Cash Planning and Management

Cash Planning and Management
With Special Refereace to Selected Public

Sector Undertakings
Thesis Approved by the University of Delhi

for the Degree of Doctor of Philosophy
R^. BARI
Department of Commerce
Zakir Husain College
University of Delhi
Triveni Publications
DELHI
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end Printed by Ashotas Press, KewDsIhi-110D05
at Rashtrat'ani Pnnlcrs.KcwDelhi'llOOM.
ACKNOWLEDGEMENTS
This study was completed under the supervision of Dr. M.Y.
Khan. I would place on record the assistance and encourage-
ment that I have received from him at the various stages of the
study.
For the initial motivation and encouragement thanks are due
to Professor S.P. Singh, National Institute of Bank Manage-
ment, Bombay.
I am grateful to Professor L.S. Porwal, Head. Department of
Commerce, University of Delhi, who gave me constant inspira-
tion and extended necessary help in the study. He also took the
trouble of going through an earlier draft and offered valuable
suggestions which have been incorporated in the final draft.
The field research work would have been impossible but for
the co-operation of the chief finance executives and other per-
sonnel of the companies which comprise the study. It is diffi-
cult toacknowledge individually all the executives who extended

their co-operation but Mr. K.R. Maheswari, General Manager
(Finance), the Handicrafts and .Handlooms Exports Corpora-
tion of India Ltd., Mr. H.S. Lain. Manager (Funds and
Accounts), Bharat Heavy Electricals Ltd., Mr. G.G. Pillai,
Chief (Budget and Cost), National Mineral Development
Corporation Ltd., Mr. P.S. Bedi, Deputy Manager (Accounts),
Central Warehousing Corporation and Mr. R.K. Goel. Deputy
Finance Manager, State Trading Corporation of India Ltd.
deserve special mention.
Mr. G.C. Sharma, Senior Assistant Manager (Business Policy),
Central Warehousing Corporation, had been, indeed, gratious
in giving his time and counsel and extending other necessary
help. 1 am indebted to him.
Dr, S.A. Ali, Principal and Mr. S.G. Hashmi. Vice Principal
Incharge. Zakir Husain College Evening Classes, (University of
Delhi), showed keen interest and provided necessary facilities
for the accomplishment of this task. I am grateful to them.

A contingent grant by the LC.S.S.R. for field work brought
the entire field investigation within the realm of and
possibility
another grant by the U.G.C. for books and journals pro%ed
to be of immense help to me m
acquiring the required literature
including xeroxing for the purpose. The Financial Executive
Institute. New York, helped me by sending pliotostate copies
of se\en articles. I am obliged to them.
I express ray gratitude to all my
and colleagues parli-
friends
larly Mr K N Dube, Dr. N K. Agarwal, Mr. S.M. Zutshi, Mr.
F U. Khan, Mr. R L Sharma, Mr N.K. Agarwal, Mr. M. N.
Sitaraman, Dr. P. K. Jain, Dr. N. Mishra and Mrs. Preeti Singh
for their invaluable assistance in the study.
I wish to thank Shri H C. Jam. Librarian. South Delhi Cam-
pus and his staff for their timely and necessary help. Mr.
Subhash Chander deserves my sincere thanks for typing the
manuscript in time.
I would be failing in my duty if I do not acknowledge the
benefit that I have derived from the v.orks of the various
authors on the subject which had enriched my understanding
of the subject.
Finally, the study would have not been completed but for
the patience, understanding, co-operation and encourage-
ment of the members ot my family particularly my younger
brothers R. S. Ban and R. V. Ban and my wife Sharda.
Zakir Husain College R. R. BARI

Delhi-1 10 006
November, 1979
CONTENTS
Acknowledgements V
1 ist of Tables ix
List of Figures xi
1. INTRODUCTION 1
Scope 5
Plan of Study 8
Sources of Data 8
2. MEASUREMENT OF CASH BALANCES 9
Methodology 11
Variations in Cash Balances 15
Cash to current assets 1
Cash to current liabilities 19

Cash to sales 23
Sales to Fixed Assets and Cash to Working Capital 26

Sales Volume and Cash Balance 33
Cash Turnover and Liquidity Ratios 38
Conclusions 43
3. FORECASTING AND CONTROL OF CASH 47
Cash Forecasting 49
Control of Cash Flows 59
Conclusions 67
4. INCREASING THE AVAILABILITY OF USABLE

CASH 81
Collection from Debtors 83
Presentation of invoices 84
Cootrcl of credit taken by customers 86
Prompt banking of collections 99
Maintenance of Inventories 112

Control Over Payables 122
Conclusions 128
5. DEALING WITH SURPLUS AND DEFICIT

CASH 137
Management of Surplus Cash 138

Management of DeScrt Cash 155
7. Conclusions 164
6. BANK RELATIONSHIP 167
Selection of Banks 16S

Banking Services and Mode of Compensation 174
Conclusions 177
CONCLUDING OBSERVATIONS 179
Appendices 187
Select Bibliography 215
Index 225
LIST OF TABLES
1. 1 Stages in the Selection of Companies 6
2.1 Components of Cash Balances in Selected

Companies (Percentages) 12
2.2 Percentage of Cash to Current Assets in Selected
Companies 16
2.3 Percentage of Cash to Current Liabilities in
Selected Companies 20
2.4 Percentage of Cash to Sales in Selected Com-
panies- 23
2.5 Ratio of Sales to Fixed Assets and Percentage
of Cash to Working Capital in Selected Com-
panies 28
2.6 Index of Sales Volume and Cash

Numbers
Balance and Percentage of Cash to Sales in
2.7 Cash Turnover and Liquidity Ratios in Selected
Companies 40
3.1 Importance of Cash Forecast ; Value Assigned

by Selected Companies 51
3.2 Departments Responsible to Prepare Cash

Forecast in Selected Companies 52
3.3 Time Span Covered in the Cash Budget by

3.4 Factors Responsible for Causing Deviations in

Actual Result as Compared to the Cash Budget
in Selected Companies 63
4,1 Number of Days Taken by Selected Companies

in Sending Bill to Customers 85
X
42 Index Numbers of Sales and Debtors in Selected

Gjmparues S7
43 Credit Period Allowed to Customers bv Selected

Companies 89
4.4 Percentage of Cheques in Hand/Transrt to

Total Cash in Selected Companies 90
4.5 Percentage ofDebts Outstanding BejondSix

Months to Total Debtors in Selected Com-
panies 91
4.6 Delaj m Receiving Cheques from Customers by

Seleceed Companies (Percentage to Total) S6
A.l Techniques Adopted by Selected Companies in
Expediting Collections from Customers 100
4.8 Loss of Interest Due to Bank Float 102
4,9 Average Daily Collection from Debtors in Selec-

tedCompanies 104
4.10 Percentage of Interest Paid on Loans to Net

Profit (Before Tax) in Selected Companies 105
411 Percentages of Interest Paid on Loans and of Net

Profit (Before Tax) to Sales m Selected
Cbm panics 106
4.12 Respective Share of the Different Companies in

the Interest Paid on Loans (Percentage to Total) 108
4.13 Percentage Share of Different Parties in the

Total Amount of Interest Paid by Selected
Companies 109
4 14 Bank Float in Local Cheques in Selected Com-
panies (Percentage to Total) 111
4 15 Percentage of Invenlorjes to Current Assets in

the Total Inventories (Percentage to Total) 119
4.17 Percentage of Inventories to Sales in Selected
Companies 120
XI
4.18 Practices of Making Payment to Suppliers by

4.19 Reasons for Making Payment Beyond the Due

Dates by Selected Companies 125
4.20 Float in Payables in Selected Companies 126
5.1 Percentage of Shoit Term Investments to Total

Cash in Selected Companies 140
5.2 Percentage of Interest Received to Net Profit

(Before Tax) in Selected Companies 141

the Total Interest Received (Percentage to Total) 143
5.4 Composition of Interest Earned by Selected

Companies (Percentage to Total) 144
5.5 Percentage of Cash in Current Account to Total

Cash in Selected Companies 152
5.6 Balances in Cash Credit Account in Selected

Companies 158
5.7 Techniques Adopted by Selected Companies in
Meeting out Cash Deficit Situation 160
6.1 Banks in Use of Selected Companies 170
6.2 Indian Banks in Foreign Countries and Foreign

Banks being Used by Selected Companies 171
6.3 Cash Credit Limit and Number of Banks in

Companies
Selected 173
6.4 Cash Balances in Current Account in Selected
Companies 177
LIST OF FIGURES
II. A Percentage of Cash to Current Assets in
Selected Companies, 1971-75 (Average) 17
II.B Percentage of Cash to Current Liabilities in

Selected Companies, 1971-75 (Average) 21
II. C Percentage of Cash to Sales in Selected

Companies, 1971-75 (Average) 24
HI. A Effect of Managerial Control on Cash Flows 61
IV.A Percentage of Cheques in Hand/Transit

to Total Cash in Selected Companies,
1971-75 (Average) 92
IV.B Percentage of Debts Outstanding Beyond

Six Months to Total Debtors in Selected
IV.C Delay in Receiving Cheques from Debtors by

IV.D Bank Float in Local Cheques in Selected

Companies 113
IV.E Percentage of Inventories to Current Assets
in Selected Companies, 1971-75 (Average) 116
IV.F Percentage of Inventories to Sales in Selected

V.A Percentage of Interest Received from Difle-’

rent Sources on Short Term Investment of
Surplus Cash by Selected Companies,
1971-75 (Average) 147
V.B Percentage of Cash in Current Account

to Total Cash in Selected Companies,
1971-75 (Average) 1^^
1
Introduction
This study is an attempt to investigate into the cash planning

and management procedures of selected undertakings in the
public sector'^. Although the concept of cash management,
as an important aspect of working capital management, is not
new, it has assumed great importance in the modern business
world due to important changes in the conduct of business and
ever-increasing difficulties and cost of borrowings. In the past
1. The term ‘public sector’ refers to enterprises established by the

Central Government in India. It may be broadly divided into two
main categories. In the first category fall those undertakings which
are managed departmentally by the Government, e.g., the Railways,
the Post and Telegraph departments and similar other industrial
activitiesof the Government. The second category consists of statu-
tory corporations established by the Government under special enact-
ments of the Parliament. Those statutory corporations and companies
have been established both by the Central and the State Governments.
—
(Ray, H. N., ‘Public Enterprises in India Strategy, Objectives and
Control’, ed., Raj K. Nigam, Management of Public Sector in Ind a,
(Bombaj’, 1971), pp. 11-36). In the present study, the companies
registered under the Companies Act and established by the Central
Government, called ‘companies sponsored by the Government of
India’, only have been included.
2 CASH PLASM*^0 AND MANACEAIENT
“ibe emphasis was only on having sufficient funds lo mrcl

any requirement. If this was accomplished, cash manage-
ment was considered as reaching the desired objective. To
meet the competitive nature of today’s bustness much more
IS required. Today, when cash, liJ.c any other asset of
the company, is a tool for profits, the emphasis is on the
rg/it amount of cash, at the r/gftr lime, at the ng'tl place,
and at the right cost’”.
Hence, the enterprises must learn lo seek wajs to make more

effecliscuse of availab’e cash resources in order lo satisfy the
heavy cash demand to support its growth and to improve the
rate of returnon Hs assets
For cash management purposes cash is used broadly to cover
cash and generally accepted equivalents of cash such asdemand
and time deposits in etc. ard also the
baaUs), cheques, drafts
marketable ie, short-term investment of cash.
securities,
Since these items are the components of current assets, the
scope of cash management problem is limited for all practical
purposes to short-term financial decisions Longer term Unan*
cial plans do affect cash management but the
‘long-term financial decisions are not made simultaneously

with cash management decisions. For example, a merger
decision will clearly affcci cash flows butit is not likely to
be considered at the same time with a decision whether to

postpone a paj ment for one monib or lo invest excess cash in
a marketable security maturing in 30 days. The difference in
magnitude and time dimension result in a separate approach
to these two problems Once the merger decision has been
made. Its effect on the first )ear have to be taken into consi-
deration by optimally handliDg the resulting cash flow-s.
Hence, the outcome of long term financial decisions can be
corsidered as a given input into the cash management
problem”.’
2 Reed, A. E . ‘Corporate Cash Management’, Financial Executive, Vol,

i I, October, 1963, p 13
3 Orglcr, Y E Cash Management • Methods
, and Models, (Californ a.
197 ).p 10
INTRODUCTION 3
The term ‘cash planning and management’ refers to

the management’s ability to recognise cash problems
before they arise, to solve them when they arise and
to delegate some one to carry out the solution having
made the solution available. It requires development and
application of some practical administrative procedures to
accelerate the inflow of cash and to improve the utilisation of
surplus funds, tlius generated, to achieve the objectives of the
—
business maximum possible profitability consistent with the
maximum liquidity of the concern
“These procedures properly applied to the cash operations

of the company should give management an additional
opportunity to increase the profits of the enterprise”.^
Cash planning is the first requirement of cash management

decisions. As planning fundamentally an intellectual process,
is
a mental predisposition to do things in an orderly way, to think

before acting and to act in the light of facts rather than of
guess, cash planning may be defined as the management process
of estimating for a specified period in the future all sources and
uses of cash available to a business. It includes the formula-
tion and promulgation of cash policies and procedures and the
control of cash. Thus, cash planning is a technique to plan
for and control the use of cash.A properly devised cash p'an
provides invaluable information to the management by giving
advance notice of (1) how much cash will probably be needed
how much cash
to realise a given short-run profit objective, (2)
it can expect from current income to meet these needs, (3) how
the cash balance will be increased and decreased by these flows
and finally, (4) how much financing may be needed to meet
expected cash deficits from operations or how much surplus
will be available for short-term (or long-term) deployment.
4. Horn, F.E., ‘Managing Cash', Journal of Accountancy. Vol. CXVII.

April, 1964, pp. 56-62.
; ; ;
4
CASH PLANNlKG AND MANAGEMENT
The system of cash management, thus, aims at making

optimum use of the cash resources*. Though the specific
nature of cash management in a particular organisation depends,
to a great extent, on the nature of the enterprise, the efficiency
of the jnlcrnal structure for collecting detailed and accurate
information, Its proper processing and utilisation a rationalm
manner, the importance of the individual finance executive,
hos\e\cr, cannot be over emphasised. His initiative, calibre,
dynamism, interest and unstintrag devotion to his duty play a
great role m the success of cash management programme. An
execotiie who manages the cash of an enterprise
“is byno means simply a cashier who pays bills and accepts
payments. His responsibilities are much more broader
he has to decide on a large number of related cash manage-
ment problems”.*
To achiev'e the objectives of cash roanagement be has to

perform certain specific functions, as enumerated below, in the
day-to-day manageraeot and control of cash
â) Collection and custody of cash and securities

(b) Control of disbursements, eg, providing sufficient
cash at the lime and place required to meet obliga-
tions ;
(c) Maintenance of adequate supply of cash to meet pro-

jected cash requirements, cash budgets and day-to-day
demands
(d) Investment of surplus cash in marketable securities to
keep It fully employed and working towards greater
profits ; and
5 Concluding his article Bsehlcr sajs ‘cash should be as fully ut'liscd as

any corporate resource to ensure optimum corporate profitafaitify
Through an adapine cash management program, idle cash can be con-
seried from a liabihiy of do’ng business to a working assel*. Bscbler,
Paul J, ‘Cash Management. Forecasting for Profit*, Management
Adtiser. Jul>-August, 1973. p 43
6 Orgler, Y E Op. cit p
, , I
INTRODUCTION 5
(e) Mainteaance of sound banking relations and adequate

deposits to meet operating needs and to compensate
the banks for their services.
Keeping in view these functions and requirements of cash

management system, the present study of cash planning and
management attempts to seek, inter-alia, answers to the follow-
ing questions :
(i) What practice do the selected undertakings adopt in

maintaining cash balances ?
(ii) How do they forecast and control their cash ?

(iii) What hidden cash resources do they have which, if
traced out, can increase the availability of usable cash ?
(iv) How do they deal with surplus and deficit cash situa-
tions ?
(v) How do they select and compensate the banks for
their services ?
Scope
The focus of the study is on the procedures of cash planning

and management of selected companies in the public sector.
The choice of these enterprises was dictated by the availability
of data. The entire selection process has passed through five
stages as shown in Table 1.1. As a first step, eighty compa-
nies, listed in Appendix A*, were approached. The response,
however, was rather poor as 42 companies accounting for
52.5% of the total did not even bother to acknowledge the
letter (Appendix B)*. Out of the 3S companies, which acknow-
ledged the letter, 12 refused permission on one pretext or the
other. The names of these companies and reasons for refusal
are given in Appendix C*. The permission to study the
problem was, thus, available from 26 companies (Appendix D)*.
7 of these 26 companies, as shown in Appendix E*, were found
to be outside the scope of the study either due to the nature of
Appendix given at the end of the study.

6 CAS!! PLANNING AND MANACniENT
TABLE !.l
Stages in the Selection of Companies
Stages Namber of Percentage

compenJes to total
1. (a) Companies did not acknowledge

the letter seeking permission 42 52.50
(b) Companies refused permission 1 15-00
2. Companies eliminated after permission

was rcceiscd because of being outside
the scope of the study either due to the
nature of their bus oess or being branch
offices 7 8 75
3. Companies declined to co-operate after

questionnaire was sent 7 8.75
4. Companies eliminated after sending

questionnaire and personal sisit due to
either lack of desired co-operation or
inadequecy of the available data 4 5.00
5. Companies continued toco-operate

in the study 8 10 00
Total companies originally contacted 80 100 00
their business or being branch offices and, hencc» eliminated in

the second stage. In the third stage, the main questionnaire
was prepared and mailed to 19 enterprises. Seseral days after
mailing the questionnaire, a reminder was sent to them with
a request to expedite the completion of the questionnaire at an
early dale and to give an appomlmcnt for personal interview
and enlist their co-operation. But 7 companies, listed m
INTRODUCTION 7
Appendix F*, declined to co-operate at this stage and, thus, we

were left with 12 companies only. Getting the questionnaire
completed was the fourth step. Out of the 12, only one com-
pany, namely, Minerals and Metals Trading Corporation of
India Ltd., could arrange to send the completed questionnaire
and invitedfor personal discussion. The remaining 1 1 com-
panies gave an appointment for personal discussion and sugges-
ted to get the questionnaire completed by personal visit. But
when they were approached, 4 of them, (Appendix G)*, had to
be eliminated due to either lack of desired co-operation or
inadequacy of the available data. The present study, therefore
relates to the following eight undertakings categorised into
three industry groups ;
{A) Mcntfacturing group :
1. Bharat Heavy Electricals Ltd. (BHEL), New Delhi.

2. Electronics Corporation of India Ltd. (ECIL), Hyderabad.
3. National Mineral Development Corporation Ltd. (NMDC),
Hyderabad.
(B) Trading group :
1. Handicrafts and Handlooms Exports Corporation of India

Ltd. (HHEC), New Delhi.
2. Minerals nnd Metals Trading Corporation of India Ltd.
(MMTC), New Delhi.
3. State Trading Corporation of India Ltd. (STC), New Delhi.
(C) Sendee group :
1. Central Warehousing Corporation (CWC), New Delhi.

2. National Buildings Construction Corporation Ltd. (NBCO,
New Delhi.
Appendix giveii at the end of the study.

8 CASH PLANNING AND MANAGEMENT
Plan of Stud)
The plan of the study is based on the broad areas of cash

planning and managetaeat. The main stndy has been divided
into SIX chapters. Chapter II presents the empirical analysis
of cash balances based on the published Balance Sheets of the
underiakings. Forecasting and control of casb, which is the
first requirement of cash management, has been discussed in
Chapter 111. The system of cash management also requires

development of necessary procedures for increasing the
availability of usable cash from within the resources of the
enterprises. This forms the subject-matter of Chapter IV.
Chapter V deals with the prevailing practice of dealing with
surplus and deficit cash situations. No cash management plan
can successfully be implemented without effective co-operation
of the bank. Therefore, the relationship of the selected com-
panies With their banks has been examined in Chapter VI.
Finally, Chapter VII contains the concluding observalions of
the study.
Sources of Data
The information on which the present study is based have

been collected mainly from primary sources. The most impor-
tant of these was a qu-stionnaire which is given in Appendix H
(at the end of the study). This was supplemented by personal
interview; Extensive use of the published Balance Sheets of
the selected companies was also made particularly for empirical
analysis. Their unpublished records were also utilised to fill
the gap in the availability of the required information.

2
Measurement of Cash Balances
Measurement of cash balances is an important part of the

study of cash management. The relevance of cash balance in
the study of cash management is because of its important role
in an enterprise. The importance of cash in the composition of
working capital of a firm hardly needs any emphasis.^ It is
the cash which keeps a business going. Hence, every enter-
prise has to .hold necessary cash for its existence.^ But in the
modem business world no business can afford the luxury of
having too much of cash because of its non-availability particu-
larlydue to ever-increasing difficulties and cost of borrowings.
1. According to Howard and Upton cash is the life blood of business

enterprise and its steady and healthy circulation throughout the entire
business operation is the basis of business solvency. For details, see ;
Howard, B. B. and M. Upton, Introduction to Business Finance, (New

York, 1953), p. 188.
2. J.M. Keynes has described three motives for holding cash by a business
house :
(i) transaction motive, (ii) precautionary motive and (iii)
speculation motive. For details, sec Keynes, J. M., The General
:
Theory of Employment, Interest and Money, (New York, 1936), pp.

170-74.
Morco%er, cash being the least productive of the assets incurs

for the business an opportunity cost through nonuse-*
“In other words, there are distinct economic disadvantages

in maintaining cash inventor es which are too far below or
above the actual cash demand"’*.
Therefore, it is desirable that the cash balances be minimised
as much as possible^ of course, keeping in mind the firm’s

liquidity. According to Cooke and Bomeh ;
“Cash management consists, basically, of having a sufficient

quantity of cash jet maintaining the balance at the lowest
figure adequate to meet current obligations’"*.
The purpose
in measuring cash balances is to determine
whether balances on a gisen date are just the right amount or
too much or too little for meetiog the operational requirements
of the firms
Though cash balances must be adequate to meet obligations
in right time, it is very difficult to judge •whether or not a busi-
ness house is keeping too much cash balance because it -depends
3. LouisK Brandi has amply cnipNasscd the Tact of opportunity cost of

cash He says that the cost resutis from holding cash inactne m the
bark or on the premises of the oterpnse instead of employing it
profitably in operations This cost is preseat regardless of the amount
in the balance but it becomes more significant as the quantity of cash
increases When the stock of cash falls to %ery low le\els, cost cons.-
deraiions btcome secondary m onportarxe to the hquidptvnsk For
details, see. Louis K , Business Finance
Brandt A Management
Approach, (New Jersey. 1965). pp 12l'25
, Op
4 Beehler. Paul J cit , p 36
5 Emphassing Ihe mm m sat/on of cash balances Jl H Jones says that

cash IS just another commodity required m production process. A
company should work just as hard to keep this insentory’ of cash down
to the mincnura as it does to hold don n jhe lockup in merchandise
imemories and rece’vables For details, sw Jorcs, RH, "Face lo
:
Face with Cash Management How one Companv Does it’, Firanc.al
Execute e,VoI 37. September. 1959 pp 37-39
6 Cooke. C W
and EC Bomeli, Business Financial Management,
(Bosian, 1967), p 66
1
mcasurement or- cash balances 1
on a variety of factors such as the nature of the business enter-

prise, the size of the sales in relation to fixed assets, the credit
position of the firm, the status of the firm’s
debtors and inven-
tory account and However, from the comparison of
so on.
cash balances of an enterprise with its historical records and
also with those of other enterprises under the same group of
industry", a conclusion may be drawn as to whether a particular
business is keeping the right amount of cash or not.
This chapter attempts to present the empirical analysis of
cash balances in the selected companies with the object to find
out their practice of maintaining cash balances. Section I of
the chapter explains the methodology while Section 11 analyses
the- variations in cash balances in relation to current assests,
current liabilities and sales. Sections 111 and IV respectively
examine the effect of changes in the ratio of sales to fixed assets
on the percentage of cash to working capital and that of the sales
'volume on the percentage of cash to sales. The effect of
changes in cash turnover ratio on liquidity ratio has been exa-
mined in Section V. Finally, Section VI presents concluding
observations of the chapter.
METHODOLOGY
For the purposes of the analysis of cash balances, relevant
data have been extracted from the published Balance Sheets
of the selected enterprises, covering a period of five years from
1970-71 to 1974-75. It is true that cash balance is a reservoir
which is by cash flows, i.e., it rises and falls with the
affected
inflows and outflows of cash. But the Balance Sheet, as the
basis of measurement of cash balances, suffers from a limitation
to the extent it shows the result of transactions only on parti-
cular dates, namely, the last day of the accounting year and,
thus, fails to reflect any changes cash balances per se during
in
the accounting year. The cash balances on a day-to-day basis

are, however, difficult to obtain. We have, therefore, relied on
the information available in the Balance Sheets for our analysis
of the cash balances maintained by the selected companies. The
12 CASH f’LANNING AND MANAGEMENT
results of the analysts should be viewed in the light of this

lim'tation of our data. The a\’aUabiHty of the latest data on
cash balances was the prime consideration in restricting the
analysis to the five year period.
fn this study cash balances represent the aggregate of (i)
Osh in Hand (including stamps), (ii) Cash in Current Account,

(ill)Cash in Savings Bank Account and (iv) Cash in Transit
including Cheques in Hand and/or in Transit. These may be
termed as components of cash balances. In compilingcash
figures a difficulty was encountered due to lack of homogeneity
m publishing the cash data by the various companies. Some
of them had shown ‘Cash Balance including Cheques in Hand
and/or Remittances in Transit’ without making any distinction
between these items. In such cases «e have treated the entire
amount as ‘Cash in Hand'. The factual position regarding the
percentage contribution of the different components to total
cash in the selected enterprises during 1971*75 is given ia Table
7.1. It discloses that 'Cash in Hand' and ‘Cash in Current
Account* had generally formed the major part of the total cash
in most of them.
TABLE 2.1
Components of Cash Balances in Selected

Companies (Percentages)
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL
Cash in Hand NA 9.7 5,2 43.9 2.2 154
Cash in Current A/c NA 26.7 21.8 25.5 23.5 24.0
Cash in Transit NA 63.6 73.0 30.6 74.3 60 6
ECIL
Cash in Hand 18 1 69.0 67.6 19.5 50.3 37.8
Cash in Current A/c 52.9 19.5 3X4 80.5 49.7 61,4
Cash in Transit 29.0 n.s nil nil nil 0.8
MEASUREMENT OF CASH BALANCES 13
1 2 3 4 5 6 7
NMDC
Cash in Hand 1.1 2.5 1.8 2.9 6.1 2.4
Cash in Current A/c 86.3 92.1 92.4 92.9 82.1 90.3
Cash in Transit 12.6 5.4 5.8 4.2 11.8 7.3
Manufacturing Group
Cash in Hand 1.4 6.6 7.1 22.7 14.1 12.9

Cash in Transit 12.9 22.7 37.7 13.7 48.8 28.6
HHEC
Cash in Hand 4.2 4.3 3.6 1.4 2.1 2.4
Cash in Transit 22.9 38.1 68.6 10.0 34.4 28.8
MMTC
Cash in Hand 44.6 20 2 23.0 39.4 99.2 52.2
Cash in T ransit 23.2 9.2 0.4 0.5 0.3 5.0
STC
Cash in Hand 39.4 18.5 25.2 28.9 58.2 29.5
Cash in Savings
Bank A/c nil nil nil 0.1 0.3 0.1
Cash in Transit 24.3 1.7 46.1 58.2 6.5 32.5
Trading Group
Cash in Hand 40.1 19.2 23.7 39.7 85.9 38.6

- Cash in Current A/c 36.0 74.8 45.6 30-7 10.7 41.4
Cash in Savings
Bank A/c nil nil nil 0.1 0.1 N
Cash in Transit 23.9 6.0 30.7 39.5 3.3 20.0
14 CASH I'LASNING AND MANAGEMENT
] 2 3 4 5 6 7
ewe
Cash in Hand 2.5 9.5 7.7 5.0 7.5 6.2
Cash in Transit 1.0 8.2 3.1 0.9 20.5 6.0
NBCC
Cash in Hand 2.1 1.6 4.6 27 40 3.1
Cash in Current A/c 83.3 93 8 84.3 73 6 80.4 82.2

Cash in Savings
Batik A/c 60 06 16 1.6 1.2 1.6
Cash m Transit S6 4.0 9.5 221 144 !3.1
Smice Group
Cash in Hand 25 82 7.5 4.9 71 59
Cash in Current A/c 96.1 84.2 g9.0 92.6 72.8 87.4
Cash m Savings
Bank A/c 0.2 oi 0.1 0.1 0.1 0.1
Cash in Transit 1.2 7.5 3.4 2.4 20.0 6.5
All Companies
Cash in Hand 20.0 14.4 14.3 23.2 42.9 23.9
Cash in Savinas
Bank A/c N N N O.l N N
Cash in Transit 16.1 11.6 28.9 22.7 26.8 21.8
N=negligible
Source : Compiled from the Annual Reports of the respective

companies.
MEASUREMENT OE CASH BALANCES 15
In analysing cash balances in this chaplei', an attempt has also

been made to focus on the differences in the practice of main-
taining cash balances by individual companies over the five-year
period 1971-75, intra-group differences among companies in a
particular industry group as also inter-industry differences.
II
VARIATIONS IN CASH BALANCES
To achieve the objectives of business — maximum possible

profitability consistent with the liquidity of the enterprise — the
firms have to employ the cash resources of their enterprise as
fully as possible. But while managing cash they are put in a
dilemma which exists in their choice between liquidity and
profitability. If they plan to maximise liquid ty, they have to
maintain the maximum possible cash balance which deprives
them of the additional income which could have been earned
from an investment of cash in business operations or elsewhere.
On the other hand, if they try to maximise profit, they have
to invest maximum possible cash to earn some additional
income which, in return, may cause danger to the liquidity
position. The remedy to this dilemma lies in developing a
pattern, from past experiences and comparing the company’s
own cash balances with other enterprises under the same group
of industry, of what portion of current assets should be held
in the cash balance to optimise the liquidity risk of not holding
enough cash and the opportunity cost of holding too much.
The ratios of cash to current liabilities and cash to sales can be
other useful bases for such a comparison.
This section attempts to e.xaraine the vaiiations in cash
balances, in terms of percentages, in the selected companies
on the assumption that there should not be significant varia-
tions in the cash balances in relation to current assets, current
liabilities and sales of an enterprise over a period of time as
well as in comparison with other enterprises under a particular

group of industry.
]6 CASH PLANNING AND MANAGEMENT
Percentag; of Cash to Current Assets
Table 2 2, which contams the percentages of cash to current

assets in selected compinies during 1971-75, discloses that
there had been wide variations in the percentages of cash to
current assets particularly in companies under manufacturing
and service groups of industry where, on an average, it was
varying from 1.2% to II 1% and 3.6% to 22 9% respectively.
The trading companies have shown comparatively lower
variations from 3.6% to 6 7%. These facts are also depicted in
Figure II.A.
TABLE 2.2
Percentage of Cash to Current Assets in

Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL NA 1.3 1.9 1.1 1.0 1.2

ECIL 1.8 3.1 4.2 14.4 8.9 8.7
NMDC 18 1 14.5 8.8 13.0 4.0 11.
Manufacturing
Croup 15.5 3.5 3.1 2.5 1.5 2.5
HHEC 4.7 4.6 5.2 lO.l 6.3 6.7

MMTC 3.4 80 27 2.5 3.2 3.6
STC 3.6 9.3 6.5 8.1 1.2 49
Trading Group 3.5 8.4 4.3 5.1 2.5 4.2
ewe 27.2 10.5 27.4 26.7 21.6 22.9

