. Free Cash Flow to Equity: Free Cash Flow to Equity represents the amount of cash
that is available after the capital is reinvested.
3. The Net Change in Cash: It refers to the movement in the total amount of cash flow
from a particular accounting period to another.
4. The Net Change in Cash: It refers to the movement in the total amount of cash flow
from a particular accounting period to another.

IMPORTANCE

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.
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OBJECTIVES

Why do we need to manage cash flow in the organization? What is the use of cash management
in the business?

These are the main objectives of cash management that will resolve the above queries:

➢ Fulfill Working Capital Requirement: The organization needs to maintain ample

liquid cash to meet its routine expenses which is possible only through effective cash
management.
➢ Planning Capital Expenditure: It helps in planning the capital expenditure and
determining the ratio of debt and equity to acquire finance for this purpose.
➢ Handling Unorganized Costs: There are times when the company encounters
unexpected circumstances like the breakdown of machinery. These are unforeseen
expenses to cope up with; cash surplus is a lifesaver in such conditions.
➢ Initiates Investment: The other aim of cash management is to invest the idle funds in
the right opportunity and the correct proportion.
➢ Better Utilization of Funds: It ensures the optimum utilization of the available funds
by creating a proper balance between the cash in hand and investment.
➢ Avoiding Insolvency: If the business does not plan for efficient cash management, the
situation of insolvency may arise. It is either due to lack of liquid cash or not making a
profit out of the money available.

FUNCTIONS

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:

1. Investing Idle Cash: The company needs to look for various short-term investment
alternatives to utilize surplus funds.
2. Controlling Cash Flows: Restricting the cash outflow and accelerating the cash inflow
is an essential function of the business.
3. Planning of Cash: Cash management is all about planning and decision-making in
terms of maintaining sufficient cash in hand and making wise investments.
4. 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.
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5. Optimizing Cash Level: The organization should continuously function to maintain

the required level of liquidity and cash for business operations.
6. Receivables Management: Any amount which the company has earned however not
yet received, i.e., its outstanding and is expected to be received in the future, is known
as receivables. An organization must manage its receivables to maintain the surplus
cash inflow. It helps the firm to fulfill its immediate cash requirements. The cash
receivables must be planned in such a way that the organization can realize its debts
quickly and should allow a short credit period to the debtors.
7. Payables Management: The payables refer to the payment which is unpaid by the
organization and is to be paid off shortly. The organization should plan its cash outflow
in such a manner that it can acquire an extended credit period from the creditors. This
helps the firm to retain its cash resources for a longer duration to meet the short-term
requirements and sudden expenses. Even the organization can invest this cash in a
profitable opportunity for that particular credit period to generate additional income.

DIFFERENT TYPES OF CASH MANAGEMENT TOOLS

Different types of Cash Management tools are:

1. Checking Account: It can also be named transaction accounts because it is a tool used
to transfer funds deposited into the account to make a cash purchase. The funds are
easily accessed through a check, an automated teller machine (ATMs), a debit card,
telephone, or internet. They are available at depository institutions (traditionally called
banks).
2. Savings Account: They hold money not spent on consumption. It allows for frequent
deposits or withdrawals of funds, is easily accessible, and can be used as a place to store
money for emergencies or to temporarily hold money not needed for daily living
expenses. They are available at depository institutions. Savings accounts are more
liquid than everything except checking accounts because a person can easily get money
out of a savings account in a few minutes. They are accessible through ATMs,
telephones, or the internet. They are interest-bearing but have lower interest rates
compared to other cash management tools except checking accounts.
3. Short-term instruments such as Money Market instruments and mutual funds, Treasury
Bills, certificates of deposit (CD), etc.
4. Long-term low-risk savings instrument.
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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.

The two most important models are:

1. The Baumol’s EOQ Model

2. The Miller – Orr’ Model

BAUMOL’S EOQ MODEL

➢ Based on the Economic Order Quantity (EOQ), in the year 1952, William J. Baumol
gave Baumol’s EOQ model, which influences the cash management of the company.
➢ This model emphasizes 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 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 making investments. Therefore, the company
needs to decide the return point or the level of money to be maintained, instead of
determining the withdrawal amount.
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➢ This model emphasizes withdrawing the cash only if the available fund is below the
return point of money whereas investing the surplus amount exceeds this level.
➢ Given below is the graphical representation of this model:

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.
➢ 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;
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‘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.

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:

1. 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.
2. 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.
3. Lockbox Account: This facility provided by the banks enable the companies to get
their payments mailed to their post office box. This lockbox is managed by the banks
to avoid manual deposit of cash regularly.
4. 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.
5. 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 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:

1. Accelerating Collection of Accounts Receivable: One of the best ways to improve

cash inflow and increase liquid cash is by collecting the debts and dues from the debtors
readily.
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2. 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.
3. 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.
4. Cost Cutting: The company must look for ways of reducing its operating cost to main
a good cash flow in the business and improve profitability.
5. 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.
6. Upgrading with Technology: Digitalization makes it convenient for organizations to
maintain the financial database and spreadsheets to be assessed from anywhere
anytime.

EXAMPLE OF CASH MANAGEMENT

Following is ABC’s weekly average cash balances:

WEEK AVERAGE CASH

BALANCE (₹)
1 10,000
2 15,000
3 8,000
4 13,000
TOTAL 46,000

Annual interest rate= 12%

Monthly Average Cash Balance is calculated as:

➢ Monthly Average Cash Balance= ₹46,000 / 4 = ₹11,500

Monthly Return on Average Cash Balance is calculated as:

➢ Monthly Return on Average Cash Balance = ₹11,500 * 0.1= ₹ 115

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Using this, the company will manage the cash of its business.

ADVANTAGES AND DISADVANTAGES

Advantages:

1. Cash management allows estimating the cash profits and not just profits from
outstanding incomes and credit sales.
2. It helps in detecting cash embezzlement.
3. It allows for speeding up the working capital cycle.
4. It helps in rewarding such debtors that make quicker payments.
5. It speeds up the operations of an organization.

Disadvantages:

1. Management of the cash requires the specified skills of the person managing it.
2. It is a time-consuming process.

LIMITATIONS

➢ Cash management ignores the accrual concept of accounting.

➢ It is historical; 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.

CONCLUSION

It is also better known as treasury management. A treasurer of an organization looks after the
overall cash management for the same. It helps in estimating the cash profits instead of profits
earned through credit sales. It can also help in tracing cash embezzlement.

It solves all the problems about the deficiency in working capital. It also ensures that a
company’s solvency is not impacted and the current value of money is more effectively taken
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into use, along with speeding up the company’s operational activities. However, it must be
noted that it is not a substitute for profit and loss statements.

REFERENCES

WEBSITES:

➢ www.investorsbook.com
➢ www.cleartax.in
➢ www.educba.com

BOOKS:

➢ NCERT CLASS 12 ACCOUNTANCY.