Working Capital Management

Working capital
• Excess of current assets over current liability
• CA-CL = WC
• For daily expenses like purchases, overheads etc
• Working capital plays a key role in a business just as
the role of heart in human body.
• It act as ‘grease’ to run the wheels of fixed assets.
• The efficiency of a business enterprise depends
largely on its ability to manage working capital.
 Definitions of WorkingCapital
• “Working Capital is the excess of C.A. over current
liabilities.” - H.G, Guthmann

• “Working Capital is descriptive of that capital which

is not fixed. But the more common use of the
Working Capital is to consider it as the difference
between the book value of the C.A. and current
liabilities.”
- Hoglend. J. Bierman, and A. K. Mc Adams,
• “Working Capital represents the excess of C.A. over current
liabilities” - J.L. Brown and L.R. Housard.

• “Working Capital to a firm’s investment in short term assets

cash short term securities, accounts, receivables and
inventories.” - Weston the Brigham

• “Working Capital represents only the current capital assets.”

- Meal Baker Malott and Field.
 Purpose / Need of the Working Capital

• To hold cash for acquiring the raw material.

• To hold work in progress for the production
process.
• To hold the finished goods up to sale
• For the period receivables are being
converted into cash.
• To meet day to day expenses
• To pay wages
Concepts Of Working Capital

– Gross Working Capital

• Total Current Assets
• WC = CA

– Net Working Capital

• WC = CA - CL
 Gross Working Capital means
• The total of all current assets or all short-term assets.
• Current assets here mean cash, marketable securities,
inventories and receivables.
• They are meant for a lesser period.
• They represent liquid asset.
• Gross working capital represents the liquidity position of
the organization.
• That this much of the asset they are holding for Getting
readily available as the cash in the business.
 Net Working Capital
• It is a broader concept.
• It works on theprinciple on solvency.
• Net working capital means excess of current assets over
current liabilities.
• Current assets we all know are cash, marketable securities,
receivables and stock.
• Current Asset – Current Liability = Working Capital
 Importance of Working Capital
• WC is the life blood and nerve centre ofa business.
• No business can run successfully without an adequate amount of working
capital.
• The main advantages of maintaining adequate amount of workingcapital
are as follows:
– Solvency of the business
– Goodwill
– Easy Loans
– Cash discounts
– Regular supply of raw materials
Factors Affecting Working Capital Requirements

• Nature or Character of Business

• Size of Business/Scale of Operations
• Production Policy
• Manufacturing Process/Length of Production Cycle
• Seasonal Variation
• Rate of Stock Turnover
• Credit Policy
• Business Cycle
• Rate of Growth of Business
Factors Affecting Working Capital Requirements
• 1. Nature or Character of Business:
– The working capital requirement of a firm basically depends
upon the nature of this business.
– Public utility undertakings like electricity water supply and railways
need very limited working capital because they offer cash sales
only and supply services, not products and as such no funds are
tied up in inventories and receivables.
– Generally speaking it may be said that public utility undertakings
require small amount of working capital, trading and financial firms
require relatively very large amount, whereas manufacturing
undertakings require sizable working capital between these two
extremes.
• 2. Size of Business/Scale of Operations:
– The working capital requirement of a concern is directly
influenced by the size of its business which may be
measured in terms of scale of operations.
• 3. Production Policy:
– In certain industries the demand is subject to wide
fluctuations due to seasonal variations.
– The requirements of working capital in such cases depend
upon the production policy.
• 4. Manufacturing Process/Length of Production Cycle:
– In manufacturing business the requirement of working
capital increases in direct proportion of length of
manufacturing process.
– Longer the process period of manufacture, larger is the
amount of working capital required.
• 5. Seasonal Variation:
– In certain industries raw material is not available through
out the year.
– They have to buy raw materials in bulk during the season to
ensure and uninterrupted flow and process them during the
entire year.
• 6. Rate of Stock Turnover:
– There is a high degree of inverse co-relationship between the
quantum of working capital; and the velocity or speed with which
the sales are affected.
– A firm having a high rate of stock turnover will need lower amount of
working capital as compared to affirm, having a low rate of turnover.