NBCC 1.7 8.5 36 4.0 3.0 3.6
Senice Group 17.9 10.1 21.1 I9.I 13.4 16.5
All Companies 6,0 5.8 4.3 3.7 20 3,5
Source: Compiled from the Annual Reports of the respective

companies.
1 8 CASH PLAHNISG AND MANAGEMENT
The manufacturing companies, which had the widest vari-
ations in the percentages of cash to current assets amongst

themselves, have also shown significant variations over the
five-)car period 1971-75- In the EClL, varying from l.b% to
14 4%, It has recorded an increasing trend upto 1974 and has
increased front 1 8% in 1971 to 14.4% in 1974. But in the
BHEL, which had the lowest percentage of cash to current
assets, also being the lowest tn all the eight enterprises,
ranging between 1 0% and 1.9% during 1972-75, it has dis-
closed, 1973 onward, a declining trend. In the NMDC this
percentage was ranging between 4.0% and 18 1%. With the
exception in 1974, when this percentage was 13.0%, it has
recorded a declining trend, being the highest and the lowest in
1971 and 1975 respectively. The manufacturing group has
also disclosed a declining trend in the percentage of cash to
current assets, from IS.S% in J97J lo 1.5% in 1975.
viz.,
Though the companies under trading group of industry had

lower variations amongst themselves, all of them had year-to-
year fiuctuaiions in the percentage of cash to current assets
during 1971-75. This percentage was the lowest in the MMTC
and the highest in the HHEC where it was ranging between
—
2.5%— 8 0% and 4 7% 10.1%, average for five years being 3.6%
and 6 7% respectively. In the STC this percentage had been
ranging between 1.2% and 9.3%, average being 4.9%. The
STC and MMTC have shown a decline from 3.6% and 3.4% in
1971 to 1.2% and 3 2% in 1975 respectively but the HHEC has
recorded an incease from 4.7% lo 6.3%. The trading group also,
having variations from 2.5% lo 8.4%, average being 4.2%, has
recorded a decline from 3.5% in 1971 to 2.5% in 1975 without
any trend.
The service enterprises have also revealed significant
variations in the percentage of cash lo current assets between
themselves where in the CWCit had generally been above
20.0%, being the highest m all the eight enterprises, but below,
4 0% in the NBCC. Further, the CWC has shown a decline
from 27.2% in 1971 to 21.6% in 1975 and, 1973 onward, a
declining trend but the NBCC has recorded an increase from
1.7% to 3.0%, 8.5% being the highest in 1972. The service
9
group has also shown a decline from 17.9% in 1971 to 13.4% in

1975 and, 1973 onward, a declining trend.
Amongst different groups of industry, the service group had,
on an average, the highest percentage of cash to current assets,
16.5%, as compared to 4.2% and 2.5% in the trading and
manufacturing groups respectively. Taking all the eight under-
takings together, thispercentage has recorded a declining trend
from 6.0% 1971 to 2.0% in 1975.
in
To conclude the above discussion regarding variations in
cish balances in relation to current assets it may be said that
there has been marked variation in the percentage of cash to
current assets not only in individualcompanies over the five-
year period 1971-75 but also amongst companies under a
particular group of industry. The trading companies, how-
ever, have shown comparatively lower variations in the percent-
age of cash to current assets than those under the manufactur-
ing and service groups of industry. From these variations it
seems that the companies covered by this study do not have the
practice of maintaining cash balances in relation to current
assets. The relation of cash to current liabilities is another
tool to judge the practice of maintaining cash balance by an
enterprise. This is discussed in the following sub-section.
Percentage of Cash to Current Liabilities
The percentages of cash to current liabilities, as presented in

Table2.3, have shown stilt wider variations in the enterprises
under all the three groups of industry, on an average, varying
from 2.1% to 34.8%, 5.9% to 33.9% and ll.l%to 72.9% in the
manufacturing, trading and service companies respectively.
Figure II.B also exhibits these facts.
Amongst manufacturing undertakings, this percentage was
the highest and the lowest in the NMDC
and BHEL ranging
from 10.3% to 55.2% and 1.8% to 2.9%, average being 34.8%
and 2.1% respectively. In the ECIL this variation was from
5.0% to 36 0% with an average of 21.1%. Upto 1974 it has
shown an increasing trend but a sudden decline from 36.0% in
1974 to 19.4% in 1975. In the NMDC
also the percentage of
20 CASH PLASNING AND MANAGEMENT
cash to current has recorded a decline from 55.2% in

liabilities
1971 to 10 3% m 1975 but io the BHEL, with insignificant
variations from year-to-year,
it has, 1973 onward, disclosed a
declining trend, 1 8% being in 1974 and 1975. The

manufacturing group has shown a declining trend, viz., from
46 5% m
1971 to 6.2% in 1972 and to 2.8% in 1975.
TABLE 2.3
Percentage of Cash to Current Liabilities in

Selected Companies
Crmpan} 1971 1972 1973 1974 1975 1971-75

(Aierage)
1 2 3 4 5 6 7
BHEL NA 2.1 2.9 1.8 1.8 2.1
ECIL 5.0 9.8 10.8 36.0 19.4 21.1

NMDC 55 2 42 0 36 2 42.4 10.3 34.8
tfjn ifLCttirmg
Group 46.5 6.2 5.5 4,3 2.8 4.5
HHEC 22.7 20.0 23.9 65.8 30.5 33.9

MMTC 4.9 11.2 4.6 4.0 5.7 5.9
STC 7.7 14.4 9.8 I2.I 1.8 7.7
Trading Group 6.6 12.6 7.J 8.1 4.1 7.0
ewe 109 0 29.2 84.5 91.8 63,7 72.9

NBCC 108 21 2 10.1 12.0 8.2 ll.l
Service Croup 83 0 27.5 63,3 62.8 38.0 51.9
All Companies 12.2 9.7 7.4 6.3 3.7 63
Source •
Compiled from the Annual Reports of the respective
companies.
The enterprises under the trading group also had year-to-year

variations in the percentage of cash to current liabilities from
FIGURE II.B
Percentage of Cash to Current LiabiHlies in Selected Companies,

1971-75 (Average)
20 0% to 65.8% in the HHEC, 4.0% to 11.2% in the MMTC

and 1.8% to 14.4% in the STC, average for five years being
33 9%, 5.9% and 7.7% respectively. The HHEC
and MMTC
ha\e recorded an increase from 22.7% and 4.9% in 1971 to
30 5% and 5 7% m
1975 respectively but the STC has shown a
decline from 7.7% to 1 8%. Similar characteristic has been
disclosed by the trading group also where ranging between 4.1%
and 12.6%, average being 7.0%, this percentage has recorded a
decline from 6.6% in 1971 to 4.1% in 1975.
Between service companies, the CWC had a much higher
percentage of cash to current liabilities ranging between 29.2%
and 109.0%, average being 72.9%, being the highest in all the
eight enterprises, as compared to the NBCC in which this
percentage was varying from 8.2% to 21.2%, average being
11 1%. But both of them have shown a decline from 109.0%
and 10.8% in 1971 to 63.7% and 8.2% in 1975 respectively. In
the service group, this percentage, ranging between 27.5% and
83.0%, average being 51.9%, has, 1973 onward, recorded a
*
declining trend, viz., from 63.3% in 1973 to 38 0 in 1975.
In iQter*industry comparison, the service group had the
highest, and the manufacturing group, the lowest, percentage
of cash to current liabilities, and average for hie years being
51.9% and 4.5% respectively, 7.0% being in the trading group.
Taking all the eight enterprises together, this percentage, rang-
ing between 3.7% and 12.2%, has recorded a declining
trend
Thus, from the above discussion of the analysis of cash
balances in relation to current
liabilities, the conclusion which
may be drawn is that the selected companies do not have the

liabilities also. There were significant variations in the per-
centage of cash to current liabilities not only in individual
companies over the five-year period 1971-75 but also in intra-
group comparison amongst companies under a particular group
ofindurstry. The
practice of maintaining cash balance can
also be judged by the relationship of cash with the sales volume
of a business. This relationship in the selected companies
forms the subject-matter of the next sub-section.
Percentage of Cash to Sales
Table 2.4 presents the percentages of cash to sales in selected

companies during 197T75. It also discloses that there had
been marked variations in the percentage of cash to sales
particularly in companies under the manufacturing and service
groups of industry varying, on an average, from 2.0% to 17.6%
and 2.5% to 46.6%. Trading enterprises have shown variations
between 0.9% and 2.8%. Figure II.C also exhibits these
facts.
TABLE 2.4
Percentage of Cash to Sales in

Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(d verage)
1 2 3 4 5 6 7
BHEL NA 1.7 2.3 1.9 2.0 2.0

ECIL 3.6 5.3 6.6 20.7 12.0 12.7
NMDC 10.9 25.3 23.0 31.5 7.8 17.6
Manufacturing
Group 10.5 4.8 4.3 4.3 2.8 4.0
HHEC 3.9 3.5 4.1 3.4 1 7 2.8

MMTC 0.7 2.0 0.8 0.6 0.8 0.9
STC 1.5 2.0 1.3 1.3 0.2 1.0
Trading Group 1.1 2.0 I.l 1.0 0.5 1.0
ewe 48.3 21.3 57.5 62.2 40.4 46.6

NBCC 2.0 3.3 2.1 27 2.3 2.5
Service Group 26.7 11.2 26.5 24.5 15.3 20.4
AH Companies 2.1 2.7 2.0 1.9 1.1 1.7
NA=Nct Available

companies.
FIGURE II.C
Percentage ol Cash to Sales In Selected Companies,

1971-75 (Average)
Amongst manufacturing undertakings, this percentage had

been the highest in the NMDC
and the lowest in the BHEL rang-
ing from7.8% to 31.5% and 1.7% to 2.3%, average being 17.6%
and 2.0% respectively. This variation in the ECIL was
between 3.6% and 20.7%, average being 12 7%. Upto
1974 it has shown an increasing irend but a decline to
12.0% The NMDC has also recorded a decline from
in 1975.
31.5% in 1974 to 7.8% in 1975. But the manufacturing group
has shown a declining trend, viz., from 10.5% in 1971 to
2.8% in 1975.
The trading companies individually as well as the group
have -shown nominal variations in the percentage of cash
to sales during the five-year period 1971*75 ranging from 0.2%
to 2.0%, 0.6% to 2.0%, 1.7% to 4.1% and 0.5% to 2.0%. average
being 1.0%, 0.9%, 2.8% and 1.0% respectively in the STC,
MMTC, HHEC and the trading onward,
group. 1973
the HHEC has recorded a dccling trend, viz from 4.1% to ,
1.7%. The trading group also has shown, 1972 onward, a

declining trend.
In the service enterprises, this percentage was ranging between
2.0% and 3.3%, average being 2.5%, in the NBCC and between
21.3% and 62.2%, average being 46.f %, in the CWC, being the
highest inall the eight companies. With year-to-year variations,
ithas recorded a decline from 48.3% in 1971 to 40.4% in 1975
but the NBCC, having nominal variations, has shown an increase
from 2.0% to 2.3%. The service group in which this percentage
was ranging brtwe n 1 .2% and 26.7%, average being 20.4%, has
1
recorded, 1973 ownard, a declining trend. Amongst different

groups of industry, this percentage had been the highest
in the service group and the lowest in the trading group. Taking
all the eight undertakings together, the percentage of cash to
sales has been considerably low ranging between 1.1% and

2.7%, average for five years being 1.7%. To sum up the
discussion, it may be concluded that the above analysis of
variations in the percentages of cash to sales is indicative of
the absence of the practice of maintaining cash balances in
relation to sales by the enterprises covered by this study.
To recapitulate the empirical evidences available in respect

26 CASH PLANNING AND »tANAGEMENT
of cash balances majnlained by the selected companies, it is

obvious that they do not support the theoretical assumption
that there should not be significant variations in the cash
balances in relation to current assets, current liabilities and
sales of an enterprise over a period of time. The available
data also do not conirm the contention that there should not
be signihcaot variations IQ cash balances in relation to current
assets, current liabilities and sales of an enterprise in
comparison with other enterprises under a particular group of
industry. The companies studied here have disclosed marked
variations in the percentages of cash to current assets, cash to
current liabilities aud cash to sales not only individually over
the five-year period l97f-75 but also amongst themselves under
tcspcclive industry groups The companies under trading
group of industry, however, have disclosed comparatively
lower variations. The inconsistency in these percentages
indicates that the selected companies do not observe the
assets, current liabilities or sales. Though the higher these
percentages, the more liquid the business but this also
symbolises mismanaged cash balances. The ratio of sales to
fixed assets is another factor affecting the maintenance of cash
balances for operational requirements. This relationship in
selected companies is discussed in the following section.
HI
RATIO OF SALES TO FIXED ASSETS AND PERCENTAGE

OF CASHTO WORKING CAPITAL
Relation of sales to fixed assets also plays an important role
in determining the level of cperalioual cash.
“A business house whose sales are relatively large compared

to assets normally requires larger bank balances to support
these sales than a busioess of similar asset size but with
smaller sales."'
7 Sagan, John, ‘Toward a Theory of Working Capital Management*.

Journal of Finance, Vol X, May, 1955, p, 124
This is because of the fact that such firms generally have a

greater amount of cash invested in inventories and receivables.
This section, therefore, aims at examining the effect of the ratio
of sales to fixed assets on the percentage of cash to working
capital in the selected enterprises. The underlying hypothesis
is companies whose sales are relatively large compared to
that
fixed assets have higher cash balances in relation to working
capital. The term ‘working capital’ is used here in the sense
of net working capital, i.e., current assets minus current liabili-
ties.
Table 2.5, which contains the ratios of sales to fixed assets

and percentages of cash to working capital in selected compa-
nies during 1971-75, discloses that in most of the companies
studied here, there had been notable variations in the ratios of
sales to fixed assets and the percentages of cash to working
capital during the five-year period 1971-75. On an average,
this variation was from 105.4 to 228.5, 0.4 to 1.7 and 0.2 to 7.1
in the ratios of sales to fixed assets and from 8.4% to 13.3%,
2.8% to 16.2% and 5.3% to 33.5% in the percentages of cash
to working capital respectively in companies under the trading,
manufacturing and service groups of industry. The analysis of
the effect of the ratio of sales to fixed assets on the percentage
of cash to working capital discloses that the trading group,
which had, on an average, the highest ratio of sales to fixed
assets, 143.9, its percentage of cash to working capital was
10.8%, not the highest. On the other hand, the service group,
having the lowest ratio of sales xo fixed assets, 0.5, had the
highest percentage of cash to working capital, 24.2%. By and
large, similar of the ratios of sales to fixed assets on the
effect
percentages of cash to working capital has been found in
individual companies also under the different groups of
industry.
Amongst manufacturing companies, the ECIL and NMDC

had, on an average, the highest, 1.7, and the lowest, ratios
of sales to fixed assets but the latter had the highest percentage
of cash to working capital, 16.2%. However, the ECIL,
having higher ratio of sales to fixed assets, also had higher
percentage of cash to working capital as compared to the
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.'0 CASH PLANNING AND MANAGEMENT
BHEL. It has, thus, partly supported the theoretical assump-

it has shown an increasing trend in the
tion in the sense that
ratios of sales to fixed assets and also in the percentages of
cash to working capital upto 1974. The BHEL has disclo:cd
an increasing trend in the ratio of sales to fixed assets and a
declining trend inthe percentage of cash to working capital
being completely inconsistent with the expectation. The ratios
of safes to fixed assets in the NMOC have shown a declining
trend during the five-year period 1971-75. But it had been
the highest and the lowest in 1971 and 1975 when the percen-
tage of cash to working capital was also the highest and the
lowest respectively. With a decline in the ratio of sales to
fixed assets from 1,0 in 1971 to 0.7 in 1972, the manufacturing
group has recorded, 1972 onward, an increasing trend but the
percentage of cash to working capital has shown a declining
trend during 1971-75 and. thus, in I97S when it had the highest
ratio of sales to fixed assets, 1.4, the percentage of cash to
working capital was the lowest, 3.1%, whereas it should have
been the highest.
Similar features have been revealed by the trading enterprises

also. The STC and MMTC had, on an average, the
the
lowest, 105.4 and the 22S.5, ratios of sales to fixed
highest,
assets but the MMTC bad much lower percentage ofcash to
working capital. 9.2%, as compared to 13.3% in the STC.
The HHEC had the lowest percentage of cash to working
capital, 8 4%, whereas its ratio of sales to fixed assets was
much ay compared to that of the STC. The
higher, 137.5,
STC has shown an increasing trend in the ratio of sales to fixed
assets but year-to-year variations in the percentage of cash to
working capital, 4.1% being the lowest in 1975 when the ratio
of sales to fixed assets was the highest, 167.0. In 1972 when
it had the highest percentage of cash to working capital, 25.9%,
the ratio of sales to fixed assets was 77.4 whereas it should
have been the highest. With an increasing trend, 1972 onward,
in the ratio of sates to fixed assets, the MMTChad the highest
percentage of cash to working capital, 27.5%, in 1972 when the
ratio of sales to fixed assets was the lowest, 160.4. 1973
onward it has shown an increasing trend in the percentage of
cash to working capital also. But in 1975 when it had the

highest ratio of sales to fixed assets, 295.0, the percentage of
cash to working capital was only 7 0% whereas it should have
been the highest. The percentage of cash to working capital
in the HHEC has disclosed an increasing trend upto 1974 and
a decline from 12.0% in 1974 to 7.9% in 1975. 1972 onward
the ratio of sales to fixed assets also has recorded an increasing
trend, being the highest in 1975 when the percentage of cash to
working capital was not the highest. Similarly, in 1972 when
it had the lowest ratio of sales to fixed assets, the percentage of
cash to working capital was not the lowest. With year-to-year

variations in the percentage of cash to working capital, 1972
onward the trading group also has shown an increasing trend
in the of sales to fixed assets, 212.1 being the highest in
ratio
1975 when the percentage of cash to working capital was the
lowest, 6.2% Further, an increase in the ratio of sales to fixed
assets from 141.0 in 1974 to 212 1 in 1975 has been found to
be accompanied by a decline in the percentage of cash to
working capital from 13.9% to 6.2% whereas it should also
have recorded an increase. Besides, a decline in the ratio of
sales to fixed assets from 116.8 in 1971 to 104.1 in 1972 was
accompanied by a notable increase in the percentage of cash to
working capital, viz., from 7.6% to 25.5%.
Between the service companies, the CWC had, on an average,
the lowest, 0.2, ratio of sales (service charges) to fixed assets
but the highest percentage of cash to working capital, 33 5%,
being the lowest and the highest in all the eight undertakings.
During the five-year period 1971-75, its ratio of sales to fixed
assets was around 0.2 but the percentage of cash to working
capital was varying from 16.2% to 40.7%. The NBCC, having,
on an average, much higher ratio of sales to fixed assets, 7.1, and
much lower percentage of cash to working capital, 5.3%,
as compared to that of the CWC, has disclosed that in 1971

and 1972 when it had the lowest and the highest ratios of sales
to fixed assets, the percentages of cash to working capital were
also the lowest and the highest respectively. A decline in the
ratio of sales to 7.1 in 1973,from 10.6 in 1972, was also accom-
panied by a decline in the percentage of cash to working capital
32 CASH PLANNING AND MANACEMLNT
Trom 14.2% to 5 6%. These fads support the theoretical

assumption that companies whose sales arc rclathely large
compared to fixed assets ha\c larger cash balances. Characteris-
tics similar to that of the CWC
have been disclosed by the
serTice group also. During 1971-75 the ratio of sales to fixed
assets was around 0 5 but the percentage of cash to working
capital had been ranging between 15 9% and 31.7%.
All the eight companies taken together has also not supported
the expectation. It has recorded a decline in the ratio of sales
to fixed assets from 9.2 in 1971 to 3.4 in 1972 which should

haxeledto a decline m
the percentage of cash to working
capital but has also show an increase from 11 S% to 14 4%,
it
1972 onward it has shown an increasing trend in the ratio of

sales to fixed assets but a declining trend in the percentage of
cash to working capital.
To conclude the above discussion of the analysis of the
elTect of changes in the ratio of sales to fixed assets on the
percentage of cash to working capital in selected companies, it
may be said that the available data in regard to their sales
volume, fixed assets, cash balances and net working capital are
also inconsistent with the expectation that the companies whose
sales are relatively large compared to fixed assets have higher
cash balances m relation to working capital. Exceptions apart,
none of the companies studied here had higher cash balances
(in relation to w'orking capital) when its sales volume (in rela-
tion to fixed assets) was higher rather in most of the cases a
;
higher ratio of sales to fixed assets has been found to be accom-

panied by a lower percentage of cash to working capital This
has been equally true in all the enterprises under dilTerent
groups of industry. the available facts
The non-confirmily of
with the contention can partly be attributed to the lack of pro-
per practice in maintaining cash balances by the selected enter-
prises. Yet another factor which affects the maintenance of
cash balance by a business enterprise is its sales volume. How
far this factor has infiuenced the cash balances of the compa-
nies covered by this study forms the subject-matter of
section IV.
IV
SALES VOLUME AND CASH BALANCE
The adequacy of cash balance maintained by an enterprise

can also be judged on the basis of the relationship of cash with
the sales volume. Since maintenance of cash balance by a
business is also influencedby its credit status, types of custo-
mers, credit policies etc., as already emphasised in the foregoing
pages, the ratio of cash to salesmay vary from company to com-
pany even though the companies may be in the same industry.
The object of this section is to examine the effect of changes in
sales volume on cash balance and the percentage of cash to
sales in the selected undertakings to test the hypothesis that as
sales increase, cash balances also increase but not in the same
proportion.
Table 2.6 contains the index numbers of sales volume, cash
balance and percentage of cash to sales in selected companies
during 1971-75. It shows that, exceptions apart, increases in
volume had led to increases in the cash balances also
the sales
but they had not led to a decline in the percentage of cash to
sales. It also reveals that a nominal increase in the sales
volume of some of the enterprises was accompnied by a not-

able increase in the cash balance and the percentage of cash
to sales.
Amongst manufacturing concerns, the ECIL and BHEL have
—
shown an increasing trend in both sales volume and cash
—
balance but increase in the cash balance had been much more
than in the sales. The ECIL has recorded an increasing trend
of cash to sales upto 1974 whereas it should
in the percentage
have shown a declining trend. It was only in 1975 when its
sales volume recorded an increase over the previous year
accompanied by a decline in the cash balance and the
percentage of cash to sales. This percentage in the
BHEL has disclosed year-to-year variations from 1.9% to
2.3% during 1972-75. The NMDC
has supported, in some
measure, the contention that increase in the sales volume
leads to decline in the percentage of cash to sales and vice
TABLE 2.6
Index Numbers of Sales Volume and Cash Balance and

Percentage ol Cash to Sales in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Taal)
1 2 3 4 5 6 7
BHEL
Sales Volume NA 1000 137.1 223,9 302.5 763.5
Cash Balance NA 1000 191.3 252,4 357.8 901.5
Cash to Sales (%) NA 1.7 2.3 1.9 2.0 20
ECIL
Sales Volume ICOO I7I.6 258.0 596.3 582.5 2148 4
Cash Balance ICOO 251.5 544.0 3406.4 3255 0 7557 0
Cash to Sales (%} 36 5-3 6.6 20.7 12.0 12.7
NMDC
SalesVolume 100.0 46.3 40.9 39.7 46.3 273.2
Cash Balance ICOO 106.8 86.2 114.7 33.3 441.0
Cash to Sales (%) 10.9 25.3 23 0 31.5 7.8 17.6
Manifaavrng Group
Sales Volume 100.0 340.8 449.4 714.3 967.7 2572.1
Cash Balance 1000 155.0 181.9 290.9 256.3 984.1
Cash to Sales (%) 10.5 4.8 43 4.3 28 40
HHEC
Sales Volume 100.0 113.0 158.6 532.4 7C0.1 1604.1
Cash Balance 100.0 102.3 166.5 460.1 298.4 1128.0
Cash to Sales t%) 3.9 3.5 4.1 3.4 1.7 2.8
1
MEASURaiENT OF CASH BALANCES 35
1 2 3 4 5 6 7
MMTC
Sales Volume 200.0 106.7 136.8 190.4 298.4 832.3
Cash Balance 100.0 308.5 147.5 147.9 357.1 1061.0
Cash to Sales (%) 0.7 2.0 0.8 0.6 0.8 0.9
STC
Sales Volume 100.0 120.6 159.1 223.8 364.6 969.0
Cash Balance 100.0 161.5 141.4 204.1 52.4 659.4
Cash to Sales (%) 1.5 2.0 1.3 1.3 0.2 1.0
Trading Group
Sales Volume 100.0 113.1 147.2 209.0 332.2 901.6
Cash Balance 100.0 210.7 144.4 192.4 164.7 812.2
Cash to Sales (%) 1.1 2.0 1.1 1.0 0.5 1.0
CWC
Service Charges 100.0 108.8 127.5 129.4 139.5 605.2
Cash Balance 100.0 48.0 151.8 166.6 116.5 582.9
Cash to Service
Charges (%) 48.3 21.3 57.5 62.2 40.4 46.6
NBCC
Sales Volume 100.0 159.2 186.1 256.4 307.2 1008.9
Cash Balance 100.0 267.1 201.2 347.9 360.5 1276.8
Cash to Sales (%) 20 3.3 2.1 2.7 2.3 2.5
Service Group
Sales Volume 100.0 132.2 154.8 188.6 217.7 793.4
Cash Balance 100.0 55.5 153.5 172.9 124.9 606.8
Cash to Sales (%) 26.7 11.2 26.5 24.5 15.3 20.4
AU Companies
Sales Volume 100 0 129.2 168.3 243.8 374.7 1016.1
Cash Balance 100.0 164.1 159.1 223.4 189.7 836.2
Cash to Sales (%) 2. 2.7 2.0 1.9 1.1 1.7
NA=Not Available
Source : Compiled from the Annual Reports of the

respective companies.
36 CASH PLANNING AND MANAGE^ÊNT
versa. Upto 1974 it has shown a declining trend in the sales

volume but year-tO'ycar fluctuations in the cash balance and
the percentage of cash to sales. In 1974 when it had the
lowest sales volume, 39.7, the cash balance, 114 7, and percen-
tage of cash to sales, 31.5%, had been the highest. In 1975 it
recorded an increase m the sales volume to 46.3 accompanied

by a decline in the percentage of cash to sales to 7 8%,
Further, decline in sales volume in 1973 to 40.9, from 46 3 in
1972, also led to a corresponding decline in the cash balance to
86.2 and in the percentage of cash to sales to 23.0%. The theore-
tical assumption that as sales increase, cash balances also in-
crease but not m
the same proportion is supported by the
manufacturing group. It has shown an increasing trend in
the sales volumeand the cash balance and a declining trend in

the percentage of cash to sales. Also, over the period of five
years, had a much higher increase in sales volume, 2572.1,
it
as compared to the increase in the cash balance, 984.1.
Amongst trading enterprises, the STC has shown an increas-

ing trend in the sales volume, v/z. from 100 in 1971 to 364.6
in l975, and also in the cash balance but only upto 1974
when was the highest, 204 1. The percentage of cash to
It
sales hasshown variations from year-to-year ranging between

0 2% and 2.0%, being the lowest in 1975 when sales volume w-as
the highest, and the highest in 1972 when sales toJume was
120 6. The MMTC, having lower increase m sales volume, 832.3,
than in cash balance, 1061.0, over the five-year period 1971-75,
has also recorded an increasing trend in the sales volume accom-
panied by, 1973 onward, an increasing trend in the cash balance.
But the percentage of cash to sales, with an increase from
0.7% in 1971 to 2 0% in 1972, has shown, tbereafier, a declin-
ing trend upto 1974 but again an increase to 0.8% in 1975
when the sales volume, 298 4 and cash balance, 357.1, was the
highest. With an increasing trend in the sales volume, the HHEC
has recorded an increasing trend in the cash balance also upto
1974 but a decline to 298 4 in 1975, from 460.1 in 1974. The
percentage of cash to sales, ranging between 1.7% and 4.1%,
has shown, 1973 onw'ard, a declining trend. In 1975 when
the sales volume was the highest, 700.9, the percentage of cash
to sales was the lowest, 1.7%. The trading group also has
shown an increasing trend in the sales volume but year-to-year
variations in the cash balance and the percentage of cash to
sales. The percentage of cash to sales was the lowest, 0.5%,
in 1975 when the sabs volume was the highest, 332.2.
The percentage of cash to sales (service charges) in service
companies, by and large, has remained unaffected by the
increase in sales volume in the respective years. Both the compa-
nies— —
the CVVC and the NBCC have shown an increasing
trend in the volume but year-to-year variations in the
sales
percentage of cash to sales from 21.3% to 62.2% and 2.0% to
3.3% respectively. The changes in the cash balance in the
eWe had led to corresponding changes in the percentage of
cash to sales also. In 1972 and 1974, when
had the lowest,
it
48.0, and the highest, 166.6, cash balance, the percentages of

cash to sales were also the lowest, 21.3%, and the highest, 62.2%,
respectively. Further, a decline in cash balances in 1972 and
1975 from the respective previous years has led to correspond-
ing decline in the percentages of cash to sales also. In 1971,
when the NBCC had the lowest sales volume and cash balance,
100.0. the percentage of cash to sales, 2.0%, was the lowest.
An increase in the cash balance to 257.1 in 1972 and a decline
in 1974 to 201,2, had led to an increase and a decline in the
percentages of cash to sales also. 1973 onward the cash
balance has shown an increasing trend but the percentage of
cash to sales has shown year-to-year variations. The service
group also has disclosed an increasing trend in the sales
volume accompained by, 1973 onward, a declining trend in the
percentage of cash to sales. In 1971 when the sales volume
was the lowest, the percentage of cash to sales was the highest,
26.7%, but in 1975 when the sales volume was the highest,
217.7, the percentage of cash to sales was 15.3% whereas it
should have been the lowest. However, taking all the eight
enterprises together, with year-to-year variations in the cash
balance, there has been an increasing trend in the sales volume
and 1972 onward a declining trend in the percentage of cash
to sales. In 1975 when the sales volume was the highest,
374.7, the percentage of cash to sales was the lowest, 1.1%.
Concluding the above discussion of the analysis of the

effect of changes in sales volume on the cash balances of the
companies covered by this study, it may be said that the empiri-
cal evidences available do not fully support the theoretical
assumption that as sales increase, cash balances also increase
but not in the same proportion. It is eloquent from the fact
volume had led to increase

that in general increase in their sales
in the cash balances alsobut not to a decline in the percentages
of cash to sales. Moreover, a nominal increase in sales solurae
in some of them was accompanied by a notable increase in
their cash balances and generally the percentage of cash to
sales was affected by the changes in the cash balances rather
than the changes m the sales volume. Thus, this analysis is
indicative of the absence of a proper practice in maintaining
cash balances by the companies covered by this study. How-
ever, the available cash resources should be effectively utilised
in the operations of the business toincrease cash turnorer, of
course, consistent with its liquidity. The effect of cash turn-
over ratios on the liquidity ratios of the selected enterprises
IS discussed in the next section.
V
CASH TURNOVER AND LIQUIDITY RATIOS
The object of this section is to examine the effect of cash

turnover ratios on the liquidity ratios of the selected under-
takings. The underlying hypothesis which this section attempts
to testIS that the enterprises having higher cash turnover ratios
have lower liquidity ratios The liquidity ratios, which measure

the ability of an enterprise to meet obligations in the short
run, represent here the percentage of cash including short-term
investments to total current liabilities. The cash turnover
ratio IS a tool to judge how efficiently the available cash
resources of a concern arc being used in its operations. This
ratio is derived by dividing net sales of a period by the opening
cash balance and shows how many times the firm has turned
itscash during that period. The higher the cash turnover, the
measurement of cash balances 39
lesser the liquidityof the business but the more fully are its
funds used in Though a lower cash turnover
operations.
indicates higher liquidity of a business, it is a signal for it to
see whether cash is receiving its maximum utilisation for profit
taking. It should be kept in mind that neither a too large nor
a too small cash turnover situation is desirable for any enter-
prise. There should be a compromise between the two the —
tendency for a too small turnover and a tendency for a too
large turnover —
so that cash is utilised as fully as possible
without undue risk to the liquidity position of the enterprise.
Table 2.7 shows cash turnover and liquidity ratios in
selected companies during 1972-75. It discloses that though,
in general, companies having higher cash turnover ratio had,
on an average, lower liquidity ratios but exceptions apart
their liquidity ratio was not the lowest when the cash turnover
ratio was the highest and vice versa
Amongst manufacturing undertakings, the BHEL and
NMDC had, on an average, the highest, 73.3, and the lowest,
3.9, cash turnover ratios and the lowest, 2.1 and the highest,
’/(
,
41.2%, liquidity ratios respectively. Taking individual compa-

nies, the ECIL has recorded a declining trend in the cash turn-
over ratio and an increasing trend, upto 1974, in the liquidity
ratio. In 1972 when it had the highest cash turnover ratio,
the liquidity ratio was the lowest. But in 1975 w'hen the cash
turnover ratio was the lowest, the liquidity ratio was 19.4%,
not the highest, the highest being 36.0% in 1974. In 1973 and
1974 when the BHEL had the highest and the lowest cash
turnover ratios, its liquidity ratios were also the highest and
the lowest. In 1975 the cash turnover ratio recorded an
increase by 1.7 over 1974 and the liquidity ratio recorded also
an increase by 0.2%. The cash turhover ratios in the NMDC
were 4.2 in 1972 and 1974 but the liquidity ratios were 48 3%
and 60.2% respectively. Further, in 1973 and 1975 its cash
turnover ratios were almost the same, 3.5 and 3.7, but the
liquidity ratios were mueh more different, viz., 52.6% and
11.2% respectively. The liquidity ratios in the manufacturing
group have shown a declining trend without being aflected by
the changes in the cash turnover ratios. In 1973 when this
ratio was the lowest, the liquidity ratio was 6.7%, not the
highest. Again in 1975 when it had the lowest liquidity ratio,
2 9%, the cash turnover ratio, 31.6, was not the highest.
Amongst trading companies, the MMTC
had, on an average,
the highest cash turnover ratio and the lowest liquidity ratio,
and the HHEC had the lowest cash turnover ratio and the
highest liquidity ratio. In theSTC, with the only exception in
1975 when it had the highest cash turnover ratio and the lowest
liquidity ratio, the liquidity ratios ha\e shown corresponding
changes alongwjth the changes in the cash turnover ratio
during 1972-75. 1973 onward it has recorded an increasing
trend in the cash turnoier ratio but no trend was discernible
TABLE 2.7
Cash Turaoter and Liquidit) Ratios io Selected Cctspanles
Company 1972 1973 1974 1975 1972-75