• 7. Credit Policy:
– The credit policy of a concern in its dealing with debtors and
creditors influence considerably the requirement of working capital.
– A concern that purchases its requirement on credit and sell its
products/services on cash require lesser amount of working capital.
• 8. Business Cycle:
– Business cycle refers to alternate expansion and
contraction in general business activity.
– In a period of boom i.e., when the business is prosperous,
there is a need of larger amount of working capital due to
increase in sales, rise in prices, optimistic expansion of
business contracts sales decline, difficulties are faced in
collection from debtors and firms may have a large amount of
working capital lying idle.
• 9. Rate of Growth of Business:
– The working capital requirement of a concern increase with the
growth and expansion of its business activities.
– Although it is difficulties to determine the relationship between
the growth in the volume of business and the growth in the
working capital of a business, yet it may be concluded that of
normal rate of expansion in the volume of business, we may
have retained profits to provide for more working capital but in
fast growth in concern, we shall require larger amount of
working capital.
Why W/C is called as Floating Capital?

• Operating Cycle
• WC changes its form
Estimation Of Working Capital
•Working Capital = Cost of Goods Sold (Estimated) * (No. of
Days of Operating Cycle / 365 Days) + Bank and CashBalance.
Inventory Management Techniques
 Inventory

• The dictionary meaning of Inventory is STOCK OF GOODS.

• The word inventory is understood differently by various
authors.
• In accounting it may mean stock of finished goods only.
• In a manufacturing concern, it may include raw materials,
work in progress and stores, etc.
• In Retail, the amount of stock present in a retail outlet and
ready to be distributed.
 Inventory Management
• Inventory Management is a Science primarily about specifying the shape
and percentage of stocked goods.
• A proper planning of purchasing, storing, and accounting should form a part
of inventory management.
• An efficient system of inventory management will determine:
1) What to purchase
2) How much to purchase
3) From where to purchase.
4) Where to Store.
• The purpose of inventory management is to keep the stock in such a way that
neither there is over- stocking nor under- stocking.
• Inventory control is the systematic control and regulation of
purchase, storage and usage of materials:
– To maintain an even flow of production;
– To avoid excessive investment in materials.
• Efficient material control reduces loses and wastages of materials
that otherwise pass unnoticed.
• Inventory control is the core of materials management.
• The need and importance of material varies in direct proportion to
the idle time cost of men and machinery and the urgency of
requirements.
 Why Inventory Management

• To meet sales
• To continue uninterrupted production
• To reduce cost
• To keep sufficient inventory (Under – Over)
STAGES OF INVENTORY MANAGEMENT
• Decision Stage : Co-ordination of purchasing, supplier development, guiding design
decisions, introducing new inventory and some minor changes in the production
process.
• Sourcing Stage : Make or buy decision, procurement facilities etc.
• Production Planning Stage : Preparation of master schedule, calculation of
inventory requirements etc.
• Stage of Ordering : Placing the orders, follow-up, packaging andtransportation.
• Receiving Stage : Receiving the items, inspection of inventory, qualityproblems etc.
• Inventory Control : Determination of economic lot sizes, safety margins and
inventory costs.
 KEY INVENTORY TERMS
• Safety Stock:
– Safety stock or the buffer stock is an ideal quantity of material that has to
be always maintained and it is drawn only in the emergency situation.
• Lead Time:
– It is the time lapse between placement of an order and receipt of items
including their approval by quality controldepartment.
– This is counted on past experiences.
– Procurement of material has a long lead time .
• Reorder Level:
– It indicates that level of material stock at which it is necessary to take
the steps for the procurement of further lots of material.
– The reorder level is slightly more than minimum stock level to guard
against abnormal use of item and abnormal delay in supply.
– Reorder level= Maximum lead time × Maximum uses
 Cost of Inventory

• Ordering cost
– Order placing cost
– Order Proceedings
• Carrying cost
– Storage, insurance, risk of damage, Depreciation, Price fall
• Stock out cost
– Out of stock, immediate purchase, customer value
Inventory Management Techniques