(Average)
1 2 3 4 5 6
BHEL
Cash Turnover Ratio NA 82.3 70 3 72.0 73.3
Liquidity Ratio (%) 2.1 2.9 1 8 2.0 2.1
HCIL
Cash Turnover Ratio 47.4 32.7 30.3 8.0 13.1
Liquidity Ratio (%) 9.8 10.8 36 0 19.4 22.0
NMDC
Cash Turnover Ratio 4.2 35 4.2 3.7 3.9
Liquidity Ratio (%) 48J 52.6 60.2 11.2 41.2
Manufccturing Croup
Cash Turnover Ratio 32,4 27.5 37.3 31.6 32T
Liquidity Ratio (%) 6.9 6.7 50 2.9 4.6
1 2 3 4 5 6
HHEC
Liquidity Ratio (%) 20.0 23.9 65.8 30.5 35.6
MMTC
Cash Turnover Ratio 151.9 62.9 1S3.2 286.2 147.6
Liquidity Ratio (%) 11.2 4.6 4.0 5.8 6.0
STC
Liquidity Ratio (%) 18.3 9.8 14.9 3.3 9.6
Trading Group
Liquidity Ratio (%) 14.3 7.1 9.4 4.8 7.9
CWC
Liquidity Ratio (%) 29.4 84.7 91.8 63.8 68.4
NBCC
Liquidity Ratio i%) 21.2 10.1 12.0 8.2 11.1
Service Group
Liquidity Ratio (’%) 27.6 63.5 62.9 38.1 48.4
All Companies
Liquidity Ratio (%) 10.7 8.0 7.2 4.0 6.5
NA=Not Available
Source ; Compiled from the Annual Reports of the respective

companies.
in the liquidity ratio. Almost similar features have been

disclosed by the HUEC also. It has shown an increasing
trend in both the ratios—cash turnover and liquidity— upto 1974
and a sudden decline from 81.9 to 38 9 in the cash turnover
ratio and from 65.8% to 30.5% in the liquidity ratio in 1975
In 1972 and 1974 when the cash turnover ratios were the
lowest and the highest, the liquidity ratios were also the
lowest and the highest whereas they should have been the
reverse. 1973 onward the MMTC
has shown an increasing
trend in the cash turnover ratio and a declining trend in the
liquidity ratio during 1972-74 which were also not the highest
and the lowest when the cash turnover ratios w'ere the lowest
and the highest The trading group has revealed that in 1975
it had the highest cash turnover and the lowest liquidity ratios
but in 1973 when the cash turnover ratio was the lowest, the
was not the highest.
liquidity ratio
Between service companies, the KBCC bad, on an average,
higher cash turnover ratio and lower liquidity ratio as compared
to the ewe which had a much lower cash turnover ratio, 2.2,
and a much higher liquidity ratio, 68 4%, being the lowest and
the highest in all the eight enterprises. In 1975 it had the
lowest cash turnover ratio, 1.7, when the liquidity ratio was
63 8% whereas it should have been the highest. In 1973 when
the cash turnover ratio was the highest, 5.5, the liquidity ratio
was 8S7% whereas it should have been the lowest. 1973 on-
ward the cash turnover ratios have recorded a declining trend
but the liquidity ratios have shown an increasing trend upto
1974. Facts slightly difTerent from this have been found in the
NBCC. In 1972 it had the highest cash turnover ratio when
the liquidity ratio was also the highest and in 1973 whrn the
cash turnover ratio was the lowest, the liquidity ratio was
10 1% whereas It should have been the highest. Further, in
1975 when the cash turnover ratio recorded a decline to 44.8,
from 64 6 in 1974, the liquidity ratio also recorded a decline
from ^.0% to 8 2% whereas H shomtd shown an incTtas*.
In 1973 the service group had the highest cash turnover ratio,
10.4,and the lowest liquidity ratio, 63.5%. Thereafter, the cash

turnover ratios have shown year-to-year variations while the
have disclosed a declining trend.

liquidity ratios
Amongst groups of industry, the trading and the
different
service groups had, on an average, the highest, 114.0, and the
lowest, 5.0, cash turnover ratios respectively but while the
latter had the highest liquidity ratio, 48.4%, it was not the
lowest in the trading group, 4.6% being the lowest in the manu-
facturing group which had much lower cash turnover ratio, 32.3,
than in the trading group. Taking all the eight enterprises
together, the liquidity ratios ha%'e disclosed a declining trend
and 1973 onward the cash turnover ratios have shown an in-
creasing trend indicating that a higher cash-turnover ratio is
accompanied by a lower liquidity ratio and vice versa.

From the above discussion of the effect of changes in the
cash turnover ratios on the liquidity of the selected enter-
r'’tios
prises, it is obvious that the available data are not completely
in agreement with the expectation that the enterprises having
higher cash turnover ratios have lower liquidity ratios. Though
the companies having higher cash turnover ratios had, on an
average, lower liquidity ratios over the four-year period 1972-75,
exceptions apart their liquidity ratio was not the lowest when
the cash turnover ratio was the highest and vice versa. This
had been generally true in all the undertakings under different
industry groups. By and of them have also shown
large, all
significant variations in both the ratios —
cash turnover and
liquidity— during 1972-75 not only individually but also in
comparison with other enterprises under a particular group of
industry'. Thus, the analysis in this section also is indicative of
the characteristics of cash balances similar to that in the
preceding ones, i.e., absence of proper practice in maintaining
cash balances by the enterprises studied here. The major
findings of the present chapter are recapitulated in section VI.
VI
CONCLUSIONS
The main conclusions emerging from the discussion of measure-
ment of cash balances in the selected companies may now be
underlined.
44 CASH PLANNING AND MANAGESIENT
One concern of the present chapter svas to examine the a

priori reasoning that there should not be significant variations
in the cash balances in relation to current asects, current liabili-
ties and sales of an enterprise over a period of time as well as
in comparison with other enterprises under a particular group

of industry. But the empirical evidences available in respect of
the cash balances maintained by the selected companies are at
variance w'lth this. This is eloquently borne out by significant
variations in the percentages of cash to current assets, cash to
current liabilities and cash to sales which were present not only
in individual companies over the five-year period 1971-75 but

also amongst enterprises under the respective industry groups.
However, companies under trading group have disclosed com-
paratively lower variations.
The analysis of the ratio of sales in relation to fixed assets on
th<t percentage of cash to working capital is also indicative of
a similar characteristic in that the available data do not confirm
the ex-hypothesis statement that companies whose sales are
relatively large compared to fixed assets have higher cash balan-
ces in relation to working capital. On the contrary, the compa-
nies having higher ratio of sales to fixed assets bad, by and
large, lower percentage of cash to working capital. Between
trading and manufacturing groups, however, the trading group
having higher ratio of sales to fixed assets also had higher per-
centage of cash to working capital. But the service group
which had the lowest ratio of sales (service charges) to fixed
assets, had the highest percentage of cash to working capital.
Another feature of the practice of maintaining cash balance

by the companies studied here is that the available information
is inconsistent with the theoretical supposition that as sales
increase, cash balances also increase but not in the same pro-
portion. Though the increases in sales had led to increases in
the cash balances also, they had not led to a decline in the
percentage of cash to sales and vice versa. Rather in roost of
the cases the changes in the cash balances have been found
causing corresponding changes in the percentage of cash to
sales. Some of the enterprises have also disclosed much higher
increase in the cash balance than that in sales over the
five-year period 1971-75.

Finally, the empirical evidences available regarding cash
turnover and liquidity ratios also do not seem to fully justify
our assumption that the enterprises having higher cash turnover
ratios have lower liquidity ratios. Moreover, some of the
selected companies had the highest liquidity ratio when their
cash turnover ratio had been the highest and vice versa.
However, some of them have disclosed an increasing trend in
the cash turnover ratio accompanied by a declining trend in
the liquidity ratio (and vice versa) during 1972-75 which shows
that companies having higher cash turnover tend to have lower
liquidity.
In brief, the above facts indicate a lack, probably, of proper
practice in maintaining cash balances by the enterprises covered
by this study. Giving due allowance to the limitations of the
Balance Sheet, as a source of information of cash balances, it
appears that their cash balances on a particular day are the
result of chance and not of any planning or systematic practice.
It is against this background of the practice of maintaining
cash balances by the selected companies that we now proceed
to discuss in the following chapters the cash planning and
management practice of the selected companies. An accurate
estimate of the potential cash flows by an enterprise is the first
requirement of cash management decisions. How the companies
covered by this study estimate their cash flows forms the
subject-matter of Chapter 3.
3
Forecasting and Control of Cash
An accurate estimate
of cash flows for some time into the
future, i.e.,cash forecast, is an important part of cash
a
planning process which by its nature precedes the decisions to
adopt a course of action. The success of any plan for the
future is greatly dependent upon the assumption s which are
made in the forecast and, thus, cash forecasting is the crucial
part of the cash planning function. The first step in making
cash management decisions is to obtain a cash forecast. Its
importance in the study of cash management is derived from
the fact that it is a good tool to predict the future cash flows
as it deals with the estimation of cash inflows and outflows at
different stages and explains their nature and also their expected
timings giving advance notice to the management to devise
appropriate and timely action.
“A good cash forecast can be a major weapon in manage-

ment’s arsenal against the unexpected.”^
1. Hagaman, T. Carter, ‘Forecasting in Financial Planning’, Financial

Executive, July, 1963, p.28.
48 CASH PLANNING AND MANAGEMFNT
Although a good cash forecast is a basic requirement of

effective cash management*, forecasting is not an exact science
and actual cash receipts and disbursements will necessarily be
somewhat different from those anticipated in the cash forecast.
Therefore, a cash forecast that turns out to be ‘wrong’, i.e.,
shows deviations from the actual results, is not necessarily a

'bad forecast*.
“The ultimate object of the exercise is to guide appropriate

and timely management action towards improved control of
cash flow. For this reason a ‘good’ forecast is not one that
turns out to be ‘right’ but the one that, as the future unfolds
and divergences from forecast present themselves, provides a
sound basis for such management action.’’*
However, a cash forecast howsoever good it may be is in

itself incapable of bringing the desired results unless proper pro-
cedurcs arc adopted to control the movement of cash to ensure
that actual results are brought nearer to the estimates. Hence,
forecasting and control of cash flows go together.
This chapter, which presents the practice of the selected com-
panies of forecasting and controlling cash flows, attempts to
seek answers to the following questions ;
(i) Of what value do the selected undertakings consider

their cash forecast to be in the success of their
business ?
(li) Which department is responsible to prepare the cash
forecast 7 ;
2. Emphasising the importance of an accurate cash forecast prepared by

Thomas B Edick sa>s that the accuracy of his
the credit executive,
and his control of accounts receivable are basic to
collection forecast
the success of a cash management programme For details, sec
Edick, Thomas D , ‘The Credit Executives Role in Cash Management’,
Credit and Financial Management, VoJ 77, No. 9, October, 1975,
pp 16-18
3. Hartley, W.C.F., Cash : Planning, Forecasting and Controlling,
(London, 1976), p. sg.
FORECASTING AND CONTROL OF CASH 49
(iii) What method do they adopt to make a cash forecast ?;

(iv) What time span do they cover in their cash forecast ?;
(v) Do they take assistance from outsiders in preparing
their cash forecast ?;
(vi) What factors provide guidelines to them in preparing

the cash forecast ?;
(vii) _ What practice do they adopt in controlling cash flows ?;
(viii) What factors cause deviations in the actual result as
compared to the budgeted ones ?;and
(ix) What steps do they ^take to remove the effect of
variations?.
The chapter has been divided into three sections. Section I

sketches the practice of cash forecasting by the selected com-
panies and Section 11 deals with their practice of controlling
cash flows. Finally, Section III presents concluding observations
of the chapter.
CASH FORECASTING
This section attempts to present the cash forecasting practice

of the selected companies. The importance of cash forecast in
the study of cash management needs no reiteration. As
mentioned above, it is a good tool in the hands of the manage-
ment to predict the movement of future cash flows to devise
suitable action regarding cash in good time.
The here give due importance to cash
enterprises studied
forecast in the success of their business. To ascertain the value
of cash forecast, they were asked the following question :
“Of what value do you consider a cash forecast to be in

the success of your business ?
(a) Crucial to success

(b) Quite important to success
(c) Mildly contributes to success
(d) Generally important to success

(e) Has no bearing on success
(f) Do not know*’
Success was construed to mean maximisation of profit. Their

replies are presented m
Table 3,1. While replying to the
above question, the Bharat Heavy Electricals Ltd. and Handi-
crafts and Handlooms Exports Corporation of India Ltd. said,
“Crucial to success”, the Minerals and Metals Trading Cor-
poration of India Ltd , State Trading Corporation of India
Ltd Electronics Corporation of India Ltd., Central Ware-
,
housing Corporation and National Buildings Construction Cor-

poration Ltd. described it, “Quite important to success”.
However, “Generally important to success" was the reply given
by the National Mineral Development Corporation Ltd.
Table 3.2 contains the departments which are responsible to
prepare regular cash forecast In the companies covered by this
study. It shows that m
the Bharat Heavy Electricals Ltd.,
Minerals and Metals Trading Corporation of India Ltd., Handi-
crafts and Handlooms Exports Corporation of India Ltd,
Ceocra! Warehousing Corporation and National Buildings
Construction Corporation Ltd., this task is performed by tbeir
respective Accounts Department. But the other companies
ha%e a separate department for the purpose known by different
names, e.g , Budget and Cost Department in the National
Mineral Development Corporation Ltd., Management Budget-
ing and Reporting Cell in the Electronics Corporation of India
Ltd. and Contracts and Credit Department in the Stale Trading
Corporation of India Ltd.
The Contracts and Credit Department of the State Trading
Corporation of India Ltd. not only prepares various budgets
an important role in the overall
for cash forecast but also plays
management of funis by performiog a variety of functions such
as :
1. —
Cash management funds position, borrowing arrange-
ments, mveslment of surplus cash etc.;
2. —
Granting of credit Joans, advances and guarantees etc.;
FORECASTING AND CONTROI. OF CASH
51
Companies
Selected
by
Assigned
3.1
Value
TABLE
Forecast
Cash
success
of success
to
on
Importance
contributes
bearing
know
no not
Mildly
Has Do
(d) (c) (f)

52 CASH l-LANNING AND MANAGEMENT
Ltd.
India
Ltd.
or
Companies
India
of
Corporation
Selected
Corporation
m
Tradins
Forecast
Electronics
State
2
3 Cash
TABLE
Prepare
to Cell
Responsible
Reporting
Department
and
Departments
Budgeting
Credit
anJ
Management
Conincis
3. Recovery of outstanding dues from sundry debtors ;
4. Liquidation of stock by periodical scrutiny and

constant follow up ;
5. Liasion with commercial banks. Industrial Development

Bank of India, Export Credit and Guarantee Corpora-
tion etc.;
6. Maintenance of opinion regarding credit worthiness of

associates ;
7. Financial and profitability evaluation and follow up of

contracts ; and so on.
To make a forecast of their cash position, all the selected

companies prepare a cash budget*. For the purpose, they are
guided by their past experience and future programme of
action. But the time span covered by them in cash budget, as
presented in Table 3.3, varies from three months to two years
which can broadly be grouped into three categories (i) two :
and monthly break-ups, (ii) one

years having yearly, quarterly,
year having quarterly and monthly break-ups, and (iii) three
months having monthly break-ups.
Amongst manufacturing companies, the Electronics Cor-
poration of India Ltd. and Bharat Heavy Electricals Ltd. pre-
pare the cash budget one year in advance having monthly and
quarterly break-ups. But the National Mineral Development
Corporation Ltd. prepares this budget two years in advance
having yearly, quarterly and monthly break-ups. In doing so,
every year in the month of December it prepares a budget for
the next to next year which is called Budget Estimate. These
budget estimates are revised after twelve months, again in
December, and are called Revised E:>timates which constitute
the budget for the current year commencing from 1st of April.
4. According to William E. Mitchell there are four methods of preparing

cash forecast : (i) Cash Receipt and Disbursement Method, (ii)
Balance Sheet Projection Method, (ii) Adjusted Earnings Method,
and (iv) Working Capita! E.\trapoIation Method. For details, see :
Mitchell, William E., 'Cash Forecasting : The Four Methods
Compared’, The Controller, April, 1960, p.p 162-66.
54 CASH PLANNING AND MANAGE'tENT
monthly
having
months
Companies
brcak*ups.
Three
Selected
by
Budget
3.3
Cash
TABLE
Ihc
in
Covered
Ltd.
India
Sii.in
of
Time
Corporation
Trading
Stale
Thus, every year two budgets are prepared — (i) Budget Esti-
mates and (ii) Revised Estimates.
The three enterprises under the trading group of industry
cover different time span in their cash budget. While in the
Handicrafts and Handlooras Exports Corporation of India Ltd.
it extends to two years having yearly, quarterly and monthly
break-ups, similar to that of the National Mineral Development

Corporation Ltd., the Minerals and Metals Trading Corporation
of India Ltd. covers one year in its cash budget, on the lines of
the Electronics Corporation of India Ltd., having quarterly
and monthly break-ups.
The State Trading
Corporation of India Ltd., in marked
contrast, prepares cash budget for much shorter period
its
covering only three months. The three months cash budget is

prepared every month in the proforma given in Annexure A*
and is called CashFlow Statement. It is divided into marketing
divisions and branch offices and further segmented by product
lines. The forecast is based on performance budget, contracts
in hand, shipment advices, past experience of the divisions/
branch offices, seasonality of trade and so on. In addition to
the figures of estimated cash inflows and outflows, transactions
which may otherwise affect the cash position or the Corporation
on long or short range basis are also indicated by way of a

foot-note. These estimates are kept under constant review and
any changes therein reported to the Contracts and Credit
Department so that it may adjust the overall position
accordingly. To further refine the technique of cash flow
forecast and make it more accurate and realistic, the STC
decided in 1973 to switch over from monthly to weekly cash
flow forecasts whereby projections were to be made for four
weeks. To implement the decision a circular was issued to
every branch and division in this regard as follows :
(i) Every week latest by Saturday, a forecast of cash flow

for the next four weeks should be compiled by each
division/branch in the prescribed proforma (Anne.xure
Anne.xure given at the end of the chapter.

B*) and sent to the Finance and Accounts Co-ordina-

tion for incorporation in the weekly report.
(ii) The estraates should be realistic and based on
performance budget, contracts in hand, shipment
advices, past experience etc.
(ill) The figures of cash flow at branches should be furni-
shed by the branches directly to the Finance and
Accounts Co-ordination as above.
(iv) In addition to figures for inflow and outflow of cash,
figures for transactions in respect of which liens may
be noted/released by the bank, c.g , deferred payment,
guarantees for import of tractors, may also be indicated
separately by way of foot-notes.
(v) The cash flow statement should be prepared in consul-
tation with the Finance Manager/Deputy Finance
Manager as the case may be.
(vi) The estimates of cash flow should be kept under cons-
tant review. Any changes therein should be promptly
reported to Banking Section so that they may adjust
the position accordingly.
(vii) In order to judge how accurately cash flow statements
are prepared, branches shall compile a weekly statement
of the actual cash flow in the prescribed proforma
(Annexurc C*> and teleprint the same to the Banking
Section every week on 7tb, I4lh, 21st, and last day of
the month. This statement in respect of the Head
Quarters will be prepared by Banking Section.
new system of preparing weekly cash flow

Introduction of the
forecastwould have been, no doubt, a commendable step in the
fieldof cash management but it was not found practicable by
the branches/divisioDS and as a result none of them ever
supplied the desired figures to the Head Office. However,
they have been supplying regurlarly the weekly statement of the
actual cash flow, i e., receipts and payments during the week
and the cash balance at the end of the week.
* Annexure given at the end of the chapter.

The two companies under the service group, namely, the

Central Warehousing Corporation and National Buildings
Construction Corporation Ltd., also cover two years in their
cash budget having yearly, quarterly and monthly break-ups. It
is prepared in two parts (i) Budget Estimates and (ii) Revised
:
Estimates. The revised estimates which are prepared in the

month of December every year, constitute the budget for the
succeeding year commencing from 1st April. The budget esti-
mates relate to the next to next year. These are prepared on
the same lines as has been explained above in the case of
National Mineral Development Corporation Ltd, The revision
of the budget estimates is done on the basis of the actual figures
of income and expenditure in the first five months of the current
year, i e., April to August, and the amounts expected to be
received and paid in the remaining seven months, i.e., Septem-
ber to March, keeping in veiw the future programme of
actions.
In view of the scope of cashmanagement which is limited to
short term, can be expected that the enterprises covered by
it
this study make an estimate of their cash flows for the short
period only covering the next six to twelve months. But the
above analysis of the time span covered by them in the cash
budget shows that in four of them, namely, the Central Ware-
housing Corporation, Handicrafts and Handlooms Exports Cor-
poration of India Ltd., National Buildings Construction Cor-
poration Ltd. and National Mineral Development Corporation
Ltd., this period has been extending to two years. The probable
explanation for this may be the advantages of both tne types
of cash forecast— short term and long term.®
5. W.C.F. Hartley has emphasised aware of

that a business needs to be
its term but also in the long
potential cash flows not only in the short
term. Hence, cash forecasts can broadly be divided into two
categories : (i) short term and (ii) long term, which have slightly
different objectives and orientation. The prime objective of a short

term cash forecast is to ensure that a firm can pay its debts in the
immediate future. It is, therefore, oriented towards the guidance of
appropriate and timely management action in the short term towards
improved control of cash flows. This is where the value in a cash
forecast lies. The long term cash forecast attempts to show only
58 CASH PLANNING AND MANACEifENT
So far as the methods of cash forecasting are concerned, the

cash receipt and disbursement method, also known as cash budget
method, and the adjusted net income method can be adopted
with advantage for the purpose. Each method has certain
advantages over the other but their purpose is the same— to
project the flow of cash into and out of the company over a
regular interval of time— day-to-day, week-to-week, monthly
quarterly, semi-annually or even longer period of time. The
cash budget
‘is more helpful m the day-to-day control of cash while the

adjusted net income method tends to produce a more
accurate estimate of cash position in forecasts for a quarter
or longer If both methods are used together, they can
balance and supplement each other The strongest fore-
casting system generally combines the two methods using
a quarterly and annually adjusted net income forecast to
check the adequacy of credit lines and bonowing reserves,
and a daily and monthly receipts and disinrhesmenis fore-
cast to maintain close control over the cash position and
aid in the full investment of temporary cash surplus".*
Perhaps these advantages are the main consideration in using

the cash budget method by all the selected enterprises for
estimating their cash flows.
To facilitate the preparation of cash forecast and make it more
accurate and realistic, assistance may be taken from outside
significantchanges caused by acqaisitions. the introduction of new

products and the long term growth of the enterprise. Its object is to
indicate the fiiincial consequence* of future strategic courses of
action and to assist
in long term —
usually beyond a year—financial
planning to show whether oser a period of time money can be
generated through working capital growth, when and where fund*
wfilteneeied and d they w/tt be available at that t’lme. For detaAs,
see; Hartley, W.C F., Op cit, pp 34-51.
€ Hill, Roger \V , Jr., Cash Management Technique, (New York,

1970), pp 13-20
:
agencies such as consultants, banks/Jending institutions and

outside auditors etc. In an attempt to
find out whether the
selectedcompanies take assistance from any such source for the
purpose, a question was asked;
“Would 3'ou please check the outside source of assistance

available to you,if any, to prepare the cash forecast
(a) No outside source

(b) Consultant
(c) Bank/Lending Institution
(d) Outside Auditor
(e) Any other {Please specif}')’’
In reply to the above question all of them gave a negative

answer and said, “we do rot need any such assistance”. It
shows that they are thorough in the cash forecasting techniques
and, hence, self dependent in this regard.
To increase the effectiveness of cash forecast, the system of
cash management requires development of procedures of control
of cash flows to ensure that actual performance coincides with
the budgeted ones. What procedures the selected companies have
to control their cash flows is discussed in the next section.
II
CONTROL OF CASH FLOWS

Because forecasting is no more than some one’s belief in the
future based on certain assumptions which have been made

regarding future events, cash forecasts will inevitably be at
variance with the actual result. This discrepancy may result
from (a) variations in factors affecting sudden and
cash, (b)
unexpected circumstances influencing operations or (c) lack of
adequate control. A good system of control is specially impor-
tant because of the consequences that may result from lack of
managerial control. Since cash is an important component of
working capital, any slackness on the part of the management
60 CASH PLANNING AND MANAOEMENT
to control this liquid asset may cause disaster to the enterprise.

The impoTtatice of adequate control is evident, in some measure,
from Figure III.A. It presents three phases of cash flows over a
given period of time. Phases I and 111show excess of cash
outflows over inflows, i e., deficit of cash, and Phase II shows the
excess of cash inflows over outflows, t e ,
surplus of cash.
Lack of managerial control may push up the cash outflow curve
AA to A’A’ and/or push down the cash inflow curve BB to B’B’
In both the situations cash deficit will increase causing strain on
the mind of the management. Therefore, to increase the effec-
tiveness of cash forecast, necessary procedoers should be deve-
loped to control the cash flows The central idea in controlling
cash flows is to ensure the of cash on the lines
flows
anticipated and estimated in the cash forecast or as near to
them as possible lest large deviations take place and create
probletas to the management. This section, therefore, attempts
to present the practice of the selected companies regarding
control of their cash flows.
In the study an attempt was made to find out the factors

responsible for causing variations^ if any, in the actual result
as compared to those in the budget of the companies covered
7 Eame‘i W
Walker and Wijlum H. Baughn have suggested thst if
msnrgnnent is to correct the deviations, an anahsts of the causes
must be made Actual cash balances vary from proposed cash balan-
ces as the resu't of cither real causes or errors made in the budgetary
process The following may be classified as real causes : changes m
the pr.ces of such items as labour, supplies, raw matrria's and finished
goods; non-coincidence ofcoVectiORs with col’ection terms ; occur-
rence of extra-ordmary expenditure for ron-anticipated items ; and
dcc'ine m demand of the products. Errors made in the budgetary
process may resu't on account of the following : omission of the
information vital to the budget; preparation of cash forecast by
inexperienced personnel who are prone to omit vita) informations as
well as making errors in the infonnations which they include
; longer
time scan covered in the cash forecast use of incorrect forecasting
;
techniques and inaccuracy of basic data due to the nature of the busi-
,
ness. For details, see ; Walker Earnest W.

and William H. Baughn,
Financial Planning and Policy, (New York,
1961). pp. 161 -d2 .
of cash 61
forecasting and control
figure III.Al
Control on Cash
Flows
Effect of Managerial
by this study. For the purpose, they were requested to answer

the following question :
“Actual cash figures are bound to be different from the

budgeted ones and you might be analysing the causes for
deviations to take corrective steps. Would you please check
the factors responsible for deviations generally noticed by
you
(A1 Changes in the prices of
Ca) Labour
(b)
fc)
Supplies
Raw Materials ' ' ^_
(d) Finished Goods
(B) Decline in demand of the products P^C

(C) Non-coincidence of collections with collection terms
ISvo it
(D) Occurrence of extra-ordinary expenditure for non-anti-
cipated items
(E) Basic data turn to be inaccurate due to-
la) the nature of your business

{bj non-seriousness of the person(s) to supply correct
data
(F) Inadequate knowledge of the pcrson(s) preparing cash

forecast
(G) Longer time span covered in the cash forecast
(H) Any other (Please specify)”
Thtir replies are presented in Tabic 3 4. Though all of them

told the overall deviation being very nominal, varying from
cash 63
forecasting and control of
preparin
elo.
person^
ihe
of
information
knowledge
forecast
correct other
ImicIcdMtc
cash
Any
(F) (G)
—
64 CASH PLANNING AND MANAGEAIENT
i5% to 5%, deviaiioDs had been there, non-coincidence of

collections with collection terms being the major factor in all
the enterprises. Next important reason had been changes in the
prices of labour, supplies and raw materials which has been
pointed out by the National Mineral Development Corporation
Ltd , Electronics Corporation of India Ltd,, Handicrafts and
Handlooms Exports Corporation of India Ltd. and National
Buildings Construction Corporation Ltd. The Handicrafts and
Handlooms Exports Corporation of India Ltd. and Minerals and
Metals Trading Corporation of India Ltd. have also mentioned
occurrence of extra-ordinary expenditure for non-anticipated
Items as another factor in this regard. Because of the nature of
their business, the Handicrafts and Handlooms Exports Corpo-
ration of India Ltd. and Minerals and Metals Trading Corpo-
ration of India Ltd. have also found, sometimes, basic data to
be inaccurate which bad led to deviation in the actual result.
Finally, the Minerals and Metals Trading Corporation of India
Ltd had, at times, also noticed decline in demand of its pro-
ducts causing such deviation.
From the above analysis it is obvious that mainly the real
causes are responsible for bringing deviations in the actual
result as compared to the cash budgets of the selected compa-
nies. The absence of error in the budgetary process indicates
the competence of their executives in estimating the cash flows.
To ascertain the practice of the selected companies regarding
exercising control over cash flows, they were ashed the following
question
“To exercise control over cash flows and assure the actual
performance to coincide with the budgeted performance, you
might be having some procedures. Please check what do
you do in this regard
(a) Tram flnaocial personnel to eliminate deviations that

result from inadequate knowledge of the managerial
functions
(b) Have a cash budget report system under which compa-
rison of actuals is done with the budgeted ones at
periodical intervals of a week/fortnight/month/quar-

ter/
(c) Any other (Please specify)”
Replying to the above question all the eight enterprises

expressed their consciousness in keeping control over cash flows
and pqinted out having a cash budget report system under which
the actual performance' is compared with the budgeted ones®
at the end of every month. In addition to the monthly budget
report, the State Trading Corporation of India Ltd. prepares a
statement of daily cash position (Annexure D'") also which
enables it to have an idea of the daily effective cash balance
showing, inter-alia, the cash credit limit, the drawing power
available against the limit, the amount drawn and the b.alance
available, cheques issued but not presented, net effective balance
and payments during the next 16
available, anticipated receipts
days and investment position. This statement, which is avail-
able by 10 A.M. every day, is very much helpful to the manage-
ment in keeping under constant watch the Corporation’s cash
position on day-to-day basis. It also provides a crisis signal
in times of tight fund position and helps in quick investment
decision when funds are likely to be surplus.
The Central Warehousing Corporation has a system of
reviewing performance under which monthly performance
its
is compared with the performance of the previous month and
w'ith the same month’s performance in the preceding year in the
proforma given in Annexure E*. Any adverse changes are

immediately reported to the regional offices so that they could
take necessary steps in time. Further, at the end of every
8. Roger W. Hill, Jr. has suggested that to increase the effectiveness of ii

cash forecast, cash management system should have some procedure for
comparing forecast figures with the actual resists, when they are avail-
able, in order to ana’yse significant differences; such differences may
indicate that important fr.clors affecting cash were not used in the
original assumptions. For details, see : Hill, Roger W., Jr., Op. cit.,
pp .^20-21.
Annexure given at the end of the chapter.
quarter the performance of the quarter is reviewed and an esti-
mate i< prepared for the next quarter. This is done by pre-
paring a statement, exhibited in Annexure F*, and is called
‘Cash Flow Statement’. This statement discloses the actual
cash receipts and disbursements during the quarter and in the
light of that an estimate for the next quarter is prepared simul-
taneously. In addition to these statements, it also prepares a

‘Quarterly Financial Report’, in the proforma given in Annexure
G*, at the end of every quarter where the actual incomes and
expenditures of the quarter are compared with the actual
incomes and expenditures from 1st April to the end of the
quarter under review. These ligures are further compared with
the actual ones in the previous year and the revised estimates
of the current year.
A cash budget report system can be adopted to determine
as to whether or not the cash plan is The deviations
effective.
that result from the uncertainties of the economy can be mini-
mised by initiating a system of comparing the forecast figures
with the actual result at periodical intervals and making ne-
cessary correction tn order that they will not recur.This can
be done by preparing a cash budget report. The purpose of
this report is to show deviations of actual operations from
budgeted operations, thus, making it possible to compare the
actual cash balance with the budgeted cash balance at the end
of budget period. It shows when and where actual ope-
also
rations deviate from budgeted operations which cause future
cash balances to differ from budgeted cash balances, provides
a means for evaluating the forecasting procedures and indi-
cates how improvements may be made iu future. From the
above discussion it may be concluded that all the selected
companies have the required procedure to control their cash
flows.
When the analysis of the causes for deviation has been made,
the management is in a position to take corrective action. If
the analysis reveals that the variation is the result of an error
Annexure ghen at theendofthediapCer.

—
in the budgeting process or an erroneous forecast, the cash

budget can be revised to eliminate the error or correct the mis-
calculation. When deviations take place on account of real
causes, it again necessitates the revision of the cash forecast.
Cash projections may be revised monthly or quarterly to main-
tain a current forecast for periods varying from a month to a
year ahead. Such revisions may be formal or informal and
can be made by inserting the actual figures of the period just
completed and adjusting the future periods without revising the
entire forecast with new estimates. Any time significant
changes occur that affect cash, informal revisions may be made
to update and improve the accuracy of the forecast.
All the selected companies have pointed out revising their
cash budget as a corrective step to remove the effect of devi-
ations. On being asked
“Please check the corrective step(s) that you take aiffer the
analysis of causes for deviations
(a) Revise the budget

(b) Revise the policy (ies)
(c) Any other (Please specify)”
all of them invariably indicated “a”, i.e., revise the budget.
The analysis of the causes for deviation is done every month

when the cash budget report is prepared. If necessary, they
revise the cash budget to make it upto date for the succeeding
period(s). The main findings of the chapter are summarised
n section III.
in
CONCLUSIONS
This chapter attempted to present the practice of the selec-

ted companies regarding forecasting and control of cash. The
discussion in the foregoing pages shows that recognising the
importance of cash forecast in the success of their business,

all of them prepare a cash budget to estimate their future cash
flows. In five of the eight companies studied here, the task of

preparing cash forecast is performed by their respective
Accounts Department. But the others have a separate depart-
ment for the purpose known by different names, vir , Budget
and Cost Department in the National Mineral Development
Corporation Ltd Management Budgeting and Reporting Cell
,
in the Electronics Corporation of India Lid. and Contracts and

Credit Department 'n the State Trading Corporation of India
Ltd.
The period coverage also differs among them. While the
State Trading Corporation of India Ltd. covers only three
roontbs, having monthly break-ups, it extends io one year in
the Electronics Corporation of India Ltd , Bharat Heavy
Electricals Ltd. and Minerals and Metals Trading Corporation
of India Ltd. with monthly and quarterly break-ups. The
other four companies, namely. Central Warehousing Corpo-
ration, Handicrafts and Handlooms Exports Corporation of
India Ltd., National Buildings Construction Corporation Ltd.
and National Mineral Development Corporation Ltd., cover a
period of two years in their cash forecast, having yearly, quart-
lerly and monthly break-ups. All of them, moreover, ate self
dependent in preparing the cash forecast.
To
increase the effectiveness of cash forecast, all the enter-
prises have a cash budget report system. This report, which
isprepared at the end of every month, enables them to compare
the actual results with (he budgeted ones and ascertain the
reasons for deviations, if any, for taking remedial steps. Devi-
ations, though nominal, take place mainly on account of real
causes rather than errors m the budgetary process. Generally
non-collection from debtors as per the credit terms causes
deviation in all of them. Besides, changes in the prices of
and raw roatenals, occurrence of extraordinary
labour, supplies
expenditure of basic
for non-anticipated items, inaccuracy
datadueto the natureof business and decline m demand of
• the products are other factors responsible for causing- devia-
efions, at times, noticed by ooe-or more companies. -After; the
forecasting and control of cash 69
analysis of causes for deviations, all the companies studied

here revise their cash budget, if necessary, to make it upto
date for the succeeding period.
The system of cash management also aims at recognising
the hidden cash resources in the enterprises with a view to in-
crease the of usable cash for profit maximisation.

availability
What hidden cash resources the selected companies have, thi;
forms the subject-matter of the following chapter.
Ltd
India
of
Corporation
Trading
State
the
in
Forecast
Cash
Imports
of
Proforma
Group
Development
IRMAC
IRMAC
(a) (b)
71
fohccasting and control of cash
cs
c
.2
and
Exp.
S O -S
^
o i2 3 r
products
« a. j -o r
Assistance
•u X 3 o O
o pj 13
o Ch ^ a
c3
r 1
o C3
Administrative
o go: £ -s u u u ITEMS
Establishment
c u.c—rt'^K
c/3 H
Export
Industrial rt
H yS 5^ 2C 5 P 0
V-
rt c/2
w
5 o— o 3 >
>
o
o
C >2 rt c g
cu
o a
OTER
1.
X u.P m Q
(c) w
of
Payment
Tax
Advance
Income
CONTROL or CASH 73
forecasting AND
Ltd.
India
of
Corporation
Trading
Products
Leatherware
Development
General
Foods
Films,
74 CASH PLANNING AND SfANAGEMENT
Produce
Fabrics
Fats
& Synthetic
Textiles
Calcutta
Madras
Bombay
Oils Agra
01 CASH 75
roKECASTlNG and CONTkOL
premium
charges
Commission
Insurance
Interest
Service
etc.
.
7. 8. 9.
10
76 CASH PLANNING ANP MANAGEMENT
ANNEXURE C
Proforma of the Weekly Actual Cash Flow Staleroent in'

the State Trading Corporation of India Ltd.
Actual Cash Flow Statement for the Week Ending
(Figures in thousands)
(0 Total Receipts during the week —
(ii) Total Payments during the week
(iii) Bank Balances as at the end of •

'
—
the week
Signature
Notes : (i) While teleprinting the message only the item

No. of the proforma and the fiigoies for the ^
corresponding items may be conveyed.
(ii) This statement is required to be furnished by

Branch offices only.
:
ANNEX URE D
Proforma of Daily Cash Position Statement in the
State Trading Corporation of India Ltd.
Daily Cash Position as on at lO.CO A.M.
Cash credit borrowings from the SBI Anticipated payments!

{t\iaxim:un limit Rs ) receipts during the
next 16 days
Drawing Amount Balance On account receipt
Office
Power Drawn Available payment
Head Office Receipts ;
Hypothecation 1.
Drawing power available Rs 2.
3.
Less
1. Notional limits allocated

at Branches Rs Payments :
2. Cheques Issued but not 1.
presented Rs 2.
3.
Rs
Rs Total
Add ;
Cheques being deposited today

Rs
Net effective drawing power at
H.O. Rs
Dy. Finance Mai;.ger
F.M. (Cr.)
CFM
Director [Fin.]
Chairman
:
78 CASH 1’LA^NJNG AND MANAGEMENT
ANNEXURE E
Proforma of Reriewing Moothly Performance in the

Central Warehonsing Corporation
Central Warehonsing Corporation

(A Govt, of India Undertaking)
Performance Review for the Month of (say) March, 1978
March, 1977 February, 197S March, 1978
Rs. Rs. Rs.
Income
(i) Storage
Charges
(ii) Other
Receipts
Total
Expenditure :
(i) Operating
Expenses
including
Administration
Charges
(ii) Interest on
Loans
Total
Net Surplus/Dcficit
ANNEXURE F
Proforma of Reviewing Quarterly Performance in the
Central Warehousing Corporation

CASH FLOW STATEMENT
for the Quarter Estimate for the

ended {sayj Quarter ending
Dec., '77 March, '78
Rs. Rs.
Opening Balance of Cash
Receipts (Actual)
To be received from the
Govt, towards further
contribution to the share
capital and loans
Total
Payments :
Capital Expenditure on
Works
Other Capital Expenditure
Investments in SWCs
Repayment of Loans
Interest Payable to Govt.
Advances for Handling
Operation and other
Advances
Settlement of Unpaid
Liabilitities
Revenue Expenditure
Income Tax
Total
Cash and Bank Balance

: :
80 CASH PLANNING AND MANAGEJIENT
ANNEXURE G
Proforma of Quarterly Knancjal Report in the

Quarterly Financial Report for the Quarter Ending

(say) Dec., 1977
Aciucls RE for Actuals

for 1976-77 for the At the
Particulars 1976-76 Quarter end of
(Oct.- the
Decent' Q larler
her) ( Apl -
Dec.)
Rs. Rs. Rs. Rs.

Income
(i) Sales Realisation
(Warehousing Charges)
(ii) Other Receipts
Total
Expenditure :
A. Establishment
(a) Salaries
(b) P.F. Contribution
(c) T.A. and D.A.
(d) Staff Wellare Exps.
B. Chemicals Consumed
C. Insurance
D. Rent, Rates & Taxes
E. Interest
F. Repairs &
Maintenance
G. Depreciation
H. Miscellaneous
Total
Revenue Surplus
Increasing The Availability of
Usable Cash
Another important aspect of the study of cash planning and

management is increasing the availability of usable cash from
within the resources of an enterprise, which is an important part
of cash management. The term cash management may be
defined as an art of or capacity for manoeuvrability of optimum
utilisation of cash resources of a firm with a view to maximise
profits without any danger to its liquidity position or loss of
reputation. Its objects are two fold (i) to ensure the availability
:
of the right amount of cash, at the right time at the right place,
and at the right cost to meet out obligatory cash outflows as
and when they become due and (ii) to increase the availability
of usable cash and its optimum utilisation to maximise profit.
In order to achieve the first objective the financial executives
have to perform certain specific functions, as already emphasised
in Chapter 1, in the day-to-day management and control of
cash. Essential to the adequate performance of these functions,
the system of cash management requires development of neces-
sary procedures for acceleration of cash inflows and decelration
of cash outflows and, thus, increase the availability of usable
cash. It can be made possible, to some extent, by keeping the
cash flow cjcle moving at the greatest possible speed. Every

business house needs a certain minimum amount of cash to
finance operations during a particular period. It is obvious,
therefore, that the greater number of times a firm can convert its
products or services into cash proceeds in a given period, the
lessercash it will need to finance the desired volume of business
during that period.
Apart from this, it may be noted that enterprises may have
some hidden cash resources which if traced out can make
additional usable cash available and help them reduce the use of
borrowed funds. This will, obviously, add something to their
profits to the extent interest payment on borrowed funds is
saved and/or interest is earned on short or long term investment
of surplus cash thus becoming available. For increasing the
availability of usable cash and maximising profit, therefore, the
system of effective cash management requires recognising the
cash potentials of the enterprises also >o addition to keeping the
cash flow cycle moving at the greatest possible speed. The means
a business house can employ in tapping these resources are
only limited to the ingenuity of the management. However
expediting collections, avoidance of unnecessary inventories an
improving control over payables are some of the technique
which can be used by the enterprises for the purpose.^
The concern of this chapter IS to present the practice of the
selected companies with regard to increasing the availability of
usable cash and to explore the areas which arc capable of pro-
viding additional usable cash to them. The chapter contains
four sections. Sections I and II respectively discuss the practice
of the selected companies regarding collection from debtors and
maintenance of inventories. Their practice of exercising control
I. The study conducted by F.W. Searby shows that, apart from others,
by improving the company’s own cash collection and payment system,
substantial outside ftnaocing can be avoided at an unfavourable tune
without weakenmg its working capita! position or its relationship with
outsiders. For details, see ; Searby, F.W., ‘Use Your Hidden Cash
Resources’, Harward Business Review, Vol 46, No. 2, March-Apnl,
J965, reprinted in Engjer, G.N , fed.), Afaaafenal Finance; Cases and
Readings, (Dalla, 1973), pp. 165-78.
;
INCREASING THE AVAILABILITY OF USABLE CASH 83
over payables has been presented in section III. Finally,

Section IV Summaries the findings of the chapter.
COLLECTION FROM DEBTORS

The importance of collections from debtors consistent with
credit terms in making the usable cash available to a business
hardly needs any emphasis. Delay in collection from them
is, in effect, equivalent to an outflow of cash whilst improve-
ment in the speed of collection creates an inflow of cash. The
system of cash management aims at expediting collections
from debtors which begins with the acceptance of goods by
them and ends with the banking of their cheques or cash in
payment. Thus, the total area of expedting collections em-
braces the following three stages :
(i) Prompt presentation of invoices and other demands

for payment
(ii) Control of credit taken by customers ; and

(iii) Prompt banking of collections.
This section of the chapter attempts to find answers to the

following questions :
(i) How much time do the selected companies take in

sending bills to their customers ?
(ii) What credit period do they allow to their customers ?
(iii) Are their customers prompt in making payment ?
(iv) What are the reasons for delayed payments, if any ?
(v) What steps do they take to expedite collections from

debtors ?
(vi) Are they efficient in depositing cheques in bank for
collection ?
(vii) Do their banks collect the cheques and credit their

accounts within the reasonable time ?
The major findings of our investigation are summarised

below ;
84 CASH PLANNING AND 5IANAGEMENT
Preseotatton of Inroices
One way improve the availability of cash, which is gene-

rally overlooked by many business houses, is to avoid delays in
invoicing-. A
system of billing that can handle particularly
seasonal peak loads quickly and accurately can eliminate the
delays and lost collection lime that result from mailing out
invoices several days after sending the goods. Errors in pre-
paring billsmay prove even more expensive than delays since
customers may not make payment untill they receive a correct
invoice. The poor billing procedure results in the delayed
receipt of payments leading to less available cash to gain a
return or reduce borrowing requiremeais-
Table 4 I shows the number of days which the selected
companies take m sending bills to their customers after the
goods are dehvered/serviccs rendered. It discloses that while
most of them take 7 to IS days in presenting bills to customers,
in some of them it extends to 30 days and beyond. Jo the
Bharat Heavy Electricals Ltd., National Mineral Development
Corporation Ltd., Minerals and Metals Trading Corporation of
India Ltd., Handicrafts and Haodlooms Exports Corporation
of India Ltd., State Trading Corporation of India Ltd.
and Central Warehousing Corporation the lime taken in
this regard ranges from 7 to IS days and from 15 to 30 days
in the Electronics Corporiiion of India Ltd. The National
Buildings Construction Corporation Ltd. sends bill to its
customers generally after 30 days. Though the presentation of
bills by them may be constrained by the nature of their busi-
ness, in view of the importance of prompt presentation of bills

m paving the way for cash inflows at an early dale, they should
try to minimise their billing time to the maximum possible
extent. The longer the invoice is delayed, the lesser the possibi-
lity of cash becoming available earlier.
2. Emphasising the importance of prompt presentation of mvo'ess in

increasing the availability of usable cash. FW. Searby hasgven
examples of three companies in the United States of America whicn by
avoiding unnecessary delay in iheir billing procedure increased their
cash inflows from 5 150,000 to $ 400,000 annually. For details, sect
Searby, F.W Op
, at., pp 169-70.
Ltd.
Customers
Corporation
to
Bill
Sending
Construction
in
Companies
Buildings
Selected
National
by
taken
days
of
Number
30
Above
Control of Credit taken bj Customers

Control of credit taken by customers is, of course, the crux
of the problem. If sales could beonly for cash, considerable
economy in cash flow could be achieved. But extension of
credit has become a part of normal trading because it is a most
powerful means of increasing sales volume. This being so, it
represents a considerable risk to the continuing existence of the
firm because no firm can live long without any collections from
customers. Morever, not only does customer credit affect cash
flow but it has a direct impact upon profitability also. There-
fore,credit control’ aims at getting payments from customers
as quickly as possible latest by the end of the credit period
allowed to them.
The companies covered by this study deal mainly with the
Government and its other departments including companies in
the public sector and generally a major part of their sales, as
pointed out by most of them, is on credit-
With a view to ascertain the relationship between their sales
and debtors during the five-year period 1971-75. the index
numbers were calculated which are presented in Table 4.2. It
reveals that with the only exception of the Kational Mineral
Development Corporation Ltd., all the enterprises have recorded
an increasing trend in sales. By increase in sales, their debtors
have also been increasing aloogwitb an increasing trend in most
of them. Though, by and large, increase in sales had been more
than that in debtors, the Bharat Heavy Electricals Ltd., MationsI
Mineral Development Corporation Ltd. and mamifactnring
group have shown a much higher increase in debtors than in
sales However, taking all the ei^t companies together, total
increase in sales and debtors over the five-year period 1971-75
had been almost the same, index numbers being 1016.1 and
1000.2 respectively.
3. According to Brcws.er credit control has two overndmg rtspoti*

sibiStics —
rt must establish mist m a person’s ability and intention to
pay and it must effect promp t collection if a person does not pay on
time For details, see: Brewster, D.E., ‘Reducing the Icvestment in
Debtors by Effective Credit ControJ’, Management Accounting.
London. Vo] 52, No. 9, October, 1974, pp. 257-60.
TABLE 4.2
Index Numbers of Sales and Debtors in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Total)
1 2 3 4 5 6 7
BHEL
Sales NA 100.0 137.1 223.9 302.5 763.5
Debtors NA 100.0 125.8 349.3 681.5 1256.6
ECIL
Sales 100.0 171.6 298.0 596.3 982.5 2148 4
Debtors 100.0 158.2 250.5 278.2 398.2 1185.1
NMDC
Sales 100.0 46.3 40.9 39.7 46.3 273.2
Debtors 100.0 94.2 196.6 185.2 256.4 832.4
Manufacturing Group
Sales 100.0 340.8 449.4 714. -5 967.7 2572.1
Debtors 100.0 761.2 1024.3 2459.6 4678.0 9022.9
HHEC
Sales 100.0 113.0 158.6 532.4 700.1 1604.1
Debtors 100.0 88.7 162.8 274.5 233.6 859.6
MMTC
Sales 100.0 106.7 136.8 190.4 298.4 832.3
Debtors 100.0 89.1 89.4 136.5 168.8 583.8

S8 CASH PLANNING AND MANAGEMENT
1 2 3 4 5 6 7
STC
Sales 100.0 120,6 159.1 223.8 364 6 9t9.0
Debtors 100 0 69.9 69,1 S6.7 54 I 372.8
Trading Croup
Sales ICOO in.i 147.2 209,0 332.2 901.6

Debtors ICOO 78.2 75.5 lU.l 105.0 469.8
cw’c
Sales 100 0 108.8 127.5 129.4 139.5 605.2
Debtors 100 0 no.o 124.7 129.1 1C8.5 572.4
NBCC
Sales 100 0 159 2 186.1 256 4 307.2 10089
Debtors 1000 89.2 175.7 55 8 I69.S 690.3
Ser'\ice Croup
Sales 100 0 UZ3 154.8 188.6 217.7 793.4
Debtors 1000 104 6 138.5 136.3 124.9 604.2
All Companies
Sales 100.0 129.2 168.3 243 8 374.7 1016.1
Debtors 100.0 121.4 136.9 256.1 385.8 1000.2
NA=Not Available
Source ; CompilerJ ftom the Aunual Reports of the res-

pective coiDpaiues.
oi usable cash
increasing the availability
90 CASH PLANNfNG AND kfANAGEWENT
The above analysis indicates that in general collection from

debtors is cot smooth in selected companies. As shown in
Table 4.3, generally most of them allow a credit period of 30
days but in rare cases payment is received on or before the due
dates. Moreover, a significant part of the debts is collected in
the last weelc/day of the accounting year and another good
TABLE 4.4
Percentage of Cheques in Hand/Transit to Total Cash in
Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

{Average)
1 2 3 4 5 6 7
BHEL NA 63.6 73.0 30.6 74 3 60.6

EClL 29.0 11.5 nil oil nil 0.8
NMDC 12.6 5.4 5.8 4.2 11.8 7.3
Manufacturing Group 12.9 22.7 37.7 13.7 48.8 28.6
HHEC 22.9 38.1 68.6 10.0 34 4 28 8

MMTC 23.2 9.2 0.4 0.5 0.3 5.0
STC 24.3 1.7 46.1 58.2 6.5 32.5
Trading Group 23.9 6.0 30.7 39.5 3.3 20 0
ewe 1.0 8.2 3.1 0.9 20.5 60

NBCC S.6 4.0 9.5 22.1 14.4 13.1
Service Group 1.2 7,5 3.4 2.4 20.0 6.5
All Companies 16.1 11.6 28.9 22.7 26.8 21.8
NA=Not Available
Source : Compiled from the Annual Reports of the res-

pective companies*
percentage remains uncollected even beyond six months. These

facts are
supported by empirical findings contained in Table 4.4
and Table 4.5 which show the percentage of cheques in hand/
transit to total cash and debts outstanding beyond six months
to total debtors respectively in selected companies during 1971-
75. The percentage of cheques in hand to total cash, which is
indicative of collections on the last day of the accounting year,
had been, in some years, as high as 74.3% (Bharat Heavy
TABLE 4.5
Percentage of Debts Outstanding Beyond Six Months to

Total Debtors in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL NA 16.4 20.0 28.9 19.1 21.7

ECIL 18.4 16.1 51.2 14.5 14.5 22.8
NMDC 32.6 24.5 53.8 57.3 50.2 47.6
HHEC 35.7 28.6 43.0 25.1 28.1 30.9

MMTC 3.1 6.2 2.0 2.9 4.0 3.6
STC 23.7 18.9 20.0 10.5 15.5 17.9
Trading Group 15.4 13.2 12.3 7.4 8.5 11.1
CWC NA NA NA NA NA NA
NBCC 85.7 63.9 67.9 69.1 52.0 66.3
Service Group 22.9 14.6 23.0 21.1 18.8 20.2
All Companies 16.5 14.7 19.6 20.7 17.2 18.1
NA=Not Available
Source : Compiled from the Annual Reports of the res-
pective companies.
92 CASH PLANNING AND JIANAGEMEST
FIGURE IV.A
PercentJge of Cheques in Hand/Translt to Total Cash in

Selected Ccmpaotes, 1971*75 (ATcrage)
Electricals Ltd. in 1975), 68.6% (Handicrafts and Handlooms

Exports Corporation of India Ltd. in 1973) and 58.2% (State
Trading Corporation of India Ltd. in 1974). Figure IV.A also
exhibits the percentage of cheques in hand/transit to total cash
in selected companies over the hve year period 1971-75. Table
4.5 discloses that the percentage of debts outstanding beyond
six months to had been, on an average, varying
total debtors
from 21.7% 47.6% and 3.6% to 30.9% in companies under
to
the manufacturing and trading groups of industry respectively.
Of the two service companies, in case of the Central Ware-
housing Corporation the relevant data were not available but in
the National Buildings Construction Corporation Ltd., over
the period of five years, this percentage was 66.3%, being the
highest in all the eight companies. These facts are also depicted
in Figure IV.B.
One factor responsible for the difficulty encountered by the

selected companies as in the delayed payments may
reflected
be the lengthy procedure, as pointed out by them, followed by
their customers’ offices in scrutinising bills etc. Another possi-
ble reason may be delay in release of funds by the Planning
Commission or banks leading to shortage of cash for the time
being. Yet another reason for delayed payments may be custo-
mers’ lethargy, i.e., lack of willingness to take prompt action.
In view of the empirical evidence available in respect of the
delayed payments, this factor may be considered to be greatly
responsible for the same. After completion of necessary for-
malities when they take up writing of cheques, it can be
expected that these cheques are received by their suppliers within
7 days, at the most within 15 days, from the date appearing on
the cheques. But a sample study of 300 cheques, selected at
random out of the cheques received by the Electronics Corpora-
tion of India Ltd.. State Trading Corporation of India Ltd.,
Minerals and Metals Trading Corporation of India Ltd.,
Handicrafts and Handlooms Exports Corporation of India Ltd.
and Central Warehousing Corporation during the year 1975-76,
has disclosed that 51% of the cheques were received by them
within 7 days, including 3.67% having been received on the
same day, 30% between 8 and 15 days, 12% between 16 and 30
FIGURE IV.B
Percentage of Debts Oustanding beyond Six Months to Total

Debtors in Selected Companies, 1971*75 (Arerage)
HGURE IV.C
Delay in Receiving Cheques from Debtors by Selected Companies
96 CASH plakning and management
days and the remaining 7%

were reiKived between 31 and 172
days. The details of this fact are presented in Table 4.6 and
Figure VI.C exhibits a comparative picture of delay in receiving
cheques by the different companies included in the above sam-
ple. Since, exceptions apart, such a delay cannot be caused by
the post ofBce,it indicates not only lethargy on the part of the
customers in issuing cheques but also their effort to cover up

the delay by issuing ante-dated cheques.
Finally, arising out of the above, what may be called 'Postal
Float’, 1 e., delay caused by the post o lice in delivering the
cheques after their despatch by the cu>tomers. may also be
responsible, to some extent, for this delay. Though control over
postal float is beyond the purview of the companies, taking
suitable steps to ensure that the cheques are issued by the custo-
mers within the reasonsable tune without unnecessary delay, this
isan important area which can help the selected companies in
increasing the availability of usable cash.
TABLE 4.6
Delay in Receiring Cheques from Customers by Selected

Companies (Percentage to total)
Days BHEL ewe ECIL HHEC MMTC STC Total
1 2 3 4 5 6 7 8
0 8 4 2 — 6 2 3.67
I 12 — — 12 J4 8 7.67
2 4 — — 8 2 2 2.67
3 6 4 — 2 8 8 4.67
4 2 2 4 8 6 4 4.33
5 6 6 8 10 8 12 8.33
6 14 10 2 8 8 12 9.00
7 8 8 10 10 14 14 10.67
0-7 60 34 26 68 66 62 51.00
1 2 3 4 5 6 7 8
8 — 8 2 4 14 4 5.33
9 — 10 8 2 2 4 4.33
10 2 6 8 2 4 2 4.00
11 2 8 2 2 6 6 4.33
12 2 4 8 4 2 2 3.67
13 4 8 4 — — 4 3.33
14 — 2 6 4 2 2 2.67
15 — 4 4 2 — 4 2.33
8-15 10 50 42 20 30 28 30.00
16 4 2 — 2 — 2 1.67
17 2 — 4 6 4 2 3.00
18 — 2 — — — — 0.33
19 — — — 2 — — 0.33
20 — — 4 2 — — 1.00
21 — 2 — — — 2 0 67
22 2 2 — — — — 0.67
23 — — 2 — — — 0.33
24 2 — 2 — — — 0.67
25 2 2 — 2 — 2 1.33
27 4 — — 2 — — 1.00
28 — — 2 2 — — 0.67
30 — 2 0.33
16-30 16 12 14 18 4 8 12.00
98 CASH PLAN»-’I*JG AND MANAGEMENT
1 2 3 4 5 6 7 8
32 2 _ _ _ _ 033
33 — — 2 — — — 0.33
36 — — — 2 — — 0.33
37 2 2 — — — ~ 0.67
39 2 — — — — — 0 33
42 — — 2 — — — 033
43 2 — — — — _ 0.33
44 _ — 2 — — _ 0.33
45 2 — _ _ _ — 033
46 _ — 2 — — — 0.33
47 2 — — — — 033
4S 2 — — — — — 033
49 — — 2 — — — 033
55 — - — — — 2 033
31-60 12 4 10 2 - 2 5.00
61 : _ 2 __ 0.67
66 __ — 2 — — — 0.33
84 — — — 2 — _ 033
lOI — 2 — — _ 0.33
172 — — 2 — — — 033
61 and
aboVe 2 — * 2 — — 2.09
Total 100 100 IW) 100 100 100 100.00
Source ; Courtesy of the ManagemesL

The enterprises have expressed their awareness of the problem

of delayed payments and pointed out the steps taken by them,
as presented in Table 4.7, to expedite collections. The Table
shows that personal contact, persuasion and sending reminders
are the more commonly adopted techniques for the purpose.
In addition, the National Buildings Construction Corporation
Ltd. offers cash discount also which is generally availed by about
25% of its customers. In the case of long overdue debts the
Minerals and Metals Trading Corporation of India Ltd. and
Bharat Heavy Electricals Ltd. have pointed out approaching the
Planning Commission, as a last resort, with a view to help their
customers in getting funds released and enable them to
discharge their debts.
The State Trading Corporation of India Ltd. has a system of
exercising control over debtors under which its marketing
managers play an important role in pursuing recoveries from
sundry debtors and refer cases of default to the Contracts and
Credit Department alongvsith their recommendations for neces-
sary action. In doing so, a statement of sundry debtors is
prepared every month (proforma given in Annexure H at the
end of the chapter) indicating, inter-alia, the outstanding debts,
the period for which they are outstanding and the recovery
position. Each debt is closely scrutinised so that proper follow
up action could be initiated in due time. Since this system has
been successful in the State Trading Corporation of India Ltd,
its introduction may be commended for consideration by the
other enterprises also.
Prompt Banking of Collections
The last,but not the least, important requirement of expedit-

ing collections is prompt banking of cheques etc. Its import-
ance arises from the fact that it has great potential for
,
providing additional usable cash. Since the usual procedure

is to get the payment through Account Payee cheques, it is
obvious that till these cheques are collected by banks, the enter-
prises cannot use their own cash due to its being in transit.
1 00 CASH PLANKING ANO MANAGEMENT
Discount
Ctislomcrs
Adopted
Cash
fioin
Technuincs
Olfcring
Collcclioiis
Expediling
4.7
In
Ltd.
TABLE
Companies
Corporation
cJ
Sclccl
by Construction
AJoptcd
Company
Buildings
T^cclinigiics
National
.
Hence, banking of collections necessitates application of control

measures for prompt deposit of cheques in banks for collection
and minimisation of 'Bank Float’ period, i.e., time taken by
banks in collecting the cheques and crediting the account after
the deposit of cheques. The longer the delay in depositing
cheques, the lesser the possibility of cash becoming available
earlier and the longer the delay in collection by banks, the lesser
the availability of usable cash. Therefore, delay in banking of
collections notonly affects the availability of usable cash but
also has adverse effect on the profitability of the enterprise
because interest payment could be saved by avoiding the
use of borrowed money for the period the cheques remained
uncollected
An idea of the quantum of interest saving from early collec-
tions of cheques by banks can be had from Table 4.8 which
shows loss of interest at the rate of 12% p.a. on 40 cheques.
These cheques are taken out of a 250 local cheques’ sample, 50
each selected at random out of the cheques deposited by the
Bharat Heavy Electricals Ltd., State Trading Corporation of
India Ltd., Minerals and Metals Trading Corporation of India
Ltd., Handicrafts and Handlooms Exports Corporation of India
Ltd. and Central Warehousing Corporation during 1975-76.
The purpose in taking this sample was to ascertain the bank float
in local cheques in the selected companies. On a scrutiny, 40
cheques were found to be of amounts of Rs. 34,000 and above
which were collected by the banks beyond three days®. Out of
these 40 cheques, collection of the 22 was delayed by one day; of
the 14, by two days of the 2, by three days anl of the remain-
; ;
ing 2, by four and eleven days on which the loss of interest at

the rate of 12% comes to Rs. 1,328.54, Rs. 3324.19, Rs. 165.40
and Rs. 1202.70 respectively, the total loss of interest being
Rs. 6,020.83.Table 4.9 shows that the average daily collec-
tion of the companies during 1972-75 was running not
selected
only in lakhs but also in crores of rupees alongwith an
increasing trend in most of them. Keeping in view the size
@ The detailed findings of the exercise arc presented in Table 4.14 on

page 111.
102 CASH planning and management
TABLE 4.8
Loss o( Interest due to Bank Float
S.No Amount of the Cheque Delay in [merest @ 72% p.a.

{Rs) collection (7?s.)
{Days)
2 3 4
34,816.54 1 11.61
2 40.700.00 1 13.57
3 48.374.80 1 16.13
4 54.674.55 1 18.23
58.459.06 ! 19.50
6 62,7^5.25 1 20.92
7 66,969.01 1 22.32
73,500.00 1 24.50
9 1,12,782.60 1 37.59
10 1,16,140.40 1 38 71
11 1,37,300.00 J 45.77
12 1,73.191.38 I 57.73
13 1.97,054.55 1 65.69
14 2,00,000.00 1 66.67
15 1,08,645.20 1 69.55
16 2,21,777-83 1 73.93
17 2,26,844.66 } 75.62
18 2,57,859.02 1 85.95
19 2,66,948.40 I 88.98
20 3,91,339J3 1 130.45
21 4,83,654.73 1 161.22
22 5,51,692.82 1 183.90 1,328.54
23 58,580.00 2 39.52
24 76,955.65 2 51.30
CASH 103
OF USABLE
increasing the AVAILABlLm'
4
2 3
1
60.00
90,000.00 2
25
64.97
97,455.00 2
26 76.60
1,14,904.07
27 83.22
1,14,825.80
2
28 o 84.65
1
1,26,956.25
29 86.31
1,29,468.98 1
30 125.20
1,87,771.10
31 145.10
o
L
32 2,17,600.60
197.90
2,r'6,989.75 2
33 310.56
4,65,836.84 2
34 362.19
5,43,289.04 3,324.19
35 1666.67
2
25,00,000.00
36
65.40
:>
65,400.00 165.40
37 100.00
1,00.000.00
38 468.46
4
,1
3,26,348.80 1,202.70
39 i t 734.24
1 1
2,00,246.20
40
6,02083
Total
co'uecio.,.
them due to bank float

The companies covered
by ^ thi
had°beea taking
from
and
ioam
banks
from the Government high rate of
capital requirements
êqu
„eaerally for working „-n,a<’es of interest
£4..’ Table 4.,0.
4*;^
oompaaies
paid on loans to net
discloses that the percent ^
Handicrafts and
-
during 1971 70 ,
loans to net profit
had been the i-,
n c
, ranging between
Handlooms Exports Corporation ot •>
More-
^3% and 420,% average for
some of the companies
^
interest pa t
over, while in
TABLE 4.9
Arerage DJily Collection From Debtors In Selected Companies
(Rupees in lakhs)
Cempany 1972 1973 1974 1975
1 2 3 4 5
BHEL NA 45.73 64.79 85.87

ECIL 0.90 1.59 3.75 5.98
NMDC 5.25 411 4,54 4.88
HHEC 1.48 1.84 6.53 9.07

MMTC 89.92 114.50 157.06 248.16
STC 89.64 116.06 161.46 267.06
ewe 1 31 1.52 1.61 1.87

NBCC 1.72 1.54 2.86 3.35
NA*Not Available

companies.
Note . Assuming 300 working days in a year, the average

daily collection has been calculated as follows :
Opening Debtors-l- Sales— Closing Debtors

300
the five, year period had been, on an average, almost equal to

their net profit, m
some others it had been much more than
that. These
facts are supported by Table 4.11 which shows the
percentages of interest paid on loans and of net profit (before
tax) to sales in the selected companies during 1971*75.
105
OF OSAEEE CASH
„<CREASmG THE AVA.EAB.UTY
TABLE 4.10
Tare)
Profit (Bof.re
on Ponns ,o Net
P.rce«.nge of loleros. P»id
in Selected
Companies
1975 1971-75
1973
Iy"-' 1974
1071
1971 1972
19// (Average.
Company
49.8 59.6
91.3 46.5
BHEL NA 364.7
89.4 50.5
25.6 38.1
'^9.4 23.4
ECIL 86.8 177.5 L
^ L L
MMDC 48.2 54.3 700
L L 102.7
Manufacturing Group
188.3 459.2
420.6 L L 142.1
HHEC 2.8 9.1 5.1
2.1 3.2
MMTC 3.1
3.6 3.1 4.3 6.5
24.3 6.9
STC 3.5 8.4 6.3
5.1 4.3
9.8
Trading Group
90.1 81.4
64.4 85.3
66.6 117.5
ewe 113.4 149.9 188.5 233.1
L 112.5
MBCC 70.0 94.5 104.6 94.6
99.8 116.6
Service Group
29.0 27-1
29.0 21.4
30.0 32.6
All Companies
lN!A=Not Available
years
L=Loss in the respective
the respective
Annual Reports of
Source :
Compiled from the
companies.
TABLE 4.11
Percentages of Interest Paid on Loans and of Net Profit

(Before Tax) to Sales in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

C Average)
1 2 3 4 5 6 7
BHEL NA 6.3 5.3 5.5 7.2 6.2

(NA> (J.7) (5.8> (11.9) (14.5) (10.5)
ECIL 5.6 48 5.0 5.0 7.5 6.1

(7.1) (20.5) (19 7) (13.n (8.3) (12.1)
NMDC 25 52 4.7 10.2 13.6 6.3

f-10 6) (--22 4) { -8.1) (11.8) (7 6)( -5 9)
ATcnufactur’ 2.7 6 1 5.2 57 7.5 62
mg Group (-9.7) ( -0.9) (5 1) (11.9) (13.8) (8.9)
HHEC 3.8 4.7 3.9 1.6 1.7 2.2
(09) ( -3.9) ( -0.7) (1.1) (0.9) (0.5)
MMTC 0 I O.I 0.1 n.2 0.5 03

(3 4) (6.1) (4.4) (7.6) (5.9) (5.8)
sre 0.7 0.4 O.I 0.1 O.I 0.2

(3.0) (5.4) (3.3) (2 8) (2.3) (3.1)
Trading Group 04 0.3 02 0.2 0.3 0.3

(3.2) (5.7) (3.8) (5.1) (4.0) (4 3)
ewe 165 16.2 14.6 16.2 162 159

(24.8) (13.8) (22.7) (19.0) (17.9) (19.6)
NBCC 4.5 28 2.6 2.8 3.0 3.0

(-5.0) (2.5) (2.3) (1.8) (1.6) (1.3)
Service Group 10.9 8.7 7.9 7.7 7.5 8.3

(10.9) (7.4) (11.3) (8.1) (7.2) (8.7)
INCKtAMNG THE AVAILABILITY OF USABLE CASH 107
I 2 3 4 5 6 7
All Companies 0.7 1.5 1.2 1.4 1.7 1.4

(2.4) (4.5) (4.1) (6.5) (5.8) (5.2)
NA=Not available
— =Percentage of net loss to sales
Source ; Compiled from the Annua] Reports of the respective

companies.
Note ; Figures within brackets show percentage of net profit
to sales.
A comparison of the respective share of the different com-

panies in the total amount of the interest paid during the same
period (1971-75), as presented in Table 4.12, reveals that the
lion’s share had been of the Bharat Heavy Electricals Ltd. where
it had been ranging between 66.1% and 72.55%, average being
66.5%; and the remaining 35.5% was shared by the other
seven companies. However, there had been inter-industry
differences in the matter of interest payment to different parties.
While the manufacturing and service companies requiring more
funds for capital expenditure were getting sanctions of loan
from the Government and paying, by and large, major portion
of interest on these loans, the trading companies requiring funds
for working capital were depending mainly on banks which has
influenced their interest payment. Table 4.13, which supports
this fact, presents the percentage share of the Government,
Banks and other parties in the total amount of interest paid
by selected companies during 1971-75.
In view of the above facts, the importance of prompt banking
of collections by the, selected companies, to avoid the use of
borrowed funds particularly for day-to-day requirements, is
obvious. The available facts disclose that all of them have
desired efficiency in depositing cheques in banks for collection.
TABLE 4J2
Respective Share ol the Differeot Companies in the

Interest Paid on Loans (Percentage to total)
Company 1971 1972 1973 1974 1975 1971-75

[Average)
1 2 3 4 5 6 1
BHEL NA 66.1 71.7 72.8 69.2 66.5
ECIL 2.9 1.6 2.8 3.3 44 3.5
NMDC 22.8 8.3 6.2 7.9 6.6 7.9
Manufacturing Croup 25.7 76.0 80.7 84.0 80.2 77.9
HHEC 3.9 2.1 2.3 1.8 1.4 1.9
MMTC 7.2 3.5 4.7 5.9 12.4 8.3
STC 42.3 10.1 3.9 2.5 2.5 5.7
Trading Group 53.4 157 10.9 10.2 16.3 15.9
ewe 16.9 6.8 6.8 4.5 2.6 49

NBCC 4.0 1.5 1.6 1.3 1.0 1.3
Service Croup 20.9 8.3 8.4 5.8 3.6 6.2
All Companies 100 0 100.0 1000 100 0 1000 100.0
NA=Not Available

companies.
OE HSAEEE CASH 10i>
.^.CKEASmG THE AVAIEAE.UTV
table 4.13
the Total Amount of

Different Parties in
Percentage Share ol
Selected Companies
Interest Paid by
1973 1974 1975 1971-75

1971 1972
Company ( Average)
6 7
2 3 4 5
1
bhel
55.4 43.7 56.6
Government NA 80.0 77.6
49.5 35.0
12.1 35.5
Banks NA 10.0
6.8 8.4
9.1
Others
NA 10.0 10 3
ECIL 39.9
48.6 33.7
Government NA 38.0 54.4
62.5 57.5
44.4 50.7
Banks
NA 62.0
3.8 2.6
0.7
Others
NA nil 1.2
nmdc 99.8 99.6 96.1

84.0 90.8 98.6
Government 0.2 0.3 0.1
nil nil
nil
Banks 1.4 nil 0.1 3.8
16.0 9.2
Others
HHEC nil nil

nil nil
nil nil
Government 100.0 100.0 100.0
100.0 lOO.O 100.0
Banks nil nil nil nil
nil nil
Others
MMTC 16.2 0.9 8.1

29.5 10.5
Government 53.6
83.7 98.7 91.4
44.6 69.7 87.7
Banks 1.8 O.l 0.4 0.5
1.8 0.8
Others
1 2 3 4 5 6 7
STC
Governmeat NA NA NA NA NA NA
Banks NA NA NA NA NA NA
Others NA NA NA NA NA NA
ewe
Government 100.0 99.4 99.9 100.0 100.0 99.9
Banks ml ml Dll nil nil nil
Others nil 0.6 0.1 nil nil 0.1
NBCC
Government 53.3 57.5 62.0 48.2 27.3 461
Banks 46.7 41.9 37.9 49.6 72.1 52 5
Others ml 0.6 0.1 2.2 0.6 1.4
NA=Not Available

It IS done on the same day or the next day depending on the
time of receipt of the cheques. Moreover, in regard to

some of the cheques of large amounts, the Bharat Heavy
Electricals Ltd. has pointed out making even special arrange-
ments for their encashment at the earliest with or without the
assistance of Its bank. Quoting an instance it told that once
It sent it> executives from Delhi to Bangalore by aeroplane
one of
to realise a cheque at the customer's bank there. But, la
general, they depend on their banks for the purpose who, to
some extent, have not been found to be equally efficient in
crediting their accounts. Normally local cheques should be
collected within three days of their deposit but a sample study
INCREASING THE AVAILABIUTY OF USABLE CASH 1 1
each taken at random out of the

of 250 local cheques, 50
cheques deposited by five of the selected companies during
already mentioned on page 101, has revealed
1975-76 as
good percentage of the cheques were
collected
that quite a
reasonable time, i.e., 3 days.
by their banks beyond the
Table 4.14. It dis-
of the facts are presented
in
The details
TABLE 4.14
Selected Companies
Bank Float in Local Cheques in
(Percentage to Total)
Days BHEL CWC HHEC MMTC STC Total
3 4 5 6 7
1
2
2 4 4 6.8
0 24
48 26 34 z 21.6
1
8 24 34 24 16 21.2
4 12 16 24 22 15.6
3
84 38 80 86 38 65.2
0-3
28 14.8
A 2
10
28
20
8
2 —8 28 12.0
6 4 — 2 4 2 2.4
16 48 12 12 58 29.2
4-6
12 2 — 2 3.2
n
8
— — 4 — 0.8
7-9
— 12 6 — 2 4.0
2 2 0.8
12
14
— 2 0.4
2 0.4
17
10 and above
— 2 2 2 2 1.6
100 100 100 100.0

Total 100 100
Source ;
Courtesy of the Management.
1 12 CASH PLANNING AND MANAGEMENT
doses that while 65.2% of Ihe cheques were collected within

3 davs, including 6.8% having been collected on the same day,
29.2% were collected between 4 and 6 days, 4% between 7 and 9
days and the remaining 1.6% between 10 and 17 days. The bank
float in the respective companies is exhibited in Figure IV.D.
Thus, minimisation of bank float period is another important

area capable of providing not only the additional usable cash
to the selected companies but also enabling them to save
interest payment on borrowed money and maximise profit. In
realisation of the importance of prompt banking of collccuons,
the Electronics Corporation of India Ltd. has an arrangement
with Its bank for the 'purchase of cheques’. Under this arrange-
ment the banks credit its account on the day the cheques are
deposited. For this facility they charge a nominal commission
and have a right to debit its account with the necessary amount
plus interest thereon in case a cheque is dishonoured. This sys>
tern deserves consideration by the other undertakings also beca-
use it is capable of abolishing the bank float period altogether.
Effective control over stocks and inventories is another area for
increasing the availability of usable cash. How the selected
companies exercise control over inventories is discussed in the
following section.
II
MAINTENANCE OF INVENTORIES
Although inventory control does not normally come under

the direct control of a finance executive, the size of inventory
maintained by a business house is another area having cash
potential. The importance of inventory control in the area of
cash management is derived from the fact that when the invest-
ment in inventory begins to mn high and consume increasing
amounts of cash, the finance executive can bring this to the
notice of the management so that steps could be taken to
reduce the inventory build-up or, if necessary, to make plans
for raising cash to accommodate the increase. Generally an
INCREASING THE AVAILABILITY OF USABLE CASH 1 13
114 ( ASH PLANNING AND MANACCMENT
excessive amount of inventory not only causes the cash require-

menis to increase but also creates the disadvantage of tying up
unnecessary capita! making it non-productive. The more the
funds are invested in inventories the greater the cost of these
funds particularly if the funds are raised from debt resources
This IS so because of the time lapse bctvvcen the acquisition of
inventory items and sales. Since the usual procedure is to
purchase inventories on credit, cash suiTicicnt to pay to the
what is needed for day-to-day require-
suppliers, in addition to
ments, must be obtained by the management. Hence having a
system of ensuring that only the required materials are purchased
and costly cash is not blocked in excessive invcntoiies.
unnecessary borrowings can be avoided and interest payment
saved.
*‘For a perspective on inventory and cash requirements,

standards may be developed either from inventory ratios
(relationship of inventory to sales) or from records of the
corporation's past experiences*’.*
This section, which presents the practice of selected companies

regarding maintenance of inventories, attempts to find answers
mainly to questions such as What percentage of current assets
of the selected companies remained tied up in inventories during
1971-75 ?: Had there been any mter-industry dilTcrences in
maintaining inventories ? ; What had been the relationship of
their inventories to sales during the five-year period 1971-75 ?
and, finally, Do they have any system of exercising control
over purchases and inventories ? Ilic findings of our investiga-
tion are given below •
Table 4.15 shows the percentages of inventories to current

assets m
selected uaderlakmgs during 1971-75. It discloses that
during the five-year period 1971-75 inventories had constituted a

major part of the current assets of the enterprises particularly
under the manufacturing and trading groups of industry, on an
average, being 73 5% and 55.7% respectively. In the service
4 Hiil, Roger W ,
Jr , Qp cit , pp. 32-33.
115
of usable cash
TABLE 4.15
in
to Current Assets
Percentage of Inventories
Selected Companies
1972 1973 1974

1971
Company
82.1 80.2 75.4 78.4

bhel NA 82.2
46.2
51.1 46.5 40.7
61.0 52.6
ECIL 46.7 57.1 41.4
13.6 40.8 39.1
NMDC 73.7 76.5 73.1 73.5
21.3 74.5
Manufacturing Group
50.6 62.3 57.7
56.9 59.2
61.5
HHEC 58.9 72.0 78.0 63.8
36.9 36.9
MMTC 51.7 46.9 48.2 45.9
36.8 45.9
STC 60.9 65.8 55.7
41.3 55.9
37.4
Trading Group
0.9 1.6 1.2
1.2 1.0
1.4
CWC 35.3 29.8 30.9 28.5
15.2 28.6
NBCC 10.1 10.5 14.6 10.2
6.4 6.5
Service Group
64.0 70.1 69.6 64.9

33.4 58.3
All Companies
NA=Not Available ^
Reports of the respective

Compiled from the Annual
]
Source :
companies.
INCREASING THE AVAILABILIIY OF USABLE CASH 117
group, as can be expected, this percentage was substantially

lower at 10.2%. In individual companies, this percentage has
been found to be the highest in the Bharat Heavy Electricals
Ltd. and the lowest Warehousing Corporation,
in the Central
average being 78.4% and 1.2% respectively. Figure IV.E also
depicts these facts. Taking all the eight companies togther,
the percentage of inventories to current assets had been ranging
between 33.4% and 70.1%, average being 64.9%
From the above, it is also obvious that there had been inter-
industry differences in maintaining inventories. The enterprises
under the manufacturing and trading groups of industry had
higher inventories as compared to those under the service group.
In some measure, this fact is also supported by Table 4.16
which contains the respective share of the companies in the
total inventories during 1971-75. It reveals that the average
share of the manufacturing and trading groups had been 66.6%
and 32.9% respectively while that of the service group was 0.5%,
This difference in maintaining inventories is probably due to the
nature of their business. The service enterprises being capital-
intensive industries require much lower inventories as compared
to the manufacturing and trading enterprises which need more
inventories for production and normal trading.
The analysis of the percentages of inventories to sales during
the same period (1971-75), as presented in Table 4.17, shows
that the companies under the manufacturing group had, on an
average, the highest inventories in relation to sales, varying from
66.0% to 129.0%, being the highest in the Bharat Heavy Electri-
by Figure IV.F, also being the
cals Ltd., as also clearly depicted
highest in all the eight companies. Maintenance of such a high
level of inventories by the Bharat Heavy Electricals Ltd. can be
attributed, to a great extent, to the nature of its business.lt takes
up construction of heavy electrical equipments completion of
which runs into 24 to 36 months and necessitates maintenance of
required materials for that period. This percentage in the trading
companies had been varying, on an average, between 9.0% and
24.0%, being the lowest in the State Trading Corporation of
India Ltd. The level of inventories maintained by these
1 18 CASH PLANNING AND MANAGEMENT
FIGURE IV.F
Percentage of lorentories to Sales in Selected Companies,

1971-75 (Arerage)
INCREASING THE AVAILABILITY OP USABLE CASH 119
TABLE 4.16
Respective Share of the Different Companies in the Total

Inventories (Percentage to Total)
Cempany 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 1
BHEL NA 62. i 55.0 69.3 63.4 61.3
ECIL 4.0 1.7 1.8 1.7 1.5 1.7
NMDC 4.6 6.2 5.5 3.3 2.5 3.6
HHEC 3.3 1.1 1.1 0.7 0.6 0.9
MMTC 31.8 14.1 22.0 16.4 22.2 20.0
STC 55.2 14.4 14.1 8.2 9.4 12.0
Trading Group 90.3 29.6 37.2 25.3 32.2 32.9
ewe O.I 0.1 N N N N

NBCC 1.0 0.3 10.5 0.4 0.4 0.4
Service Group 1.1 0.4 0.5 0.4 0.4 0.5
All Companies 100.0 100.0 100.0 lOO.O 100.0 100.0
NA=Not Available
N=Negligible

companies.
TABLE 4.17
Percentage of InTeatories to Sales in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL NA 107.7 100.4 138.3 142.7 129.0
ECIL 124.2 9I.I 80.1 66.9 54.9 68.0
NMDC 8.2 71.3 102.6 113.6 112.2 66.0
Manufacturing Group 14.0 103.0 1000 134 0 136.0 120 0
HHEC 51.0 42.9 46.6 16.8 16.5 24.0
MMTC 7.6 9.5 16.5 15.8 20.8 160

STC 15.3 9.8 10.5 77 8.3 9.0
Trading Group 120 10.0 140 12 0 14.0 13.0
cwc 2.4 2.4 2.1 2.1 2.9 2.0
NBCC 17.7 11.1 21.0 20.1 23.8 20.0
Service Group 9.0 7.0 13.0 14 0 14.0 13.0
All Companies 12.0 27.0 30.0 37.0 36 0 32.0
NA = Not Available
Source ; Compiled from the Annual Reports of the respective

companies
shows that their goods are readily sold.®

enterprises
Maintenance of such a low level of inventory in the Slate
Trading Corporation of India Ltd. was made possible by strict
control over purchases and stocks by its Contracts and Credit
Department through the Financial Administration Committee.
This Committee consists of the Director (Finance) as Chairman,
one Executive Director, the Chief Economist, the Chief Finance
Manager, the Legal Adviser and the Credit Manager. The
Committee not only clears the price but also ensures that the
purchased materials are required, have stable demand and
there is no possibility of distress sale. At times, some purchases
are to be made on directives from the Government. In such
cases, it is upto the Committee to judge these purchases on the
criterion of commercial prudence. The Contracts and Credit
Department also prepares a monthly stock statement (in the pro-
forma given in Annexure I at the end of the chapter), indicating,
inter-alia, the quantity and value of all items of stocks together
with the age thereof. This statement is reviewed with a view to
identifying the items where corrective steps are required to be
taken and where special efforts are necessary for liquidation of
stocks. This statement is also placed before the Board every
month.
Emerging out of the above analysis of inventories maintained
by the selected companies, it may be concluded that in general
the enterorises under the manufacturing group of industry have
Ti'Sifoencv to maintain a higher level of inventories. To optimise
the use of available cash resources and reduce borrowings, their
inventory level needs to be minimised. This can be accomplished
by introducing a system of exercising control over purchases
and stocks on the lines as existing in the State Trading Corpora-
tion of India Ltd. Control over payables is another area having
5. T. N. Krishna Iyer has suggested that as a general rule stock should

not e.\cced 25 per cent of the sales excepting where the unit has to
stock scarce raw materials, import raw materials in bulk and store
finished goods in view of seasonal nature of demand. A low percen-
tage of inventory to sales indicates that goods are readily sold and
vice-versa. For details, see : Iyer, T. N. Krishna, Guidelines for
Financing of Small Scale Industries : A Handbook for Bankers,
(Bombay, 1976), p. 67.
122 CASH I'LANNINO AND HIANAGCMFST
cash potential. This forms the subject-matter of the next

section.
in
CONTROL OVER PAYABLES

The availabihly of usable cash from within the resources of
an enterprise can also be increased by exercising control over
payables Control o^cr pavables aims at optimum utilisation
of available cash by a firm through delaying payments to
suppliers and other parties without weakening its working capi-
tal position or relationship with outsiders. In an attempt to
present the practice of the selected companies of exercising
control over payables, this section aims at exploring the
following
(i) Do the selected companies make payments on the due

dates
(ii) What are the reasons for making payments, if any,
beyond the due dates ?

(ill) How much time do their suppliers lake in collecting
cheques issued by them (selected companies) ?
(iv) Do they utilise 'heir cash during the period when
cheques issued by them remain uncollected “? If so,
how ?
(v) Do they have centralised payment and disbursement
system ?
(vi) Do they have any system of having an idea of their
consolidated cash position ?
The findings of our mvcsiigation arc discussed below :
As shown Table 4.18, most of the selected companies

in
have pointed out making 100% payment to supplier and other
parties on the due dates While the National Mineral Develop-
ment Corporation Ltd., Bharat Heavy Electricals Ltd State ,
Trading Corporation of India Ltd., Central Warehousing Cor-

poration and Minerals and Metals Trading Corporation of
India Ltd. pay generally 100% on the due dates, the National
mpa
Selected
by
Ltd,
Suppliers
4.18 India
of
to
table
Ltd.
Corporation
Payment
Corporation
Exports
Making
of
Construction
Handlooms
Buildings
and
Handicrafts
National
Buildings Construction Corporation Ltd. and Electronics Cor*

poration of India Ltd. pay only "70% and 90% respectively on
the due dates and the balance after that. But in the Handi-
crafts and Handlooms Exports Corporation of India Ltd. 80%
payment is made before the due dates, which is on account of
advance payment, 15% on the due dates and 5% after the due
dates. The reasons for payment beyond the due dates are
contained m Table 4 19. It shows that payments are delayed
mainly due to three reasons, viz , (i) delay in completion of
formalities, fii) shortage of cash, and (iii) as a policy matter.
The shortage of cash being responsible for delayed payments
has been pointed out fay the National Mineral Development
Corporation Ltd National Buildings Construction Corporation
,
Ltd, and Minerals and Metals Trading Corporation of India

Ltd. The NationalBuildings Construction Corporation Ltd.
has also shared the views of the Electronics Corporation of
India Ltd. which considers delay in completion of formalities
necessary for payment being another responsible factor for such
a delay. Finally, 'payments are made beyond due dates as a
matter of policy’ was another reason pointed out by the Handi-
craftsand Handlooms Exports Corporation of India Ltd. and
Minerals and Metals Trading Corporation of India Ltd. On
seeking clarihcatioit it was found that such a policy is adopted
only in disputed cases.
Another requirement of the control over payables is taking
advantage of the float period. From the day the cheques are
entered m the cash book in settlement of the debts, delivered
to the parties and till they are collected from the bank account,
some delay is inevitable due to diflerent types of float, namely,
'pos'al : c , time taken by the post office in delivering the
cheques to the parties concerned ; 'lethargy float’, i.e., time
taken by the parlies in depositing the cheques in bank for

collection ;
and, finally, ‘bm’< float’, i.e., time taken by the
paxtiAs’ hawks, so. coUecUag, th* checviea aad txcdhiwg, the account.
The total delay involved in these floats is knonn as ‘float
period’. By estimating the anticipated float period, cash can
be utilised by the firms during that period without any barm to
their reputation. With a view to ascertain the float period in
of usabi.e cash 1.25
Companies
Selected
by
Dates
Due
4.19
the
TABLE
Beyond
1 25 CASH PLAHVIN'G AVD MANAGEMENT
the selected companies, a sample study of 100 cheques, taken

out of the cheques issued by them during the year 1975-75, was
conducted The selection of the sample of 100 cheques was done
at random dictated by the availability of data The findings of
this presented in Table 4.20. The Table show's
exercise are
that while of the cheques issued by the selected companies

62'’;!
were collected from their banks wdlhin 10 days and 32% bet-
ween 10 and 30 days, the remaining 6% were collected beyond
30 days of the issue.
TABLE 4.20
Float in Payables in Selected Companies
Dove Taken in Cheques Collected by Banks

Collection (Percentage to total)
0- 5 24
5-10 38
10-15 16
15—20 n
20-30 4
30 and Above 6
Total 100
Source Courtesy of Ibc ManagemenL
The above analysis indicates that after the cheques are issued,
the companies covered by this study can utilise their cash pro-
fitably for periods from I to 30 days, in some cases even for
more days, if they could estimate the float period accurately.
But generally they do not lake advautage of float period. In
reply to a question
“Do you take adrantage of your cash during such period

when cheques issued by you remain uncollected ? If ‘Yes’,
please elaborate how do you make use of it”.
INCREASING the AVAILABILITY OF USABLE CASH 127
six companies gave a nagative reply, but the Electronics Cor-

poration of India Ltd. and Minerals and Metals Trading Cor-
poration of India Ltd., giving affirmative answer, said, '‘Till the
cash credit account is debited, we need not pay interest" and
“Available balance is reflected in our account” respectively.
Yet another way of optimising the use of cash resources is to

have a centralised payment and disbursement system. This
system has the effect of conserving cash at the head office and
reducing unproductive bank balances in the hands of the subsi-
diaries, divisions or other offices. It also enables the head office
to expedite the paper flow, to schedule payments and to invest
the excess funds more productively.
All the enterprises coveredby this study have pointed out
having centralised payment and disbursement system under which
payments to suppliers and other important payments are gene-
rally made directly from the head
office. The branch and other
sub-offices are authorised topay the routine expenses only such
as salaries and wages, purchases of stationery and such other
usual and necessary payments.
To have an idea of the consolidated cash position, all of
them have a system of centralised cash management. Under
this system they maintain a central bank account at the head
office lo which the branch office banks transfer cash balances
with them as per the arrangements. Regarding transfer of cash

balances, two types of arrangements have been found, viz., daily
and occasionally. While the State Trading Corporation of
India Ltd., Minerals and Metals Trading Corporation of India
Ltd., and Bharat Heavy Electricals Ltd. require their branch
office banks to transfer cash balances daily —
whether debit or
credit, of India Ltd., National
the Electronics Corporation
Mineral Development Corporation Ltd., Handicrafts and Hand-
looms Exports Corporation of India Ltd., Central Warehousing
Corporation and National Buildings Construction Corporation
Ltd. require such transfers occasionally, i.e., whenever the cash
balance with them exceeds the limit fixed for them. In other
words, the branch office banks of these five companies are
authorised to keep cash balance upto a certain limit fixed by
the respective head offices and transfer only the surplus when-
ever it arises.
]28 CASH PLANNING AND MANAG&tENT
From the above discussion it may be concluded that, by and
large, the selected companies have proper procedures to control

payables. The mam findings of the chapter are recapitulated in
Section IV
IV
CONCLUSIONS
This chapter attempted to examiae the practice of the selected

companies regarding expediting collections from debtors, main-
tenance of inventories and exercising control over payables Its
object was to explore the areas which can help them in inercas-
iog the availability of usable cash from wiibin the resources ol
their organisation. The major findings of the chapter are sum-
mansed below •.
The main customers of the enterprises covered by this study

are the Government and Us other departments including com-
panies in the public sector and generally a major portion of
their sales is on credit. In general, they follow the practice of
sending bills to customers after the goods are dellvertd/serv'ices
tendered. While in six of them, namely, BharatHeavy Electricals
Ltd., National Mineral Development Corporation Ltd., Handi-
crafts and Handlooras Exports Corporation of India Ltd State ,
Trading Corporation of India Ltd. and Central Warehousing

Corporation, the number of days taken in sending bills vanes
from 7 to 15 days, in the case of the Electronics Corporation
of India Ltd it extends to 30 days. This period exceeds 30 days
m the National Buildings Construction Corporation Ltd. This
IS an area having cash potential insofar as paving the way for
cash flowing in earlier is concerned.
Another area for increasing the availability of usable cash is
collection from debtors as per the credit terms. Most of them
allow a credit period of 30 days. But the empirical evidences
available have shown that usually they do not get payment in
time. Generally large sums are collected in the last week/day of
the accounting year and a good perrentage of the debts remains
unpaid even beyond six months. Amongst various factors, the
lethargy on the part of their customers has been greatly respon-

sible for the delayed payments. It is eloquent from the fact
that, though rarely, they have been issuing antedated cheques
which shows their awareness of the delay and the effort to cover
it.
Keeping in mind the reasons for delay, they take steps for
expediting collections. Personal contact, persuasion and send'
ing reminders are the most commonly adopted techniques for
the purpose.In case of exceptionally over due debts, some of
them have also pointed out approaching the Planning Commis-
sion also with a view to get the funds released for their
customers and enable them to discharge their debts. The State
Trading Corporation of India Ltd. has a system of exercising
control over debtors under which its marketing managers play
an important role in pursuing recovering from sundry debtors
and refer cases of default to the Contracts and Credit Depart-
ment alongwtih their recommendations for necessary action.
Once the cheques are received from customers, alt the selected
companies get them deposited in bank for collection without
any delay. It shows not only their efficiency but also the cons-
ciousness of prompt banking of collections. If the amount of
a cheque happens to be substantial, some of them even make
special arrangements to get it encashed at the earliest with or
without the help of their banks. But in general they depend on
their banks for the collection of cheques who, in some cases,
have been taking unreasonable time in crediting their accounts.
The delay on the part of the banks in collecting cheques not
only affects the availability of usable cash but also the profit-
ability of the enterprises. Considering the size of average daily
collections of the selected companies during 1972-75, which had
been running into crores of rupees in most of them, the magni-
tude of loss of interest, at a normal rate, due to delay in collection
by banks can very well be imagined particularly when they
depend on borrowed funds for day-to-day requirements. They
had been taking loans from the Government mainly for capital
expenditure and from banks generally for working capital
requirements on which the interest paid during the five-year
130 CASH PLANNING AND MANACERflNT
period 1971-75, has amounted, on an average,

equal to or more
than the net profit of some of them. In some
measure the
amount of interest can be minimised by ensuring
payments from
customers and collection of cheques by banks within
the reason-
able time. Thus, it is another area capable of providing
still
additional usable cash. The

Electronics Corporation of India
Ltd. has an arrangement with its banks
for the purchase of
cheques under which they credit its account
on the day the
cheques are deposited and, thus, it avoids ‘bank
float' com-
pletely For this facility the banks charge a
nominal commission
and have a right to debit its account together
with interest in
case a cheque is dishonoured. This system
deserves considera-
tion by the other enterprises also.
There have been inter-industry differences

in maintaining
inventories, as Judged in relation to current
assets and sales,
being the highest and the lowest in the
manufacturing and the
service groups respectively. In general, the manufactnitag
companies tend to maintain higher inventories
in comparison
with the companies under trading group.
This is so probably
due to the nature of their business. However,
reduction of
inventories is yet another area having cash
potential paniculatly
for manufacturing companies. Amongst trading companies,
the ratio of inventories to sales has been found
to be the
m the State Trading Corporation of India Ltd. for which lowest
credit
goes to us Contracts and Credit Department
for exercising
control over purchases and stocks.
In exercising control over payables, by
and large, all the
selected companies follow sound practice as per the
requirements
ofcash management system. In doing so, they
make payments
to suppliers and other payments
generally on the due dates,
have a centralised payment and disbursement
system and also a
system of centralised cash management,
though with slightly
different arrangements with their
branch office banks in regard
to transfer ofcash balauecs. While the State Trading Corpora-
tion of India Ltd., Minerals and
Metals Trading Corporation of
India Ltd., and Bharat Heavy Electricals
Ltd. require their
branch office banks to transfer cash
balances daily-whelher
debit or credit — to the central bank account at the head office, the
other companies follow the practice of authorising their branch
officebanks to retain cash balances upto a certain notional limit
fixedby them and transfer only the surplus whenever it arises.
Increasing the availability of usable cash apart, cash manage-
ment system requires dealing with surplus and deficit cash
situationsalso. How the temporarily excess cash, if any, is
deployed for profit maximisation, or deficit cash situation is
faced, by the selected companies forms the subject-matter of
Chapter 5.
at...
as
Pcbtors
Sundry
of
Statement
India
Madras
Wig
CASH 133
INCREASING THE AVAILABILITY OF USABLE
Ltd.
India
of
Corporation
Tradins
at
as
Slate
Position
the
in
Slock
Statement
showing
Stock
Statement
Monthly
the
of
Proforma
Pharm.
&
IRMAC
Drugs
Lcatherwear
Exports Produce
5
and
Dealing with Surplus
Deficit Casli
. day-to-day
management
various Chapter 1. the
Amongst , observed in
as a situations
and control of cash, J ^ deficit cash
compaaie, have » ,ea.poraril, excess
also.
Though cash
or shortage cash
situa lo
jjcceptable problem than a
presents a mo management
surplus generally considered
cash deficit, both of them q endangers the
action. This Is so
because ''“y ^presents under
the wdh
very existence of idea in dealing
utilisation of the
resources. necessary action
cash s'^^^îons
'
surplus and deficit

surplus more b.^.^ce for the
better
to deploy the
taken to deal
position well that can be
f circumstances
The specific constrained by
problems, is
,vhat is
properly with these
the decision no
Ruling at the time .^15, For this reason
acceptable ^ steps ca
and what is not failsafe
of deployment of
hard and fast list position or
be set down for improving the
any circumstances.
^
surplus cash, under
138 C\S([ PLAS'JING AND MANAGtMENT
This chapter aims at cnquiriDg into the practice of the selec-

ted companies in managing surplus and deficit cash situations
and seeking answers, intcr-alia, to questions such as What do
they do with their surplus cash ? ; What are the popular
outlets for short term investment of surplus cash ? Do they ;
have any idea of the sources available for deployment of

temporarily excess cash which, somehow, they are not utilis-
ing ? ; How do they face a cash deficit situation ? ; and
What arrangements do they have for emergency requirements
of cash ? etc. The chapter is divided into three sections.
Section I of the chapter presents the practice of the selected
companies regarding the management of surplus cash and
Section If, the management of deficit cash. The concluding
observations of the chapter are recapitulated in Section III.
MANAGEMENT OF SURPLUS CASH
The concern of this section is to examine the practice of

the selected undertakings in dealing with surplus cash situa-
tions. The surplus cash may be defined as the excess of cash
infiows over cash outflows not currently needed for operational
requirements. An adequate and accurate short term cash
forecast helps management determine fairly accurately the
amount and the period for which the surplus is likely to be
available. Once it has arisen, either as a result of increase in
sales volume or as a result of effective control over cash move-
ment, the management has to decide what to do with such a
surplus. If it is retained in cash or put in the current account,
it will earn precisely nothing. On the other band, if it is
deposited in banks, it might cam a nominal rate of return
through the interest, if any, that is paid. But surely manage-

ment ought to be able to deploy the surplus to greater benefit
than that earned from bank interest.
“Although cash maBagement is valuable as an accounting

139
and DEFICIP CASH
dealing with surplus
tool to meet future ^"^"’^^^"genTraraSkiLal

utilisiug idle eash to genera
direeted toward
,Viere are three primary

In a cash
management . safety of principal
(j)
objectives of
management o ofinvest-
marketability
worthiness action
(credit potential management
ments and (m) yield differs from
case to case
taken for i
period of
that might be ^ .r surplus, the
size f -ash
upon the
and much depends ^
the
time becoming available
ment had that the
availability
cash
of opportuniie
^ term deployment
^
Depending on
of sur-
these
ingenuity of one or
plus cash and be utilised in
cash ca term
factors the surplus ,
investments in
mo re of the folio wing ways. ‘
National and loca^
deposits; (b) making m ^be money market;

overni;,h to
Government; (c)
(e) extension of loans
subsidiaries u) tanno ,
payment. enterprises
prompt of the
ascertain th P ^^^bce
With a view to .
of temporarily
study
covered by this ''ft" To, iow,
question-
q
the, were ashed the
excess oush,
“You might be you do of such

check what do
needed in operations,
excess cash
Have no excess cash

(aj
accoun
(b) Deposit in current
P. '1^- managing the
TV p^llI J Op. cit., uior'tk’pq in
1 .
2 .
Corporate Mone>
nortant considerations waging the
details, see:
Anderson. Clay of Philadelphia,
Business Review, Fede
Position’,
1961, pp.3-10.
March.
1 40 CASH PLANNING ANP MANAGEMENT
(c) Retire short term debts

(d) Give loan to subsidiaries
tc)Make short term investments
(0 Any other (Please specify)”
Replying to the above question, the five companies, namely,

the Electronics Corporation of India Ltd., Bharat Heavy
Electricals Ltd., Minerals and Metals Trading Corporation of
India Ltd Handicrafts and Handlootns Exports Corporation
,
of India Ltd. and National Baildings Construction Corporation

Ltd., said that generally they depend on their banks for neces-
sary funds and. hence, surplus cash situation rarely arises.
But whenever it arises, it is deposited in banks. This fact, viz.,
surplus cash situation a rare phenomenon, is evident, in some
is
measure, from Table 5.1 which shows the percentage of short

term investments to total cash in selected companies during
1971*75. It reveals that, with the exception 5n the National
TABLE 5.1
Percentage of Short Term Investments to Total Cash in
Selected Companies
Company 1971 1972 1973 1974 1975
BHEL NA nil nil 1.0 06

ECIL ml nil nil nil nil
NMDC 10.3 15.2 45.3 42.2 8.6
HHEC nil nil nil nil nil
MMTC oil nil nil nil nil
STC nil 26.9 nil 22.8 88.4

ewe N 0.4 0.2 0.1 0.1
NBCC nil nil nil nil nil
NA=Not Available
N=Negl)gible
companies.
DEALING WITH SURPLUS AND DEFICIT CASH 14l
Mineral Development Corporation of India Ltd. and State

Trading Corporation of India Ltd., the percentage of short
term investment to total cash was either nil or below 1%
during the five-year period 1971-75 in the undertakings covered
by this study. But Table 5.2, which contains the percentage
TABLE 5.2
Percentage of Interest Received to Net Profit

(Before Tax) in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL NA 0.9 8.1 1.1 0.4 1.4

ECIL 1.7 0.4 0.3 0.3 0.8 0.5
NMDC L L L 9.1 10.6 L
MamifacUtring Group L L 9.0 1.5 0.6 1.9
HHEC 26.7 L L 7.1 13.4 31.9

MMTC 1.6 1.0 0.1 0.4 0.9 0.8
STC 28.6 5.5 11.4 10.3 11.0 11.4
Trading Group 13.2 3.2 5.5 3.2 4.0 4.6
CWC 11.7 21.8 9.2 14.3 23.7 15.4

NBCC L 0.9 0.4 1.0 2.2 1.8
Service Group 14.3 17.9 8.1 12.4 20.6 14.3
All Companies 17.2 3.8 6.4 2.7 2.7 4.0
L=Net Loss in respective years

-NA=Not Available
Source ; Compiled from the Annual Reports of the

142 CASH i’LANNlNG AND MANAGEMENT
of interest received to net profit (before tax) in selected

companies during 1971-75, shows that during the above five—
jear period all of them had some income on account of
interest Although, on an average, the interest received had
been belcw 2% of the net profit m
the Bharat Heavy Electri-
cals Ltd, Electronics Corporation of India Ltd., Minerals and
Metals Trading Corporation of India Ltd. and National Build-
ings Construction Corporation Ltd., it had been ranging
between 7 1% and 26 7% in the Handicrafts and Handlooms
Exports Corporation of India Ltd., between 5,5% and 2S.6% in
the State Trading Corporation of India Ltd. and between
9.2% and 23-7% in the Central Warehousing Corporation,
being the highest and the lowest in the service and the manufac-
turing groups of industry respectively. Taking all the eight
enterprises together, the range of variations of this percentage
had been between 2.7% and 17.2%, average for five years being
4 0% However, on comparing the respective share of the
different companies and the groups of industry in the total
interest received during the same period (1971-75), as presented
in Table 5.3, it has been found that the lion’s share had been
of the State Trading Corporation of India Ltd., on an average
being fi8.7%, and of the trading group, 78 9%, the share of the
service group being the lowest, 6.5%.
The above analysis indicates that whenever the selected
companies had a little bit of surplus cash, it was utilised by
all of them for adding something to the profits. On the basis
of the composition of interest earned during 1971-75. their
practice of utilising surplus cash can broadly be grouped into
three categories : (i) deposits in bank, (ii) loans and advances
to subsidiaries, and (iii) others including loans and advances

to employees, co-operativesocieties maintained by them for
the benefit of the employees and similar other items. Table
5 4, which presents the percentage contribution of different
sources to total intecest received by selected companies during
1971-75, shows that while some of them were deploying their
surplus cash in one or two of these sources, the others were
using all the three sources for the purpose. The Electronics
DEALING WITH SURPLUS AND DEFICIT CASH 143
TABLE 5.3
Respective Share of the Different Companies in the total

Interest Received (Percentage to total)
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL NA 1.4 28.7 14.2 5.3 10.7

ECIL 0.1 0.2 0.1 0.2 0.4 0.2
NMDC 1.3 2.4 3.1 6.6 4.2 3.8
Manufacturing Croup 1.4 4.0 31.9 21.0 9.9 14.6
HHEC 0.4 1.3 1.0 0.7 1.1 0.9
MMTC 6.5 14.2 6.3 6.7 13.7 9.3
STC 86.5 69.5 56.4 65.4 67.8 68.7

Trading Group 93.4 85.0 63.7 72.8 82.6 78.9
CWC 5.1 10.9 4.3 6.1 7.4 6.4

NBCC 0.1 0.1 0.1 0.1 0.1 0.1
Service Group 5.2 11.0 4.4 6.2 7.5 6.5
All Companies 100.0 100.0 100.0 100.0 100.0 100.0
NA=Not Available

144 CASH PLANNING AND AJANAGtMENT
Corporation of India Ltd. utilised the entire cash surplus under

and earned 100% interest from that. The
the group ‘others’
same percentage of interest, Lc., 100%, was earned from ‘loans
and advances to subsidiaries’ by the Minerals and Metals
Trading Corporation of India Ltd., Handicrafts and Handlooms
Exports Corporation of India Ltd. and National Building?
Construction Corporation Ltd. ‘Deposits in bank’ and ‘loans
TABLE 5.4
Composition of Interest Earned b} Selected

Companies (Percentage to Total)
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
ECIL
Deposits in Bank nil nil nil nil nil nil
Loans and Advances nil ml nil nil nil nil
Others 100.0 lOO.O 100.0 100.0 100.0 100 0
MMTC
Deposits in Bank ml nil ml nil nil nil
Loans and Advances 100.0 1000 100.0 lOO-O 100.0 100 0

Others nil oil nil nil ml nil
HHEC
Deposits in Bank oil ml ni! ml nil ml
Loans and Advances ICO.O 100 0 100.0 100.0 100 0 1000
Others nil nil nil ml nil ml
1 2 3 4 5 6 7
NBCC
Deposits in Bank nil nil nil nil nil nil
Loans and Advances 100.0 100.0 100.0 100.0 100.0 100.0

Others nil nil nil nil nil nil
CWC
Deposits in Bank 99.8 99.0 97.8 98.8 96.1 98.0
Loans and Advances 0.2 LI 2.2 1.2 3.9 2.0
Others nil nil nil nil nil nil
NMDC
Deposits in Bank 85.2 68.3 94.3 58.4 33.4 59.5
Loans and Advances nil nil nil nil nil nil
Others 14.8 31.7 5.7 41.6 66.6 40.6
BHEL
Deposits in Bank NA 24.1 0.1 6.8 4.2 2.7
Loans and Advances NA 64.6 1.7 13.0 17.0 7.8
Others NA 11.4 98.2 80.0 78.7 89.5
STC
Deposits in Bank NA NA 14.5 8.0 9.3 10.3
Loans and Advances NA NA 11.5 44.3 45.2 35.8
Others NA NA 74.0 47.7 45.5 53.9
NA = Not Available
Compiled from the Annual Reports of the

Source :
and advances to subsidiaries’ were prevalent in the Central

Warehousing Corporation, the former being more prominent.
In the National Mineral Development Corporation Ltd. two
of the sources, namely, deposits in bank and others, were m
use But the interest received from 'deposits in bank* has shown
a declining trend over the five-year period 1971-75. With the
decline in deposits in bank, utilisation of surplus cash under
the group ‘others’ has been found to become popular. It is
evident from the fact that interest earned from this source has
shown an increasing trend. The year 1973, however, had been
an exception when the interest from ‘deposits in bank’ was the
highest and from ‘others’, the lowest. The Bharat Heavy
Electricals Ltd. and the State Trading Corporation of India
Ltd were deploying their surplus cash under all the three
groups and earning, on an average, the highest interest under
the group ‘others’ 1973 onward both of them have shown a
declining trend in the interest from ‘deposits in bank’ and an
mcreasiivg trend m the interest from ‘loans and advances to
subsidiaries’. Figure V.A also shows the percentage of interest
received (average) from different sources on short term invest-
ment of surplus cash by selected companies during 1971-75.
The increase in the interest under the group 'loans and advan-
ces to subsidiaries' m
the State Trading Corporation of India
Ltd. has been probably the result of an arrangement with its
subsidiaries handle the surplus and deficit cash
to Under
the arrangement surplus funds are switched over from one
corporation to another for use within the STC group’ to
ensure maximum utilisation of available resources and minimi-
sation of interest payments on borrowed funds. The chances
of one corporation in the STC group borrowing from its
bankers and the others enjoying a comfortable cash surplus at
3 The STC Group consists of Ihefollowme corporations—

(a) State Trading Corporation otlndia Ltd.
(b) Projects and Equipments Corporation of India Ltd.
(c) Handicrafts and Handtooms Exports corporation of India Ltd
(d) Cashew Corporation of India Ltd
(c) Indian Motion Pictures Export Corporation Ltd
of
STC
Investment Subsidiaries
to
Term
BHEL
Advances
Bank
Short
in
and
on
Deposits
Loans
NMDC
(Average)
Sources
1971-75
Different
CWC
from
Companies,
Received
NBCC
Selected
Interest
by
of
Cash
HHEC
Percentage
Surplus
:
A MMTC
V.
FIGURE
tbe same lime can not be ruled out. To avoid this, the follow-
ing arrangement has been developed
(a) The subsidiaites transfer iheir surplus funds to the

holding company.
(b) If the holding company is m credit and the subsidiaries
are borrowing, the subsidiaries* borrowing limits are
suspended temporarily and an equiv alent amount is lent
to them.
(c) Id case the group as a whole is in surplus, the amount
IS invested in the best possible manner and the return
IS shared
Regarding payment of interest on the investment of surplus

cash by subsidiaries with the holding company and vice versa,
the Committee of Management approved the following in
1973
“Interest will be patd/received on the funds borrowed/lent

between the holding company and the subsidiaries on the follow-
ing basis .—
(i) At the borrowing rate so Jong as the borrowing com-

pany IS in debit on its cash credit account with the
State Bank of India
(ii) If the borrowing company goes in surplus, i.e., a
situation arises where all companies are having credit
balances, the same should be invested in the best possible
way in consultation with the Contracts and Credit
Dcpanmenl and interest will be paid to the lending
company at the rate of return on investment.
(ill) In the event of investment not being possible as the
credit balance may last only for a very short period,
no interest will be payable”
Dunng the year 1971-72 interest was paid to the Cashew

Corporation of India Ltd. (berem after called CCI) on the
basis of the above formula and where investment was made.
dealing with surplus and deficit cash 149
benefit of the higher rate of return on investment was passed

on to the CCI as the STC’s investment was not large. How-
ever, during 1972-73, apart from the surplus lent by the CCI,
the STC had got its own huge surplus which was invested and,
therefore, it was decided that interest to the CCI be paid at the
average rate of return. On this basis the following formula
was approved for payment of interest to CCI
(A) When funds lent by the CCI are not invested by the STC
either with the HHEC or elsewhere :
(i) When the STC is in debit :
On the full amount lent by the CCI at the STC’s

borrowing rate, viz., 9J% p.a. less commitment
charges, if any.
(ii) When the STC is in credit :
(a) If the credit balance is less than the amount lent

by the CCI :
“On the difference between the amount lent by the
CCI and the STC’s credit balance at STC’s borrow-

ing rate less commitment charges, if any’’.
(b) If the credit balance is more than the amount lent
by the CCI :
“for that period no interest to be paid to the CCI”
(B) When funds lent to the STC are invested either with
the HHEC or elsewhere :
interest will be paid at the average rate of return being

calculated as under :
Total net returnon Monthly product of CCl’s

^
investment* funds with STC
Monthly products of total investment including
CCl’s funds
•(Gross return minus interest, if any. paid on

temporary debits in the account)
At times It may happen that the amount lent by the CCI may
be more than the amount invested by the STC ; the balance
being held either as ‘minimum balance’ in the cash credit
account or utilised to liquidate STC’s debit. In such a situa-
tion it was decided that interest should continue to be paid on
the basis of the above formula.
The interest is payable at the end of each month on a
provisional basis as the rate of interest earned on short term
deposits may ultimately work out to be less m the event of
premature encashment. The final adjustment is made when the
receipt is hoally realised.
In an attempt to explore the opportunities known to the
selected enterprises for deployment of temporarily excess cash,
they were asked the following question :
“Would you mention the sources of short term

please
investment opportunities known to you, if any, which
somehow you arc not utilising?”
But rone of them could point out any such source. However,
the General Manager (Finance) of the Handicrafts and
Handlooms Exports Corporation of India Ltd., who was very
keen to find newer sources for deploying temporarily excess
cash, said.
“There are two major sources of short term investment

which I can see (i) deposits with the banks and
:
(ii)
Treasury Bills of Reserve Bank of India. There were one

or two schemes which unfortunately could not materialise.
A few companies in general and the State Trading Corpora-
tion of India Ltd. in paricular tried to enter the bill market
scheme in the country but that was not approved by the

Reserve Bank of India. It was of the opinion that the
bill market should be restricted to financial institutions
only, perhaps due to
infancy (which was still in the
its
process of development) being 4-5 years old in the

country.” Expressing his opinion he further said, “I
personally feel that the bill market scheme should be opened
at least to large industrial and trading companies parti-
cularly in the public sector. They should be encouraged
that if they have surplus cash why not to invest in the bill
market and have a little higher income if they can.”
The above discussion shows that companies generally do not

have proper opportunities for deploying cash in the short
period. At present Treasury Bills of the Reserve Bank of India
and deposits with banks are the main sources for the purpose
which have their own limitations. The difficulties to be en-
countered in using Treasury Bills ate evident from the fact that
none of the enterprises covered by this study has pointed out
utilising its surplus cash in Treasury So is the case,
Bills
more or less, with b ink deposits also. The problem with bank
deposits is that banks generally do not allow any interest on
deposits for a period less than 15 days, which implies that the
surplus cash, if any, will have to remain unproductive if it is
not available for more than 15 dajs. The analysis of cash

balances maintained in the current account by the selected
companies during 1971-75 shows that the companies covered
by this study generally do not have a cash surplus for more
than 15 days. In view of their consciousness in utilising the
temporarily excess cash for profit maximisation, it can be
expected that they do not maintain higher cash balance in the
current account. But the empirical evidences contained in
Table 5.5, which shows the percentages of cash in current
account to total cash in selected companies during 1971-75,
reveal that they had quite a sizeable percentage of their cash m
the current account on an average varying from 24.0% to 90.3%
in the manufacturing companies, from 37.9% to 68.8% in the
trading companies and from 82.2% to 87.8% in the service
152 CASH PLASS’INO AND MANAGEMENT
companies, being the highest and the lowest in the service and
the trading groups respectively. A comparative picture of the
percentage of cash in current account to total cash in the
respective companies over the five-year period 1971-75 is also
presented in Figure V.B. Since large sums are collected in the
last wcek/day of the accounting year, as already discussed in
TABLE 5.5
Percentage of Cash in Current Account to Total Cash

in Selected Companies
Company 1971 1972 1973 1974 1975 1971-75

(Average)
1 2 3 4 5 6 7
BHEL NA 26.7 21.8 25.5 23.5 24.0

ECIL 52.9 19.5 32.4 80.5 49.7 61.4
NMDC 86.3 92.1 92.4 92.9 82.1 90 3
hfanufactunng Group 85.7 70.7 55.2 63.6 37.1 58 5
HHEC 72.9 57.6 27.8 88.6 63.5 68.8
MMTC 32.2 70.6 76.6 60.1 0.5 42.8

STC 36.3 79.8 28.7 12.8 t5.0 37.9
Trading Group 36.0 74.8 45.6 30.7 10.7 41.4
ewe 96.5 82.3 89.2 94.1 72.0 87.8

NBCC 83 3 93.8 84.3 73.6 80.4 82.2
Serv.ee Croup 96.1 84.2 89.0 92.6 72 8 87.4
All Companies 63.9 74.0 56.8 54.0 30.3 54.3
NA=Not Available
companies.
DEALING WITH SURPLUS AND DEOCIT CASH 153
FIGURE V.B
Percentage of Cash in Current Account to Total Cash in
Selected Companies, 1971-75 (Average)
the preceding chapter, maiatenance of such a high cash

balance in the current account at the end of the accounting
year may partly be attributed to the lack of opportunities for
profitable use of surplus cash for periods Jess than 15 days
Given proper opportunities for periods from I or 2 days to
extending beyond six months, as js available in the United
States of America*, encouragement to the enterprises to free
more funds by strict control over the movement of cash for
profit maximisation apart, the temporarily excess cash can be
utilised to take advantage of yield difierentials among maturities
as well as among securities. This can be made possible by
selling the existing ones and reinvesting the proceeds in others
At present the selected compimcs arc not able to maximise
return on short term investments by yield differentials It is-
evident from their replies to the folloss’ing question—

“To take advantage of yield differentials among maturities
as well as among different types of secuniies, do you sell
short term investments and reinvest the proceeds 1
(a) Among maturities Yes/No
(b) Among securities Yes/No"
4 Y E Ofg et hai mentioned Treasury

Bills Federal Ageoey Securities,
Public Housmj Auihonly Motts, State and Local Bonds. Banker's
Acceptances, Tune Certificates of Depos.t, Finance Company Paper
and Commercial Paper being the principal short term corporate
alternatives mailable m
the 'United States of America, having different
maturity periods Out of these the last three can te utilised even fora
dayoriv.0 The Tunc Certificates of Deposit, popularly known as
CD’s, generally of 90 days maturity, is a receipt gi\ en by a bank for
tune deposits of money with a promise to return the amount deposited
plus interest to the bearer of the cmificate on the date specified.
This certificate is transferable and may be traded before its maturity
date The Finance Company Papers, providing almost any maturity
required by the buyer, arc issued by companies fiiuncmg consumer
appliances and automobi'es They are reasonably safe and carry a
high rate of interest The CommeTctal Papers arc in the nature of
unsecured promisory notes issued by a relatively small group of
highly rated companies. These papers are usually of four-mo.ith to
S!K-month tmciintifI t>iit sometimes ^s short asfivedays. The yield
IS usually the highest of those that can be obtained from any short
term security. For details, sec. Orgler, Y E., Op. cir., pp. 18*19.
dealing with surplus and deficit cash 155
In reply to the above question, all of them gave a negative

answer.
Yet another way of maximising the return on short term

investments may be making investment in selected securities of
desired maturities for specified purposes. In the absence of
proper opportunities, the selected enterprises are generally not
able to increase the return on their investments by this tactics
also. On being asked
“Do you make investments in selected securities of desired

maturity for specified purposes (meeting specific liabilitity
at some future date)
? Yes/No
If ‘Yes’,would you please name the liabilities tand also
the securities) for which you make investment in selected
?’’
securities
seven of the eight companies gave a negative answer. However,

the one company, namely, the National Mineral Development
Corporation Ltd., said, ‘Yes’ and pointed out depositing
surplus cash in the bank so as to time the ro>alty payment and
the payment of the instalment of loan and/or interest.
From the above discussion of the management practice
of surplus cash, it may be concluded that the companies

covered by this study generally do not allow their temporarily
excess cash to remain idle and utilise it for profit maximisation
whenever possible. A business house has an equal chance of
temporarily running short of cash. How the selected companies
face such a situation is discussed in Section II.
II
MANAGEMENT OF DEFICIT CASH
Contrary to the surplus cash, deficit cash is a situation whic’n

to
indicates excess of cash outflows over cash inflows leading
the shortage of cash. It is a situation that is generally undesir-
able because any carelessness on the part of the management

156 CASH PLANNIVO ASD MANAGEVEVT
to deal properly with this situation might throw the firm into
liquidation in spite of its substantial anticipated cash inflows in
the future. Anticipation of» or existence of, cash deficit is not
unusual m a business house. Any unexpected change in the
cash forecast may give rise to a possible serious cash shortage
causing strain on the mind of the management.
Handling of cash deficit differs from case to case and the size,
duration and degree of warning of the occurrence are some of
of appropriate management
the critical factors in the selection
action. As a matter when a cash shortage situation is
of fact,
expected, U does not autoraatically and necessarily imply a
search for additional external financing. Depending on these
factors, the management initially mav be able to avoid or at
least to minimise the undesirable situation by effective internal
control of resources. This can be made possible by taking
decision on such matters as (a> increased efforts to speed up
collections i (b) reduction of purchases of inventories ; (c)
increasing cash sales ; (d) sale of redundant asscsts ; (e) sale of
short term investments ; (f) deferment of certain expenditure
such as capital additions ; fg) postponement and delaying pay-
ments and so on because it can be done more inexpensively than
outs'de financing.
“Even if an external source has to be found, this might be

seen as a bridging operation pending the ability to bring
on-stream an alternative internal source*’.*
This section, which presents the mangement practice of dealing

with deficit cash situations by the selected companies,
attempts
to find answers mainly to questions such as How do they handle

a cash deficit situation ? What arrangements do they have for
emergency cash requirements ? Have they ever coiue across any
emergency cash rcquifcmcnt situation ? If so, What were the
factors responsible for such an emergency and how it was faced.
5 Hanley, WCF . Op ot . p. 85
—
As already mentioned in the preceding section, most of the

companies covered by this study have pointed out depending on
their banks for necessary funds for working capital require-
ments. For the purpose they have cash credit arrangement
with their banks. The limits of the cash credit are got sanc-
tioned for the ensuing year to ensure the availability of cash
for all the purposes. An idea of their dependence on banks can
be had from Table 5.6 which shows balances in the cash credit
account in selected companies during 1971-75. This arrange-
ment had been playing an important role, apart from providing
cash for working capital requirements, in meeting out their cash
deficit situations
also. As a matter of fact, having cash credit
arrangement, they least bother for any cash shortage. Those
having no such arrangements, have sufficient fund in term depo-
sits which they can use in case of need. In reply to the following
question
“Please check the steps which you take to meet such a situa-
tion when your budgeted disbursements (for a particular
period) are more than budgeted receipts ;
(a) Never came across such a situation

(b) Arrange for bank loan
(c) Arrange for other short term loan
(d) Speed up collections
(c) Sell marketable securities
(f) Postpone payments
(g) Delay payments
(h) Any other (Please specify)"
though one or more of the companies pointed out expediting

collections, postponement and delaying payments, encashment
of prematured term deposits and increasing cash sales being the
techniques adopted by them for the purpose, as presented in
Table 5.7, in the presence of cash credit account it may be said
that contribution of these sources might not have been significant
particularly because of the difficulties in expediting collections,
'
as already observed in Chapter 4.
15S CASH PLANNING AND MANACB'IENT
758.68
4,99644
lakli)
in
ml
287.51
(lliipccs
14
Cotiipanies
159 1,60976
Selected
in
ml 885
Account
CrcdU
14
1,014.32
Cash
9J6
in
H.U.inct’i
Group
V fig
H-
s sre
W
s
DEALING WITH SURPLUS AND DEFICIT CASH 1 59
CO
vd vd
VO o
vd
VOVO
o O
fd
td r-'
VO vO
CO
cd
VO
m r-
r--
vn OV
o
CO
o
CO
O o
U
c
2:
CQ
O ;z: ^
160 C4SH PLANNING AND MANAGEMENT
Situation
Deficit
Cash
Corporation
out
Meeting
7
5 in
Warehousing
TABLE
Companies
Central
Stikctcd
deposits
by
term
A«Ioj)c<l
prematured
Tccltni(]\us
of
Encashment
—— —
dealing with surplus and DEncir cash 161
With a view to enquire into the efficacy of the sanctioned

cash credit
limit, the companies were asked
“Have you ever utilised the maximum limit of the following

facilities ?
la) Cash credit Yes/No

(b) Overdraft Yes/No"
In' reply to this question companies, namely, the Bharat

six
Heavy Electricals Ltd., Minerals and Metals Trading Corpora-
tion of India Ltd., Handicrafts and Handlooms Exports Cor-
poration of India Ltd., National Mineral Development Corpora-
tion Ltd. and the State Trading Corportion of India Ltd., gave
affirmative answer. The reply gh en by the National Buildings
Construction Corporation Ltd. was, however, negative. It shows
that,by and large, the cash credit limits of the selected com-
panies are within their requirements.
While managing of the economy
cash the uncertainties
should also be kept in mind. Sometimes there may be an emer-
gency requirement of cash either on account of unexpected
events or to exploit an opportunity. The former one being
more dangerous than the latter because it may, if not met pro-
perly. cause a disaster particularly when the firm is running
short of cash. Therefore, the system of cash management re-
quires well planned necessary arrangements to meet successfully
such an emergency. Depending upon its nature and size,
proper arrangement can be assured in one or more of the
following ways :
(a) Maintaining a minimum cash balance over and above

the amount needed for operations,
(b) Having bank overdraft/cash credit arrangement.
(c) Having special arrangement with lending institutions for

such purposes.
(d) Discounting bills receivable or encashing term deposits.
(e) Raising loan against warehouse receipts, if any.
162 CASH I LASMNG AND MANAGEMENT
The cash credit arraogement with the banks had been a

dependable source to the selected companies for providing cash
m emergencies also. Having this arrangement they least worry
for any unexpected cash requiremeots. In reply to the following
question
‘
You will agree that sometimes there may be an emergency
requirement of cash either on account of unexpected events
or to exploit an opportunity. Please check the arrangements
that you have for such circumstances—'
(a) Always maintain a minimum cash balance over and

above the amount needed for operations
(b) Bank overdraft/cash credit arrangement
(c) Discount bills receivable
(d) Raise loan against warehouse receipts
(e) Have special arrangement with some lending agency for
such purposes
(f) Marketable securities
(g) Any other (Please specify)”
SIX of the eight companies said, “cash credit arrangement”.

Those having no cash credit account with banks expressed confi-
dence m their own resources, failing which in banks, and replying
to the above question said, ‘In case our resources turn out
insufficient to meet any specific requirement of cash, our bank
is there to help us’. In view of the presence of cash credit
arrangement, most of the companies studied here never
experienced any emergency regarding cash requirement On
being asked
“Have you ever come across emergency cash requirement

situation ’ If ‘Yes’, please elaborate the circumstances
leading to it and how it was faced ?”
with the on}y exception of the Cenirai Warehousing Ccrpora-

tion, all the companies denied having ever come across
such a situat on. In 1973 the Central Warehousing Corporation
—
had to pay all of a sudden a substantial sum for income tax

which could not be anticipated in the cash budget due to
disputes going on with the Income-tax Department. To face this
situation, though it had sufficient funds in short term deposits
which could have been utilised for the purpose, it preferred
to raise loan from the bank. In taking this decision the
relative costs of the two alternatives were worked out and
the encashment of prematured term deposits was found to be
more costly as compared to the interest payment on borrowed
funds. This decision was certainly a prudent decision from cash
management point of view.
Though none of the companies pointed out maintenance of
minimum cash balance for emergencies, the fact remains that
in the absence of bank overdraft/cash credit facility such a
balance can play an important role in meeting out emergency
requirements of cash. With a view to ensure the reasons for
not maintaining minimum cash balance for emergencies, the
companies were requested to answer the following question
“In case you do not maintain miniirjum cash balance for

emergencies, would you please check the reason (s) for not
doing so ?
(a) Have a cushion for unforeseen developments
(b) The lending institution has given assurance to help in

emergency
(c) By the nature of your business you are confident that no
such emergency will ever arise and as such you believe
in investing all possible cash in the business to increase
cash turnover
(d) Could not conceive the idea
(e) Any other (Please specify)”
Replying to the above question all the companies having cash

creditaccount invariably indicated “b”, i.e., the lending institution
has given assurance to help in emergency. The ‘lending institution’
was clarified as bank and the ‘assurance’ as cash credit account.
164 CASH PLANMNG AND MANAGEMENT
However, the companies having no cash credit arrangement

indicated a", i c , have a cushion for unforeseen developments.
‘
The ‘cushion' was explained as short term deposits in bank.

Thus, It IS obvious from the above discussion that the cash
credit arrangement with banks plajs an important role in provi-
ding cash to the selected companies not only for the day-to-day
requirements and facing cash shortages but also in ensuring the
availability of requisite funds in emergencies. The enterprises
having no such arrangement are confident of their own resources
in taking care of cash shortages, if any, and also of timely help
from banks m case of need.
Ill
CONCLt'SrONS
The main conclusions arising out of the discussion of dealing

with surplus and deficit cash situations are summarised m this
section.
Surplus cash situation a rare phenomenon m the selected
is
companies Generally they depend on their banks for necessary

funds even for day-to-day requirements Hence, management
of surplus cash does not pose any problem to them. Whenever
surplus cash arises, they deploy tt in the best possible way
for profit maximisation Their practice of utilising surplus
cash can be grouped into three categories (i) deposits in
:
bank, (ii) loans and advances to subsidiaries and (tii) others

comprising loans and advances to employees, co-operative
societiesmaintained by them for the benefit of the employees
and similar other items. During the five year-period 1971-75 it
has been found that while in the Minerals and Metals Trading
Corporation of India Ltd., Handicrafts and Handlooms Exports
Corporation of India Ltd. and National Buildings Construction
Corporation Ltd. the group ‘loans and advances to subsi-
diaries’ was popular, the group ‘others’ was used by the Electro-
nics Corporation of India Ltd. for deploying the surplus cash.
'Deposits in bank' and ‘others' categories iverc in use in the
DEALING WITH SURPLUS AND DEHCIT CASH 165
National Mineral Development Corporation Ltd. In addition

to ‘deposits in bank’,
the group ‘loans and advances to subsi-
diaries’ was also used for the purpose in the Central
Warehous-
ing Corporation, the former being much more prominent than
the latter. The Bharat Heavy Ltd. and the State
Electricals
Trading Corporation of India Ltd. used all the three sources
and earned, on an average, the highest and the lowest amount,
of interest from ‘others’ and 'deposits in bank’ respectively.
1973 onward both of them has'e shown a declining trend in the
interest from ‘deposits in bank’ and an increasing trend in the
‘loans and advances to subsidiaries’ which in the State Trading
Corporation of India Ltd. had been the result of an arrange-
ment with its subsidiaries for optimum utilisation of cash with-
in the STC group.
At present the enterprises do not have proper outlets for
deployment of temporarily excess cash. ‘Depopits with bank’
and ‘Treasury Bills’ are tire only main sources for the purpose
which have their own limitations. Given proper opportunities,
the surplus cash can be utilsed even for a day or two. By and
large .all the selected enterprises maintain substantial cash
balance in their respective current account which can partly be
attributed to collections in the last week of accounting year
and partly to non-availability of opportunities for utilising
surplus cash for periods less than 15 days.
Most of them have cash credit account with their banks
which provides them cash for day-to-day requirements, face cash
shortage situations and meet emergency requirements. Hence,
they have not to strain tdeir mind in dealing with cash deficit
situations also. Cash credit arrangement apart, however, ex-
pediting collections, postponement and delaying payments,
increasing cash sales and encashment of prematured term
deposits are relied upon
to meet out a cash deficit. Enterprises
having no arrangement
cash credit depend on their own resour-
ces and are also confident of their banks for timely and necessary
help in case of need.
With the exception of the Central Warehousing Corporation
none of the companies ever came across emergency cash
166 CASH PLANNING AND MANAGEMEKT
requirement situation. In 1973 the Central Warehousing Cor-

poration bad to pay all of a sudden substantial sum for income
tax which was not anticipated m
the cash budget due to disputes
going on with the Income tax Department. However, the situa-
tion was faced prudently by borrowing from bank m spite of
the fact that it had substantial fund in term deposits. It is
obvious from the above discussion that the banks had been
playing an important role in dealing with surplus and deficit
cash situations in the selected undertakings. Thus, an effective
the bank h accessary for the success of cash
reJafionsbip with
management programme. The relationship of the selected
companies with their banks forms the subject-matter of the
succeeding chapter.
6
Bank Relationship
The relationship between a business firm and its banks is an

important part of the study of cash management problem. Its
importance in the area of cash management is derived from the
services that banks provide to the business houses. Emphasis-
ing the importance of thecheque facility, a service provided
by banks, Charles A. Ageraian says
“The use and facility of writing a cheque to settle accounts

has made users of this service forget its value. It is so
simple and has become so much a part of every day life
that its value is no longer appreciated Modern day
business cannot operate without cheque service”.'
The importance of bank relationship in cash management

depends, to a large extent, on the number of banks used by
a business house and the type of banking services it requires. In
the words of Roger \V. Hill, Jr.
“It through the banking system that a financial executive

is
implements his cash management plan and the careful
1. Agemian, Charles A., ‘Maintaining an Effective Bank Relationship’,

Financial Executive, January, 1964, p. 24.
168 CASH PLANviNG AND MANACEfctEKT
selectionand use of deposit, imprest and regular bank

accounts contribute to lbs most efScient control and safe-
keeping of cash. The lending capacity of the banking system
further provides a corporation uiih flexibility in financing
seasonal requirements and special transactions Although
the extent andcomplexity of a corporate bank may vary
number of banks and the services required, no cash
with the
management programme can be complete without an
effective one.’”
Maintaining an efTeclive bank relationship is making the most

efficient banking connection available and taking full advantage
of the experience, Inov'ledge and service that a back can offer
and in no way it implies keeping a top heavy amount of cash
lying idle in the bank. In fact, in maintaining relationship with
banks, the enterprises are generally concerned with such basic
problems as cash credit arrangements, discounting and collect-
ing bills and cheques, control of balances, fair compensation
of banks for services, appraisal of banks in terms of the services
rendered by them and so on
This chapter, which concerns itself mainly to examine the
practice of the selected companies regarding selection of banks,

services rendered by banks to them and mode of compensation
by them to the banks for the services, has three sections.
Section I of the chapter presents the practice of the selected
companies regarding selection of banks The banking services
and the mode of compensation have been discussed in Section
II. Finally, Section III contains conluding observations of the
chapter.
SELECTION OF BANKS
In establishing relationship with banks, first of all an enterprise

has to decide on the number and location of banks which will
2. Hill, Roger W., Jr, Or cit..p.3^-

BANK RELATIONSHIP 169
serveit. But before a firm considers the banks that it may use,
itmust identify its cash requirements, both in the short term
and in the long term, because this can be helpful in planning the
bank selection. Facilities to handle present and future financial
requirements apart, it must analyse the ability of banks to
provide the required services as and when needed. The object
of this section is to present the practice of the selected
companies in regard to the selection of banks.
Table 6.1 contains the names of the popular banks being in
rise of the enterprises covered by this study. It discloses that
although most of them use more than one bank, all of them
have accounts with the State Bank of India. Since the Slate
Bank of India has the largest number of branches throughout
the country as well asabroad, maintenance of account with
this bank by all the enterprises shows that probably the ability
of banks to provide required services constitutes the main
criterion in the selection of banks by the selected comp'nies. In
some measure this fact is also supported by Table 6.2 which
shows Indian banks in foreign countries and foreign banks
being used by selected companies. The State Trading Cor-
poration of India Ltd. and the Handicrafts and Handlooms
Exports Corporation of India Ltd., which frequently trade
with foreign countries, have accounts with banks abroad to
suit their requirements. With several different operating
accounts one bank, the transfer of funds from one account
in
to another, and also from one place to another, is simplified
and the firm may treat all accounts as one in determining the
profit or loss of the relationship to the bank. Since they have a
centralised cash management system under which they require
their branch banks to transfer cash balances to the
office
central bank account at the head office daily or at periodical
intervals as per the arrangements, as already observed in
Chapter 4, perhaps this is another reason for maintaining
accounts with the State Bank of India.
But having accounts with more than one bank seems to be
influenced by the capability of banks to provide cash credit
facility. The facts contained in Table 6.3, which shows the
cash credit limits of the selected companies during 1975-76 and
no C^^SK PLANNING AND MANAGmENT
TABLE 6.1
Banks iii Use ofSelectei Companies
Bank Compames Nvrnher of

Con-pames
State Bank of India BHEL. ewe, ECIL. 8

HHEC. MMTC. NBCC,
NMDC. STC
Indian Overseas Bank BHEL. ECIL, MMTC 3
State Bank of Hyderabad BHEL. ECIL. NMDC 3
Syndicate Bank ECIL. MMTC, NBCC 3
Panjab National Bank BHEL. ECIL 2
Caoara Bank BHEL NMDC, 2
Bank of India HHEC. MMTC. 2
State Bank of Travancore BHEL, ECIL 2
Bank of Baroda BHEL. HHEC 2
Centra] Bank of India BHEL. HHEC 2
Union Bank of India BHEL 1
Stale Bank of Patiyala NBCC 1
State Bank of Mysore NMDC 1
Source : Anauaf Keporfs of ffie respective companies and

courtesy of the Management.
o o Beirut
contpanies
:z; o
: 2 East,
•i
^ c
rt
« Pc
Hamburg.
2
Selected
C3
CO rt Middle
s
c Cd»i G o
by
CQ
O U w c3
Bank,
of
o c3
C P
rt
C CJ
C H
nsed
C3
P o Bank
< rt
*rt cO
:s c
G
being C
o
2 o P Deuthsche
o •*>> t/5
G British
*5 C3 w* *?
Banks P 2 il u tu
6.2 (4) (1)

fs ro
Fornign
TABLE
O Singapore.
and >-
t)
Connirics O JD
O
2
c .h rt
Bank,
cJ
o C3
•O
fa
H 2 a
Cj
•3 ,o Overseas
^ T3
roreign
o 2
o* C 3
c
rt
in c ’rt
P 3
4«d .S2
.S "rt c C
c
•O 3 rt rt
Danfa CQ CQ
Indian
U
in U
la
2 H
CO
p
Berlin.
Bank,
Handles
Ausscn
companies.
DoutscSê
(2) respective
the
of
London.
1974-75
[ndia,
Uepotls
of
Bank
Annual
Slate
:
(2)
Source
BANK RELAHONSHIP 173
the number of banks being used by them, disclose

that the
undertakings requiring more financial assistance
had accounts
with comparatively larger number of banks.
It is eloquent
from the fact that the
Bharat Heavy Electricals Limited, having
the highest
cash credit limit of Rs. ISO crores, had accounts
with the largest number of banks, nine banks, and the State
Trading Corporation of India Limited and Central Warehousing
Corporation, having no cash credit arrangement, had accounts
with one bank only. It also indicates that probably none of
the banks individually is able to meet the entire financial

requirements of an enterprise. Hence, as also pointed out by
TABLE 6.3
Cash Credit Limit and Number of Banks in Selected

Companies
Company Number of Cas/i Credit Limit

Banks {.Rupees in Crores)
1 2 3
BHEL 9 180.0
ECIL 6 14.0
MMTC 4 45.0
HHEC 4 3.8
NMDC 4 2.9
•>
NBCC 0 3.0
STC 1 nil
ewe 1 nil
Source : Annual Reports of the respectiv e companies and

courtesy of the Management.
174 CASH PLANNIHG AND MANAGEMENT
the companies, they have to approach other banks too for the
purpose. However, if their Unancial requirements could be
curtailed, or the entire requirement of an enterprise could be
fulfilled by a smaller number of banks, the accounts can be
concentrated in a few banks only for good reasons. It enables
a firm, besides facilitating the transfer of funds from one
account to another and also making cash free unnecessarily
tied up in difierent banks, to maximise its importance as a
customer to a particular bank.
“The larger the account, the more incentive there is for the
banker to be accommodating”,*
The selection of bank is followed by an agreement regarding

services to be provided by them and the mode of payment for
services by the business bouse. This is discussed m the next
section.
II
BANKING SERVICES AND MODE OF COMPENSATION
Once the selection process is over, an agreement has to be

reached with each bank so selected on the type of services
to be provided by the bank and its compensation by the
enterprise. The services to be provided by banks can broadly be
grouped into two categories . (i) routine services; and (ii) special
services. Keeping of accounts, imprest payments including
salaries and wages, dividend, income tax and such other usual
services fall under the category of routine services and those
other than the routine ones such as transfer of funds, purchase
of cheques and bills, issue of letters of credit and foreign
exchange service etc. come under the category of special
services. For these services the banks maybe compensated
by the firms in two ways : (i) by maintenance of compensating
3. Hill. Roger \V., Jr.. Op. cil., p. 35,

balances, i.e., a certain level of deposits in the banks

which enables them to earn profit to themselves ;
and (ii) by
payment of direct fees for each of the services provided. This
section attempts to enquire into
the services required by the
selected companies from their banks and the mode of compen-
sation by them for the services.
The enterprises covered by this study require both the types

of services — special as well as routine— from their banks.
Transfer of cash, issuing letters of credit, giving guarantee to
foreign banks, foreign exchange service and purchase of cheques
are the most prominent special services required by them. For
these services they compensate the banks in two ways : (i)
paying commission at the rates prescribed by the Reserve Bank

of India and (ii) paying commission as per mutual agree-
ment As already discussed in Chapter 4, the selected
companies have a centralised cash management system which
but for effective co-operation of banks would have not been
successful. For effecting transfer of cash balances from branch
offices to the central bank account at the respective head offices,
the banks charge only the actual cost of the telex or the telegram.
In a way this service may be regarded to be free of cost
insofar as compensation to banks is concerned. For purchas-
ing the cheques, the arrangement which only the Electronics
Corporation of India Ltd. has, the banks are paid a nominal
commission at the agreed rate. But the other special services
which are required by one or more of them, depending on the
nature of their business, are paid in the form of commission
at the rates prescribed by the Reserve Bank of India.
To compensate the banks for the routine services, all of

them maintain compensating balances in the current account.
Normally the banks require them to maintain a nominal
amount not exceeding Rs. 500/- to provide the routine
services But the empirical evidence contained in Table 6.4,
which shows the cash balances in tlie current account in
selected companies during 1971-75, discloses that the actual
cash balances maintained by them had been quite substantial.
176 CASH PLAN*JI.N'G ANO MANAGEM^T
tunning into crores of rupees ia most of them * Though

maintenance of large cash balances by them in the current
account may be partly due to collection of large sums in the
last week of the accounting year and tack of proper outlets for
deployment of temporarily excess cash, as already emphasised
in the preceding chapter, and also partly due to maintenance
of balances for operational requirements, they seem to have
a tendency to maintain a higher cash balance in the current
account. This may b; explained by the existence of intangible
returns to them from higher deposits in banks.
“The mam return is associated with the readily available

credit speciillv during light money situations.’’®
Generally the routine services constitute a major part of the

services required by an enterprise from its banks and the usual
practice to compensate them is maintenance of some balances
in the current account which enables the banks to cover the
cost of maintaining (he relationship and to make a profit.
But
“There is no simple formula for establishing the correct

level of balances necessary to maintain good bank relations.
Much depends upon the corporations understanding of
what corporate services arc needed. As long as compensat-
ing balances are used as a method of piyment for banking
services, negotiations between the corporate officer and the
banker will probably be the means for determining the level
of balances required.”*
4 Describing the popu'arjty of nuinUining compensating balances to

compensate ilie banks for the services. Y. E. Orgler says that this
method IS so common that many firms go beyond the break-even com-
pensation principle and bold deposits in excess of the required levels or

deliberately agree to hoM large compensating balances For details,
see : Orgler, Y E ,
Op cil , p 34
5 Ibid , p 35
6. Hill, Reger W . Jr ,
Op cit , p 40
TABLE 6.4
Cnsh Balances in Current Account in Selected Companies
(Rupees in Lakh)
Company 1971 1972 1973 1974 1975 1971-75

(Avercgo)
1 2 3 4 5 6 7
BHEL NA 45.9 71.5 110.5 144.1 93.0

ECIL 3.7 3.4 12.4 192.3 J13.4 65.0
NMDC 319.1 363.8 294.5 394.2 101.1 294.5
HHEC 10.9 8.8 7.0 61.3 28.4 23.3
MMTC 56.9 3S6.0 200.1 157.4 3.3 160.7
STC 117.1 414.8 130,8 84.3 59.1 161.2
CWC 176.3 72.1 247.3 286.2 153.1 187.0

“
NBCC 5.4 16.3 11,0 16.7 18.9 13.7
NA=Not Available

Ill
CONCLUSIONS
This chapter attempted to examine the relationship of the
selected companies with their banks particularly with regard to
their selection, services required and mode of compensation to
them. The major findings of the chapter are recapitulated in
this section.
By and large the enterprises covered by this study use more
than one bank for the services and the State Bank of India
has been found to be popular to all of them. While the
178 CASH PLANNING AND MANACEMENT
selection of binks to be used by a particular enterprise is

mainly based upon their ability to provide required services,
having account with more than one bank is greatly influenced
by their capability to provide requisite financial assistance in
ihe form of cash credit. As none of the banks individually
could meet their financial requirements they had to approach
other banks also for the purpose. However as far as possible
an effort may be made to concentrate accounts in smaller
number of banks which will enable them not only to free more
funds unnecessarily tied up in more banks but also to maximise
theirimportance as a customer to a particular bank.
The selected companies require routine as well as special
services from theirbanks and generally compensate them by
paying commission at the rates prescribed by the Reserve Bank
of India for the latter ones. To facilitate the centralised cash
management system, the transfer of cash balances from branch
office banks to the central bank account at the respective head
offices IS one of the special services required by all the enter-
prises. For this service the banks are paid only the actual cost
®f telex or telegram. Purchase of cheques is another special
service for which the banks are given a commission at the
agreed rates. To compensate them for the other special services
such as issuing letters of credit, standing as a surety for foreign
banks etc , reference is made to the rates prescribed by the
Reserve Bank of India.
The most common raelhod to compensate the banks for
routine services by the enterprises studied hereis maintenance
of compensating balances in the current account. But they
seem to have a tendency to maintain excessive cash balances in
the current account to be much more than the requirements of
banks. Giving due allowance to the maintenance of adequate
balances for operational requirements, the balances in the
current account need to be minimised to the maximum possible
extent for profitable utilisation of cash resources.
By now we have discussed all the areas of cash management.
Hence, this chapter is followed by the concluding observations
of the study of cash planning and management practice of the
selected companies.
7
Concluding Observations
This chapter cotttains the main conclusions of the study of

cash planning and management practice in the selected compa-
nies in the public sector in India.
The analysis of the cash balances maintained by the enter-
prises during the five-year period 1971-75 has shown that the
actual cash balances on a given date are more the result of
chance rather than of any planning. This is obviously indica-
tiveof the lack of proper practice in maintaining cash balances.
For this state of affairs probably the prevailing circumstances
arc responsible to a considerable extent. The companies arc
not able to plan their cash balances partly because of absence
of smooth collections form customers. Another reason may
be non-availability of proper opportunities for deployment of
temporarily excess cash.
All the selected enterprises in general give due importance to
a regular cash forecast in the success of their business. They
prepare a cash budget to make a forecast of their cash. But
the period coverage differs among them, varying from three
months to two years. The State Trading Corporation of India
Ltd. covers only three months in its cash budget, whereas in
the case of the Electronics Corporation of India Ltd.,
Bharat Heavy and Minerals and Metals Trad-

Electricals Ltd.
ing Corporation of India Ltd. it extends to one year. The

ISO CASH rUNNINO AND MANAGCMtMr
National Mineral Development Corporation Ltd., Handicrafts

and llandlooms Exports Corporation of India Ltd., Central
Warehousing Corporation and National Buildings Construction
Corporation Ltd. cover a longer period, i.c , of two years, In
theircash forcast
Apart front the difTcrcnccs in the lime span covered by the
various enterprises, the departments entrusted with the prepara-
iionof the cash budget are also ditferent in the dilTcrcnt enter*
prises.In the ease of the five of them, namely, the Bharat
Heavy Electricals Ltd., Central Warehousing Corporation,
Handicrafts and Handlooms Exports Corporation of India Ltd.,
Minerals and Metals Trading Corporation of India Ltd. and
National Buddings Construction Corporation Ltd., the cash
budget IS prepared by their respective Accounts Department.
There are separate depatimcnts for the purpose In the case of
the other companies. The cash budget of the State Trading
Corporation of India Ltd. is prepared by the Contracts and
Credit Department. A Budget and Cost Department in the

National Mineral Development Corporation Ltd. is responsible
for Its cash forecast Similarly, the Electronics Corporation of
India Ltd also has a special department in the form of Manage-
ment Budgeting and Reporting Cell.
To exercise control over
cash flows and increase the
cflcctivcncss of the cash forecast, all of them have a Ciish
PuJi’ci Report System under which the actual results arc
compared with the budgeted ones at the end of every
month. This comparison enables them to locate the reasons
for deviations and devise remedial steps The overall varia-
tions, however, have not been large. The analysis of causes
for deviation h.is disclosed that deviations generally taVe
place an account of real causes such as non-coincidence of
collections with collection terms, changes m
the prices of
labour, supplies and raw materials, occurrence of extra-ordi-
nary cxpindiluTC for non-anucipalcd items, dcclmc in demand
of products and inaccuracy of basic data due to the nature of
business, rather than errors in the budgeting process. The cash
budget is revised in the light of the deviations and the analysis
of the causes.
CONCLUDING OBSERVATIONS 181
By and large
all the enterprises have some hidden cash
resources which have the potential to provide usable cash from
within their resources. The time taken in sending bills to
the customers is one area having potential for usable cash. It
is obvious that the longer the bills are delayed, the lesser the
possibility of cash inflow. In the case of the enterprises
covered by this study unnecessary delay is involved in sending
invoices after goods are delivered/services rendered. Their
billing procedure, therefore, needs attention of the management
to pave way for cash inflows at an early date. It can be
accomplished by ensuring that there is no lethargy on the part
of the persons responsible to supply information and/or prepare
bills, having centralised billing system and mechanising the
invoice-processing operations.
Collection from customers as per the credit terms is another
potential area The
to increase the availability of usable cash.
main customers of the selected companies are the Government
and its other departments including companies in the public
sector and a major part of their sales is on credit. But generally
payments from them do not coincide with the credit terms.
Besides, delays in payments upto six months and beyond are
also not unusual. In general a significant part of the debts is
week of the accounting year. The selected

collected in the last
companies have shown awareness of the problem arising out
of the delayed payments. Amongst different factors, lethargy
on the part of the customers has been found to be greatly
responsible for the delayed payments. The lengthy procedure
followed by their customers’ offices in scrutinising bills etc. and
shortage of cash are the other factors causing this delay. Keep-
ing these factors in mind they take steps such as personal
contact, persuasion and sending reminders for expediting
collections but without much avail. From the view point of
effective cash management, this is an area which needs atten-
tion of both the debtors and the creditors. The lengthy proce-
dure in scrutinising bills etc. can suitably be curtailed by mutual
discussion or credit period can accordingly be adjusted to
ensure payment on due dates. This will be in the interest of
all the undertakings in the public sector. The State Trading
1 82 CASH PLANNING AND MANACCMCNT
Corporation of India Ltd. has a system of exercising control

over debtors under which ns marketing managers pUy an
important role 10 pursuing recovencs from sundry debtors and
refer cases of default to the Contracts and Credit Department
alongvvith their recommcnjations for necessary action. This
system has been, toajargecxtcnt.successfulandjtsjntroduc'
non may be commended for adoption by the other enterprises
also The introduction of 'factoring*, as prevalent in the
United States of America, also deserves consideration to ensure
collection from debtors in lime. To avoid the problem of
delayed payments altogether, a sys’cm of ‘cash and carry' may
be iniroduced.
The usable cash with the selected companies can also be
increased by speedy collection of cheques by banks While
there is no slackness on the part of the enterprises m
depositing
the received cheque* in the bank for collection, presence of
‘Hank Hoat’ hinders, to some extent, the availabihiy of usable
cash expeditiously and cfliceniJy Realising the jmport.'nce
of speedy collection of cheques, the riectromcs Corporation of
India I.id has an arrangement wjiJi jts banks for purchase of
cheques Under this arrangement banks credit its account on the
day the cheques are deposited, forilrnfacijiiy they charge a
nominal commission and have a right to debit its account
with the amount of the cheque plus interest thereon in case a
cheque is dishonoured. The introduction of this system
deserves consideration by the other enterprises also because it
would ensure collection of cheques expeditiously to the extent
thebank float v-ill be eliminated.
Reduction of inventories is still another area for increasing
the availability of usable cash particularly in companies under
manufacturing group of industry which in general and the
Bharat Heavy f.icctricals Ltd m
particular maintain a very
high level of inventory in relation to sales. Though mainte-
nance of larger invcn'ory may be necessitated by the nature of
tlieir business, they need to ensure that the costly cash is not
unnecessarily blocked in excessive inventories The practice

followed by the State Trading Corporation of India Ltd in
respect of inventory maintenance may be recalled here.
euNCCUOINt: !;>.'
through Ihc biiuiudat Adiuiuistr.itiou CouuuiUcc. Us CoulrasHs

aud Credit Dcparttucut exercises strict coutroi over puieluises
uud stocks, this Comndtlee not only cleats the ptiee but
also cttsiircs that the putvhased uiateriats are rerptiivd. tuwe
stable dciuaud aurl there is uo t»ossibility of distress sale. Vise
Coutraets aird Credit nepartmeut also prepares a utoathly
stock statetucut iudicatiug. iuter-alia. live riuautity and value
of all items' of stocks togetlicr with the age tltcrcof. I'his
stalciucut is reviewed with a view to idcutiiyiug. the iteitis
where corrective steps are required to be taketr aud where

special clVorts arc necessary tor lii|uidtitiott of slocks. I'ho
undertakings having unduly large inventories may adrq't tins

system for clVective control over slocks. It is all the more
necessary when they dei'cnd generally on borrowed t'unds.

In exercising control over payables, m geneial all the cntci-
prises sound practice.
follow I hcy generally make payments
to suppliers etc, on the due dates, i’aymcnts beyond due dates,
if any, arc made mainly due to tlncc icasons, vir., (i) the
procedtire of completion of formalities, (n) shortage of casli
and (iii) the policy mailer, which is adopted in disputed cases
only. Apart (Voiu making payments on due dates, they also
have a system of ccniraliscd payments and dislnirscnicnls
under which ca.sh is eonserved at. and all the important pay*
ments are made hy, the respective itead olliees, ’t he branch
oliiccs are authorised to pay only llic ronline expenses such us
.salaries and wage.s. piirchiises of slalioin-iy ami the like items.
Thus, cash is not allowed to remain unprodtielive at the bran-

ches and sub-onices. Hesides. alt of them have it eentiahsed
ciish management system winch enables them to have an
alst)
idea of the consolidated cash position. Under this system all the
enterprises mainttiin a bank iiccount at the licinl oUiee to winch
the branch oflice banks are required to iransfer the caslt bahmees
with them. In this regard two types of ari'angentenls Ituve been
found. Three companies, namely, the bt.tle Tritding Corpoia-
lion of India Ltd., Minerals and Metals 'I'i'ailing Uorporalion
of India Ltd. and Uharat Heavy Llectrieals Ltd. requite their
branch oHice banks to transfer cash balances daily, lint the
branch olHcc banks of the other companies are authorised to

184 CASH PLANNING AND MANAGEMENr
keep a cash balance upto a certain notional limit and transfer

only the excess as and when it arises.
Most of the companies studied here depend on their banks
for necessary funds. Hence, generally they do not ha\e sur-
plus cash and its management is no problem to them. But
whenever they have such a cash, it is utilised by all of them for
pfoQt maximisation Their practice of utilising temporarily
excess cash can broadly be grouped into three categories : (i)
deposits in bank, (n) loans and advances to subsidiaries and
(iiij others comprising loans and advances to employees, co-
operative societies maintained by them for the benefit of the
emploj-ees and similar other items The State Trading Corpo-
ration of India Ltd. has an atrangemsnl with its subsidiaries
for handlin the surplus and deficit cash situations within the
'
STC group. The subsidiaries having temporarily excess cash

lend It to the State Trading Corporation of India Ltd. which
advances u to other compantes under the group, if they need.
Otherwise, the surplus is invested in the best possible way and
the return is shared on the basis of an agreed formula.
Though most of the companies depend on banks for necessary

funds for working capital requirements, their need for borrowed
funds can be minimised, to some extent, by increasing the
availability of usable cash .and investing the surplus, thus
released, m marketable securities. But the enterprises, at
present, do not have proper outlets for deployment of tempo-
rarily excess cash The available opportunities do not provide
sufficient incentive to them to free more funds by strict control
on the movement of cash for profitable utilisation. ‘Deposits
in bank’ and ‘Treasury Bills’ of the Reserve Bank of India are
the only main sources for the purpose which suffer from their
own limitations Given proper opportunities, incentive to
enterprises to free more funds for profitable utilisation apart,
they shall be able to take advantage of yield differentials among
taiiatiiies as well as among different types of securities. As
prevalent m the United Stales of America, the Time Certificates
of Deposit popularly known as ‘CDs’, can be introduced.
Overnight lending to banks or, m
general, to business nouses or
some airangement in the nature of ‘money at call and short
CONCLUDING OBSERVATIONS ]85
notice’,as existing in banks, may be developed. The Bill

Market Scheme may also be opened to at least large industrial
and trading companies particularly in the public sector.
Most of the enterprises have cash credit arrangement with
their banks which provides cash not only for working capital
requirements and meeting out cash deficits but also ensures the
availability of necessary funds in emergencies. As a matter of
fact, having mtide this arrangement they least bother for any
cash shortages. It is obvious, thus, that cash deficit situation
also docs not pose any problem to them. The companies having
no cash credit arrangement have confidence in their own
resources to take cire of cash shortages or emergencies.
They are also confident of the timely and necessary help from
their banks in case of the failure of their resources.
The enterprises get the cash credit limit sanctioned for the
ensuing year to ensure the availability of cash whenever needed.
Though, in general, their limits for cash credit arc within
their requirements, the cash credit system may be made flexible
for effective utilisation of the national resources. In this
respect it would do well if these limits arc got sanctioned on

yearly basis, as is being done now, and on the basis of their
cash forecast they inform their bank one month in advance
about the amount which they intend to use in the succeeding
month with a request to increase or decrease their limits
accordingly. The present system tends to hinder efTeciive
utilisation of the scarce resources of the nation because once the
limit is sanctioned, have always to maintain the
the banks
entire amount with them as they do not know when it may be
required by the enterprises. If the cash credit arrangement is
made flexible, the banks will keep only the required amount
and sanction higher limits to more
more needy undertakings for
profitable utilisation of the resources which otherwise would

not be possible.
The enterprises, by and large, maintain accounts with more
than one bank, the State Bank of India being common to all of
them. While the selection of banks to be used by a particular
enterprise seems to be influenced by their ability to provide
required services, having account with more than one bank is
dictated by the capability of banks to provide cash credit

facility. The inability of a particular bank in meeting out the
Tequiremenis of the respsctisc enterprises compels them to
approach other banks also for ibe purpose. Hov.ever, if iheir
requirements could be curtailed or met by a comparatively
smaller number of banks, accounts can be concentrated in a
few banks only This will enable them not only to free more
funds unnecessarily tied up in different accounts but also to
maximise importance as a customer to a particular bank.
their
The banks have been facilitaling the bus ness of the selected
companies by extending special as well as routine services to
them and generally charging commission at the rates prescribed
by the Reserve Bank of India for the former ones. For the
routine services, they are compensated by the enterprises by
maintenance of compensating balances m the cutrem account.
But the actual balances maintained by them during the
five-year period 1971-75 has been found to be much more
than the minimum required balance by the banks Maintenance
of excessive cash balances in the current account may be due
to (i) Iar|e collections in the last week of the accounting year,
til) absence of proper opportunities for deployment of short
term surplus cash, and <iii) need of cash for operational require-
ments. From cash manigement view point, however, maintenance
of large amounts in current account is undesirable for the reason
that banks do not allow any interest on these balances and the
costly cash remain, unproductive Hence, for optimum utilisa-
tion of cash resources every’ step should be taken to minimise
tue balances in the current account. Since most of them
have cash credit account with their banks, the merger of current
account with the <asb credit account would be worth consi-
dering This will keep their idle cash fully employed by reduc-
ing the unfavourable balances in the cash credit account, save
interest payments and maximise profits as well
appendices
APPENDIX A
LIST OF COMPANIES ORIGINALLY CONTACTED
S. No. Name of Company
1. Bharat Pumps and Compressors Ltd., Allahabad.

2. Bharat Earth Movers Ltd., BangaIore-2.
3. Bharat Electronics Ltd., Bangalore-13.
4. Bharat Coaking Coal Ltd., Dhanbad.
5. Bokaro Steel Ltd., Dhanbad.
6. Bharat Heavy Electricals Ltd., New Delhi-1.
7. Bharat Heavy Electricals Ltd., Hardwar.
8. Bharat Aluminium Company Ltd., New Delhi-49,
9. Bharat Aluminium Company Ltd., Bilaspur.
10. Central Fisheries Corporation Ltd., Calcutta-15.
11. Cochin Shipyard Ltd., Cochin-15.
12. Cashew Corporation of India Ltd., Cochin-11.
13. Cotton Corporation of India Ltd., New Delhi-I.
14. Cement Corporation of India Ltd., New Delhi-1.
15. Central Warehousing Corporation, New Delhi-49.
16. Electronics Corporation of India Ltd., Hyderabad-62.
17. Engineers India Ltd., New Delhi-1.
18. Engineering Projects (India) Ltd., New Delhi-1.
19. Fertiliser Corporation of India, Gorakhpur.
20. Fertilisers and Chemicals Travancore Ltd., Kerala.
21. Food Corporation of India, New Delhi- 1.
22. Hindustan Latex Ltd., New Delhi-1.
23. Hindustan Machine Tools Ltd., Bangalore-31.
24. Hindustan Aircrafts Ltd., Bangalore.
25. Hindustan Aeronautics Ltd., Bangalore-1.
190 CASH PLANNINCJ AND MANAGESIENT
26. Hindustan Steelworks Construction Corporation Ltd.,

Calcutta*22.
27. Hindustan Copper Ltd , Calcutta'17,
28. Hindustan Organic Chemicals Ltd., Kolaba.
29. Hindustan Steel Ltd., Bhilai.
30 Hindustan Steel Ltd., Rancbt.
31. Hindustan Paper Corporation Ltd., New Delhi.
32. Hindustan Salts Ltd , Jaipur.
33. Hindustan Insecticides Ltd., New Delhi-49.
34. Hindustan Te'.eptintcts Ltd., Madras-32.
35. Hindustan Antibiotics Ltd., Poona-18
36. Hindustan Shipyard Ltd., Vishakapatnam.
37. Hindustan Zinc Ltd , Udaipur.
38. Handicrafts and Haadlooms Exports Corporation of
India Ltd., New Delhi-10.
39. Indian Drugs and Pharmaceuticals Ltd., New Deltu-49.
40 Indian Rare Earths Ltd., Bombay-20.
41. Indian Telephone Industries Ltd., BangaIore-16.
42. Indian Motion Picture Exports Corporation Ltd,,
Bombay.
43 Industrial Credit and Investment Corporation of India
Lid., Bombay.
44. Indian Petrochemicals Corporation Ltd., Baroda-20.
45. Instrumentation Ltd., Kota-5
46. Indian Oil Corporation Ltd , New Delhi-I.
47. Industrial Finance Corporation ofJndia, New Delhi-1.
48. Indian Oil International Ltd., New Delbi-1.
49. Indo-Burma Petroleum Company Ltd., Bombay-I.
50. Jute Corporation of India Ltd , Calcutta-16.
51. Machine Tool Corporation of India Ltd., Ajmer.
52. Madras Rubber Factory Lid., Madras-2.
53. Mazagon Dock Ltd., Bombay.
54. Mineral Exploration Corporation Ltd., Nagpur.
55. Minerals and Metals Trading Corporation of India Ltd.,
New Delhi-1.
56. Mining and Allied Machinery ‘
Corporation Ltd.,
Durgapur.
appendix a 191
57. Modern Bakeries India Ltd., New Delhi-57.

58. Mysore Sugar Company Ltd., Bangalore-2.
59. National Buildings Construction Corporation Ltd.,
New Delhi-24.
60. National Coal Development Corporation Ltd., Ranchi.
61. National Industrial Development Corporation Ltd.,
New Delhi-21.
62. National Instrumentation Ltd., Calcutta-32.
63. National Mineral Development Corporation Ltd.,
Hyderabad.
64. National Projects Construction Corporation Ltd.,
New DeIhi-24.
65. National Seeds Corporation Ltd., New Delhi-55.
66. Nahan Foundry Ltd., Nahan.
67. National News Print and Paper Mills Ltd,, Nagpur.
68. Projects and Equipments Corporation of India Ltd.,
New Delhi- 1.
69. Pyrites, Phosphates and Chemicals Ltd., Rohtas.
70. Rehabilitation Industries Corporation Ltd., Calcutta-16.
71. Shipping Corporation of India Ltd., Bombay-21.
72. Salem Steel Ltd., Salera-5,
73. State Farms Corporation of India Ltd., New Delhi-12.
74. Steel Authority of India Ltd., New Delhi-1.
75. State Trading Corporation of India Ltd., New Delhi-1.
76. Southern Petrochemicals Industries Corporation Ltd.,
Madras- 14.
77. Scooters India Ltd., Lucknow-6.
78. Triveni Structural Ltd., Allahabad.
79. Tannery and Footwear Corporation of India Ltd.,
Kanpur.
80. Trade Development Authority, New Delhi-1.
APPENDIX B
LIST OF COMPANIES WHICH DID NOT ACKNOWLEDGE

THE LETTER SEEKING PERMISSION TO STUDY
CASH MANAGEMENT
S. No Ncme of Company
9.
1. Bharat Pumps aad Compressors Ltd., Allahabad,

2. Bokaro Ste«l Ltd., Dhanbad.
3. Bharat Aluminium Company Lld.,New Delhi*49.
4. Bharat Alumimum Corpoatioo Ltd Bilaspur. ,
5 Cashew Corporation of India Ltd , Cochtn*! I.

6, Colton Corporation of India Ltd., New Delhi-L
7 Engineers India Ltd, New Delhi*I,
S Corporatin of India, Gorakhpur.
Fertiliser
and Chemicals Travancorc Ltd , Kerala.
Fertilisers
10. Hindustan Aircrafts Ltd., Bangalore-!.
11. Hindustan Aeronautics Ltd., Bangalore-l.
12. Hindustan Steel Ltd., Ranchi.
13 Hindustan Paper Corporation Ltd , New Delhi
14. Hmdstan Salts Ltd., Jaipur.
15. Hindustan Teleprinters Ltd , Madras-18.
16. Hindustan Antibiotics Ltd , Poona-18
17. Hindustan Shipyard Ltd , Vishakhapatnam.
18. Hindustan Zinc Ltd., Udaipur.
19. Hindustan Latex Ltd , New Delhi-I
20. Indian Drugs and Pharmaceuticals Ltd , New DeIhi-49
21. Indian Telephone Industries Ltd., Baogalore-16.
22. Indian Rare Earths Ltd , Bombay-20.
23 Indian Motion Picture Exports Corporation Ltd., Bombay.
APPENDIX B 193
24. Industrial Credit and Investment Corporation of India

Ltd., Bombay.
25. Indian Oil International Ltd., New Delhi-1,
26. Indo-Burma Petroleum Company Ltd., Bombay-1,
27. Jute Corporation of India Ltd., Calcutta-16.
28. Mining and Allied Machinery Corporation Ltd.,
Durgapur.
29. Modem Bakeries India Ltd., New Delhi-57.
30. Mazagon Dock Ltd., Bombay.
31. Madras Rubber Factory Ltd., Madras-2.
32. Mineral Exploration Corporation Ltd., Nagpur.
33. Machine Tool Corporation of India Ltd., Ajmer.
34. National Instrumentation Ltd., Calcutta-32.
35. National Coal Development Corporation Ltd., Ranchi.
36. National News Print and Paper Mills Ltd.. Nagpur.
37. Pyrites, Phosphates and Chemicals Ltd., Rohtas.
38. Rehabilitation Industries Corporation Ltd., CaIcutta-16.
39. Steel Authority of India Ltd., New Delhi-1.
40. Scooters India Ltd., Lucknow-6.
41. Triveni Structural Ltd., Allahabad.
I
42. Tannery and Footwear Corporation of India Ltd.,
Kanpur.
APPENDIX C
LIST OF COMPANIES WHICH REFUSED PERMISSION

AND REASONS THEREOF
5 A'o Nome of Company liersom for Refusal
I Bharat Electronics Ltd., (i) Cash management is confi-

Bangalore. dential and (ii) busy with the
finalisation of accounts.
2. Cement Corporation of In view of our systems and

India Ltd ,
New Delhi proceoures having not bern
organi^d and given proper
shape; secondly, our becoming
understaffed and April-May be-
ing our closing months, it will
not be possible for us to supply
you with requisite data and
information which may benefit
you for your thesis.
3. Cochin Shipyard Ltd , This project is still m the con-

Cochin. struction stage and the cash
requirements are met from rele-
ases made by the Government

of India in accordance with the
Bureau of Public Enterprises
instructions Therefore, this
project at this stage may not be

of help to Shn Ban for his rese-
arch work.
APPENDIX C 195
4. Hindustan Copper Ltd., We do appreciate the desire of

Calcutta. Mr. Bari. However, we would
like to state that at this stage it
will not be possible for us to

assist him for this study.
5. Hindustan Insecticides Our company’s data on the

Ltd., New Delhi. items mentioned would not be
adequate for research work for
a Ph.D. degree.
6. Hindustan Organic Our project has not yet been
Chemicals Ltd., Kolaba. completed since a few more
plants are to be errected and
commissioned. Till such time
we cannot consider ourselves
to be in a well established posi-
tion to effectively use the tools
for cash management and
control. I, therefore, feel that
any investigation into this
aspect at this stage may not be

fruitful.
7. Hindustan Steel Ltd., We would to inform you

like
Bhilai. that our cash management is
centralised at our head office.
Mr. Bari may, therefore, write

to them at Ranchi about their
convenience.
8. Indian Petrochemicals The projects in our corporation

Corporation Ltd., are still in the construction
Baroda. stage and the type of material
you would require is not, there-
fore, available at present.
9. National Seeds Cor- As presently w'e do not have

poration Ltd., New Financial Controller with us, it
Delhi. will be difficult to make

196 PLAKNINC AND MANAGEMENT
available the requisite data/

iofonnation.
10. Projectsand Equipmeots Before we consider your request,

CoTporalvon of India would suggest you to for*
Ltd., New Delhi. ward your application through
the Head of the Department of
Commerce, University of Delhi.
11, Salem Steel Ltd , Salem We have just started with a

(T.N.). nucleus organisation to take
care of the preliminary works
connected with the construction
of the Salem Steel Project.
Since we shall be following the
practices that are being adopted
in the public sector steel com*
panics, it would perhaps be
useful for Mr. Bari if be visits
one of the public sector steel
plants under Hindustan Steel
Ltd.
12. Trad: Development This organisation does not deal

Authority, New Delhi. with the subjects mentioned
therein.
.
APPENDIX D
LIST OF COMPANIES GIVING PERMISSION TO

STUDY CASH MANAGEMENT
S.No. Name of Company
1. Bharat Earth Movers Ltd., Bangalore-2.

2. Bharat Heavy Electricals Ltd., New Delhi-1.
3. Bharat Heavy Electricals Ltd., Hard war.
4. Bharat Coaking Coal Ltd., Dhanbad.
5. Central Warehousing Corporation, New Delhi-49.
6. Central Fisheries Corporation Ltd., Calcutta-15.
7. Electronics Corporation of India Ltd., Hyderabad-62.
8. Engineering Projects (India) Ltd., New Delhi-1.
9. Food Corporation of India, New Delhi-1.
11. Handicrafts and Handlooms Exports Corporation of
India Ltd., New Delhi-1.
12. Hindustan Steelworks Construction Corporation Ltd.,
Calcutta-22.
13. Instrumentation Ltd., Kota- 5.
14. Indian Oil Corporation Ltd., New Delhi-1.
15. Industrial Finance Corporation of India Ltd.,
New Delhi- 1.
16. Minerals and Metals Trading Corporation of India Ltd.,
New Delhi-1
18. National Mineral Development Corporation Ltd.,
Hyderabad- 1.
19. Nahan Foundry Ltd,, Naban.
20. National Buildings Construction Corporation Ltd.,
New Delhi-24.
New Delhi-24.
22 National Industrial Development Corporation Ltd.,

New Delhi 21.
23. State Trading Corpotalion of India Ltd., New Delhi-1.
24. Shipp ng Corporation of India Lid., Bombay-21.
25 Southern Petrochemicals Industries Corporation Ltd.,
Madras-14.
APPENDIX E
LIST OF COMPANIES WHICH WERE ELIMINATED
AFTER PERMISSION WAS RECEIVED
S’A’b Hamecf Company
1. Bharat Coaking Coal Ltd., Dhaobad.

2 Bharat Heavy Electricals Ltd., Haidwar
3. Engineering Projects i'India) Ltd., New Dclhi*l.
4. Industrial Finance Corporation of India Ltd
New Delhi- 1
5 National Industrial Development Corporation Ltd.,
New DeIhi-21
6. Nahan Foundry Ltd., Nahan.
APPENDIX F
LIST OF COMPANIES WHICH DECLINED TO
CO-OPERATE AFTER QUESTIONNAIRE WAS SENT
1. Central Fisheries Corporation Ltd., CaIcutta-15.

2. Hindustan Steelworks Construction Corporation Ltd,,
Calcutta-22.
3. Indian Oil Corporation Ltd., New Delhi-1.
4. Instrumentation Ltd., Kota-5.
New Delhi-24.
6. Shipping Corporation of India Ltd., Bombay-21.
7. Southern Petrochemicals Industries Corporation Ltd.,
Madras- 14.
APPENDIX G
LIST OF COMPANIES MTOCH \^TERE ELIMLNATED

AFTER QUESTIONNAIRE WAS SENT AND PERSONAL
VISIT DUE TO EITHER LACK OF DESIRED CO-
OPERATION OR INADEQUACY OF THE A^TLABLE
DATA
1. Bharat Earth Movers Ltd., Bangalore-2.
2. Food Corporation of India, New Delhi- 1.

APPENDIX H
(Confidential)
A QUESTIONNAIRE ON CASH PLANNING AND
MANAGEMENT PROCEDURES IN PUBUC SECTOR
UNDERTAKINGS
Pact I —General Data

1. Name of the Company
2. The year in which the company was founded
3. Please check
(A' the industry group to which your company belongs
(a) Trading (c) Service

(b) Manufacturing .. (d) Any other (Please specify)...
(B) the products/servtces which you—

(a) Manufacture
(b) Sell
(c) Provide
4. Please mention the number of Branches and Regional Offices

of your company
Brcnch Offices Regional Offices
(a) In India
(b) Abroad
5 Please check
(A) the credit period, if any, allowed by you to customers/

from suppliers to you—
(a) To customers 15/30/60/ days/Ko Credit
'b) By Suppliers 15/30/60/ days/No Credit
APPENDIX H 201
(B) the date when payment is made/received—

Payment Payment %*
made Received
(a) Before the due date

(b) On the due date
(c) After the due date
*In case payment is made/received on all the above

dates, please mention their approximate respective per-
centages.
(C) the probable reasons which in your opinion can be for

payment beyond the due date
To Suppliers By Customers
(a) Policy matter
(b) Shortage of cash
(c) Lethargy
(d) Any other (Please specify j
(D) the working days taken by your organisation in sending

the bill to customers after goods are delivered/services
rendered
.(a) Bill is sent before the goods are delivered

(b) Bill is sent alongwith the goods
(c) Bill is sent after 7/15/30/ days of delivery..
(d) Any other (Please specify)
6. Do your suppliers offer cash discount for early

payments ? Yes/No
If ‘Yes’, please check your practice of availing it
(a) Always
(b) When cash is available
(c) Borrow to avail it
(d) Never because of

(i) Policy matter
(ii) Shortage of cash
—
202 CASH PLANNING AND MANAGE»lENr
7. Do you offer cash discount to jour customers for

earjy payments ?
(a) Ycs/No
Cb) To only certain customers
8. Could you give an idea as to what percentage of

your customers take advantage of the cash
discount ? %
9. Depending upon payment habits customers can be classified
into various categories such as very prompt, prompt and so
on. Do you classify your customers in such categories ? If
‘Yes’, could you please give an idea as to as what percentage
of your customers fait to various categories given below
<al Very psompt paying on or before the due date .%

(b) Paying with 30 days beyond the due date ...%
(c) Paying beyond 30 days of the due date ...%
(d) Paying beyond six months of the due date ...”4
(e) Turn to be bad ...%
(f) Any other (Please specify)
10. Do you find yourself making many on the spot

decisions regarding cash reed ?
(a) Often (c) Seldom.

(b) Occasionally (d) Ncser ..
Would you please comment on the probable reasons for your

answer ?
Part II— Cash Forecasting and Control
J. Of what value do you consider a cash forecast to be in the

—— —
APPENDIX II 203
success of your business ? (Success is construed below to

mean maximisation of profit).
(a) Crucial to success
(b) Quite important to success
(c)Generally important to success
(d) Mildly contributes to success
( e) Has no bearing on success

2. For effective cash management a cash

forecast is a must for
every business house. You
might also be making a cash
forecast. Would you please check
(A) the method which you use to forecast your cash
position
(a) Cash Budget Method

(b) Adjusted Net Income Method
(c) Combination of (a) and (b)
(B) the cash position which the forecast enables you to

know
(a) Daily (f) Half yearly
(b) Weekly (g) Yearly
fc) Fortnightly (h) Any other —
(d) Monthly.... (Please specify)
(e) Quarterly...
(C) the time span covered in the cash forecast—
(a) Two years/one year having weekly/fortnightly/

monthly/quarterly/half yearly/yearly break-ups
(b) Two years/one year having weekly/fortnightly/
monthly/yearly break ups
(c) One year having monthly and quarterly break-
ups
(d) Any other (Please specify^
—
204 CASH PLAKNING AND MANAGEMENT
(D) Iht department in Jour organisation nliich prepares the

cash forecast—
(a) Budget Department

(b) Finance Department
(c) Accounts Department
(E) the outside source of

assistance available to you, if any.
for preparing cash forecast-
fa) No outside source

(b) Consultant
(c) Bank/ Lending Institution
(d) Outside Auditor
(e) Any other (Please specify)
3. What sources of information are used

in collecting data
during the budgeting process
?
(a) Braneh Offices (d) Directors

(b) Regional Offices (e) Bankers
(c) Sales Offices
(!) Any other
(Please specify)
4 What factors provide guidelines to prepare the cash forecast ?
(a) Past experience

(b) Future programme
(c) Any other (Please specify)
5- To exercise control over cash

flows and ensure that actual
performance coincides with the
budgeted performance, you
might be having some procedures.
Would you please check
what do you do in this regard
(a) Train financial personnel to eliminate deviations

that result from inadequate knowledge
of the
managerial functions
appendix h 205
(,b) Have a Cash Budget Report system under which

comparison of actuals is done with the budgeted
once at periodical intervals of a week/fortnight/
montb/quarter/
6. Actual cash figures are bound to be different from the bud-

geted ones and you might be analysing the causes for
deviations to take corrective steps. Would you please check
the factors responsible for deviations generally noticed by
you
(A) Changes in the prices of—

(a) Labour
(b) Supplies
(c) Raw Materials
(d) Finished Goods
(B) Decline in demand of the products
(C) Non-coincidence of collections with collection terms...
(D) Occurrence of extra-ordinary expenditure for non-anli-

cipated items
(E) Basic data turn to be inaccurate due to
(a) the nature of business
(b) non-seriousness of the persons to supply correct
data
(F) Inadequate knowledge of the persons preparing cash

forecast —
(G) Longer time span covered in the cash forecast
(H) Any other (Please specify

— —
206 CASH ?LASNlNO ANO MANACEAtEST
7. Pleass check the corrective step(s) that you take to eliminate

the effect of deviations—
(a) Revise the budget

(b) Revise the policy(ics)
(c) Any other (Please specify) —
8. In case you revise the cash budget, please check how many
times a year do you revise it
(a) Monthly (c) Halfy early

(b) Quarterly (d) Any other
(Please specify)
9 For purposes of analysis and calculation of ratios, please

fill m the following data. These ratios will be used as a
basis for common camparison. In order to conserve your
own time in completing this part of questionnaire, you
may prefer to have Mr. Ban to do this in your office or else
1970-
where
1971-
1972- Purchases Sales
1973- Cash Credit Cash Credit
1974- Rs. Rs. Rs. Rs.
71
72
73
74
75
PS : Please attach the standard proforma, if any, used by you

m preparing cash forecast and controlling cash flows.
Part—III
Handling of Surplus and Deficit Cash
I. You might be having some excess cash not currently needed

in operations. Please check what do you do of such excess
cash
—
APPENDIX H 207
(a) Have no excess cash

(b) Deposit in the Current Account
(c) Retire short term debts
(d) Give loan to subsidiaries
(e) Make short term investments
2. If you make short term investments of the excess cash,
please check the securities in which
you ini'est
Period %VieJd
(a) Deposits in the bank
(b) Discounting of bills
(c) Treasury Bills
3. To take advantage of yield differentials among maturities as

well as among different types of securities, do you sell short
term investments and reinvest the proceeds ?
(a) Among maturities Yes/No

(b) Among securities Yes/No
4. Do you make investments in selected securities of desired

maturity for specified purposes, i.e., meeting specific liability
at some future date ? Yes/No
If ‘Yes’, would you please name the liabilities for which
you make investment in selected securities?
(a)
(b)
please mention the sources of short term

invest-
5. Would you
ment opportunities known to you which somehow you are
not utilising ?
Period ^flield
Name of the opportunity
(a)
(b)
(c)
• — —
208 CA1H PLANNING AND MANAGEMENT
6. If you do not invest the temporarily excess cash, please check

the reasons for not doing so
(a) Very little excess cash

(b) Additional income not worth the effort and risk
(c) Volatile cash flow of your organisation
(d) Non-availability of appropriate short term investment
opportunities
(e) As a matter of policy
(0 To provide cushion for emergency
fg) Any other (Please specify)
7. Please check —
(A) the techiques which you adopt to speed up collections—
fa) Offer cash discount
(b) Revise discount already offered
(c) Shorten the credit period allowed
(d) Help the customers to obtain finances elsewhere
and pay you
(e) Have special arrangements for collection
(f) Have centralised cash management system
(g) Any other (Please specify)
(B) the steps which you take to meet such a situation when
your budgeted disbursements (for a particular period)
arc more than budgeted receipts
(a) Never came across such a situation
(b) Arrange for bank loan
(cl Arrange for other short term loans
(d) Speed up collections
(e) Sell marketable securities
(f) Postpone payments
(g) Delay payments
(h) Any other (Please specify).........
8. Generally how long in advance do you apply for a short

term loan, if at all, before the actual need?
15/30/60/90/ days
— —
APPENDIX H 209
9. How many times in a year do you apply for short term

Joans from a lending source?
Once/Twice/Thrice/Frequently/Never/
10. Has your request for a short term loan been always honou-
red by your lending agency? Yes/No
If ‘No’, would you please mention how many times

it has been turned down during the last five years and on
what grounds? Please give your comments, if any.
11. You will agree that sometimes there may be an emergency

requirement of cash either on account of unexpected events
or to exploit an opportunity. Please check the arrangements
that you have for such circumstances
(a) Always maintain a minimum cash balance over and

above the amount needed for operations
(b) Bank overdraft/cash credit arrangement
(c) Discount bills receivable
(d) Raise loan against warehouse receipt
(e) Have special arrangement with some lending agency
for such purposes
(fl Marketable securities
(g) Any other (Please specify)
12. Have you ever come across emergency cash requirement

"ies/No
situation?
If ‘Yes’, the circumstances leading to it

please elaborate
and how it was faced,.
13. Please check how do you determine the minimum amount

needed for operations
(a) With the help of cash budget

(b) At some point of sales
(c) Certain fixed percentage of current assets
210 CASH PLAN’NIS’G AND MANAGEMENT
14. What cash balance, if any, do you alwajs maintain for

emergencies? Rs
Please check how do you determine it
(a) Just a rough estimate... .

(b) With due consideration to past experience
(c) With the help of some formula
15 In case you do not maintain a minimum cash balance for

emergencies, would you please check the reasons for not
doing so
(z) Have a cushion for unforeseen developments

(b) Lending institution has ghen assurance to help in
emergency .
(c) By the nature of your business you are confident that

no such emergency will estr arise and as such you
believe in investing all possible cash in the business to
increase cash turnover .. ..
(d) Could not conceive the idea

(e) Any other (P'ease specify) . ...
16. In case your lending agency has given assurance to stand by

you in emergency, please check the terms
(a) At normal rate of interest

(b) At abnormal rale of interest...
(c) On mortgage of properties etc
Part IV —Back Relationship and Float
1 . Please give the name of your bank(s) and check the accounts
maintained with them
Name of the bank(s) Accounts maintained

(A) Current Account
(a) General A 'c
(b) Disbursements A>c
—
appendix H 211
(c) Payroll A/c

(d) Dividend A/c
(e)
(0
2.
(B) Any other Account
(a)
(b)
(c)
In case you maintain Disbursements A/c, please check the

balance generally kept in this account —
(a) Zero balance
(b) Any other (Please specify)
3. Do you have arrangements with your banks for cash credit

and/or overdraft facilities ? Yes/No
If ‘Yes’, please mention their maximum limits;
Limit Rate of
(Rs.) interest
6.
(a) Cash Credit ...%p.a.
(b) Overdraft .. % p.a.
4. Have you ever utilised the maximum limits of these Licili-

ties ?
(a) Cash Credit Yes/No

(b) Overdraft Yes/No
5. Does your bank provide some special services to you in

addition to the routine ones? Yes/No
If ‘Yes’, please elaborate these services and the cost which
you have to pay.
Please check how do you compensate your bank(s) for the
routine services
(a) By maintaining compensating balances

(b) By paying extra charges
212 CASH PLANMNC AND MANAGOiENT
7. You might be maintainiog a bank account at e\ery place of

business. Please check if you have any arrangement with
>our bank under \Nbich
(a) Branch Office banks transfer debit or credit balances

daily to theHead Office bank account
(b) Branch Office banks are authorised to keep with them
a balance upto a certain limit any surplus beyond
which IS immediately transferred to the Head Office
bank account
8. Please mention bow much does such arrangement costs

Rs per transaciion/per month/ . ...
9. From the day the cheques are prepared by your customers

till your bank account is credited and you are able to draw
It, some delay is involved. Could }ou please give an idea
as to generally how many da>s after the cheques are—
(A) received by your office (from the dale appearing on the

cheques)*’
(a) 1— 7 days (c) 15-30 days ...
(b) 7 — 15 days (d) beyond 30 days ...
(B) deposited in bank for collection by your office (a^te
their receipt)
(a) Same day (c)
(b) Next day...... (d) No idea
(C) collected by the bank (after their deposit) and your

account is credited
(a) Local cheques within 2/3/5/6/ days/No idea

(b) Outstaiion cheques within 7/15/ days/No idea
APPENDIX H 213
10. Do you have some special arrangements with your bank for
collection of cheques at an early date ? Yes/No
If ‘Yes’, please elaborate it.
11. From you deliver a cheque to your supplier till it is

the day
collected from your bank account some delay is involved.
Could you give an idea as to after how many days (from
the date appearing on the cheque) it is collected from your
bank account
(a) Local cheques within 7/15/ days/No idea

(b) Outstation cheques within 15/30/ days/No idea
12. Do you take advantage of your cash during such period

when cheques by you remain uncollected?
issued Yes/No
Jf 'Yes’, please elaborate how do you make use of it.
Part V — Financial Executive’s Opinion
Would you please make any additional comments about the

subject of ‘Cash planning and Management’ not specifically
asked in the questionnaire? Please feel free to elaborate in
any way.
Thanks for Co-operation

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Index
Bank :
to working capital, 26
38
101,124 turnover and liquidity ratios,
float,
127
Centralised cash management,
relationship, 167,168
disburse-
Centralised payment and
Banking
ment system, 127
of collections, prompt, 99
Collection from debtors, 83
services and mode of compensa- 99
Collections, prompt banking of,
tion, 174
Compensating balances, 174
services, routine, 174 12
Components of cash balances,
services, special, 174,175
of, 168 Control ;
Banks, selection
of cash flows. 59
customers, 65
of credit taken by
Cash :
over payables, 122

balances, measurement of, 9
budget report system, 66
Debtors ;
concept, 2
collection from, 83
deficit, 155 84
presentation of invoices,
flows, control of, 59
Deficit cash, 155
forecast, 47
forecasting, 49
management, 10,81 Float
management of deficit, 155 bank, 101,124
lethargy, 124
management of surplus, 138
eriod, 124
planning, 3
3 ostal, 96, 124
planning and management,
cast, cash, 47
t _r ^1-
surplus, 138
to current assets, 16
to current liabilities, 19 maintenance of, 112
Inventories,
to sales, 23
—6 C-vSH ri.A.NV:VG AVD MANAGEMCVT
Intsrs floE 1^4 Proa^banhiOS ofco'iiciun-. v;
Mjaiitrsance of ipventories 112 Sales 10 fi\ed assets, 26

Marônen- qT Sales volume anfl cash balance. 33
Jisficn cish 155 Scope o’" cash manacernent, 2
“
siitjIiis cash HK Selcisd ojmpanies.
Msasumnsn: of cash babacss, ^ Selection of banks. 16B
Surplis cash. I3S
Pa^-afalcs control c'^’c' 122
Piannins cash 3 Usable cash, increases the oiailabi*
Piaiminj and marascmsni, cash 3 In of, sj
Postal float 96 12-4
Prcscnratioi) of invoices, F-? larianons sn cash balances. 15

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With Special Refereace to Selected Public

Thesis Approved by the University of Delhi

Published b^'B.P. Misrafor Trivsni Publications

cult toacknowledge individually all the executives who extended

for the accomplishment of this task. I am grateful to them.

Zakir Husain College R. R. BARI

2. MEASUREMENT OF CASH BALANCES 9

Cash to current assets 1

Cash to current liabilities 19

Sales to Fixed Assets and Cash to Working Capital 26

3. FORECASTING AND CONTROL OF CASH 47

4. INCREASING THE AVAILABILITY OF USABLE

Collection from Debtors 83

Maintenance of Inventories 112

5. DEALING WITH SURPLUS AND DEFICIT

Management of Surplus Cash 138

6. BANK RELATIONSHIP 167

Selection of Banks 16S

CONCLUDING OBSERVATIONS 179

1. 1 Stages in the Selection of Companies 6

2.1 Components of Cash Balances in Selected

2.6 Index of Sales Volume and Cash

2.7 Cash Turnover and Liquidity Ratios in Selected

3.1 Importance of Cash Forecast ; Value Assigned

3.2 Departments Responsible to Prepare Cash

3.3 Time Span Covered in the Cash Budget by

3.4 Factors Responsible for Causing Deviations in

4,1 Number of Days Taken by Selected Companies

42 Index Numbers of Sales and Debtors in Selected

43 Credit Period Allowed to Customers bv Selected

4.4 Percentage of Cheques in Hand/Transrt to

4.5 Percentage ofDebts Outstanding BejondSix

4.6 Delaj m Receiving Cheques from Customers by

4,9 Average Daily Collection from Debtors in Selec-

4.10 Percentage of Interest Paid on Loans to Net

411 Percentages of Interest Paid on Loans and of Net

4.12 Respective Share of the Different Companies in

4.13 Percentage Share of Different Parties in the

4 15 Percentage of Invenlorjes to Current Assets in

4.18 Practices of Making Payment to Suppliers by

4.19 Reasons for Making Payment Beyond the Due

4.20 Float in Payables in Selected Companies 126

5.1 Percentage of Shoit Term Investments to Total

5.2 Percentage of Interest Received to Net Profit

5.3 Respective Share of the Different Companies in

5.4 Composition of Interest Earned by Selected

5.5 Percentage of Cash in Current Account to Total

5.6 Balances in Cash Credit Account in Selected

5.7 Techniques Adopted by Selected Companies in

Meeting out Cash Deficit Situation 160

6.1 Banks in Use of Selected Companies 170

6.2 Indian Banks in Foreign Countries and Foreign

6.3 Cash Credit Limit and Number of Banks in

6.4 Cash Balances in Current Account in Selected

II.B Percentage of Cash to Current Liabilities in

II. C Percentage of Cash to Sales in Selected

HI. A Effect of Managerial Control on Cash Flows 61

IV.A Percentage of Cheques in Hand/Transit

IV.B Percentage of Debts Outstanding Beyond

IV.C Delay in Receiving Cheques from Debtors by

IV.D Bank Float in Local Cheques in Selected