• EOQ
• ABC ANALYSIS
• VED ANALYSIS
• JIT
 EOQ - Economic Order Quantity

• EOQis a quantity of inventory which can reasonably be ordered economically

at time.
• In determining this point, ordering costs and Carrying Costs are taken into
consideration.
– Ordering costs are basically the cost of placing anorder.
– Carrying cost includes costs of storage facilities and loss of value through
physical deterioration, cost of obsolescence.
• The balancing point is known as Economic Order Quantity.
• Economic Order Quantity is one of the techniques of inventory
control which minimizes total holding and ordering costs for the
year.
• Definition of EOQ :- EOQ is essentially an accounting formula that
determines at which the combination of order, costs and inventory
carrying cost are at the least.
C= Annual Consumption / use of material
O = Cost of order placing
I = Annual Carrying Cost
 Advantages
• Each material can be procured in the most economical quantity.
• Purchasing and inventory control personnel automatically
devote attention to the items that are needed only when required.
• Positive control can easily be exerted to maintain total inventory
investment at the desired level simply by manipulating the
planned maximum and minimum value.
• Minimizes Storage and Holding Costs
• Specific to the Business
 Disadvantage
• Complicated Math Calculations
• Based on Assumptions
• The orders are raised at irregular intervals which may not be
convenient to the suppliers
• In case the lead time is very high supply of inventory may
interpret
• EOQ may give you an order quantity which is much below the
supplier minimum, and there is always a chance that the
ordering level for an item has been reached but not noticed in
which case a stock out may occur; and
• The items cannot be group and ordered at a time since the
recorder points occur irregularly
 ABCAnalysis

• It means Always Better Control

• Under this the inventory is classified into 3 categories viz.
A, Band C.
• These categories are based upon the inventory value and cost
significance .
• Items of High value and small in no. are termed as A.
• Items of moderate value and moderate in no. are termed asB.
• Items of small value and large in no. are in category C
• ABC analysis is widely used for unfinished good, manufactured
products, spare parts, components, finished items and
assembly items.
 Item A
• Small in number, but consume large
amount of resources
• Must have:
– Tight control
– Rigid estimate of requirements
– Strict & closer watch
– Low safety stocks
– Managed by top management
 Item B
• Intermediate
• Must have:
– Moderate control
– Purchase based on rigid requirements
– Reasonably strict watch & control
– Moderate safety stocks
– Managed by middle level management
 Item C
• Larger in number, but consume lesser amount of
resources
• Must have:
– Ordinary control measures
– Purchase based on usage estimates
– High safety stocks
• ABCanalysis does not stress on items those are less
costly but may be vital
• Item A:
– Items categorized under A are goods that register the highest value in terms of
annual consumption. It is interesting to note that the top 70 to 80 percent of the
yearly consumption value of the company comes from only about 10 to 20
percent of the total inventory items. Hence, it is crucial to prioritize these items.
• Item B:
– These are items that have a medium consumption value. These amount to about
30 percent of the total inventory in a company which accounts for about 15 to 20
percent of annual consumption value.
• Item C:
– The items placed in this category have the lowest consumption value and
account for less than 5 percent of the annual consumption value that comes
from about 50 percent of the total inventory items.
• The cost of each item is multiplied by the no. used in a given period and
then these items are tabulated in descending numeric valueorder.
 ABC - STEPS
1. Find out future use of each item of stock in terms of physical
quantities for the review forecast period.
2. Determine the price per unit for each item.
3. Determine the total project cost of each item by multiplying its
expected units to be used by the price per unit of such item.
4. Beginningwith the item with the highest total cost, arrange
different items in order of their total cost as computed under step
(iii) above.
5. Express the units of each item as a percentage of total costs of all
items.
6. Compute the total cost of each item as a percentage of total costs
of all items.
 ADVANTAGES OF ABC ANALYSIS
• It ensures a closer and a more strict control over such items,
which are having a sizable investment in there.
• It releasesworking capital, which would otherwise have
been locked up for a more profitable channel of investment.
• It reduces inventory-carrying cost.
• It enables the relaxation of control for the ‘C’ items and thus
makes it possible for a sufficient buffer stock to be created.
• It enables the maintenance of high inventory turn over rate.
 DISADVANTAGES OF ABC ANALYSIS

• Proper standardization & codification of inventory items

needed.
• Considers only money value of items & neglects the
importance of items for the production process or assembly
or functioning.
• Periodic review becomes difficult if only ABC analysis is
recalled.
• When other important factors make it obligatory to
concentrate on “C” items more, the purpose of ABC analysis
is defeated.
VED ANALYSIS
• In VED analysis, the inventory is classified as per the
functional importance under the following three
categories:

• Vital (V)
• Essential (E)
• Desirable(D)
• Vital-
– Items without which treatment comes to standstill: i.e. non-
availability can not be tolerated. The vital items are stocked in
abundance , essential items and very strict control
• Essential-
– Items whose non- availability can be tolerated for 2-3 days, because
similar or alternative items are available. Essential items are stocked
in medium amounts, purchase is based on rigid requirements and
reasonably strict watch.
• Desirable-
– Items whose non –availability can be tolerated for a long period.
Desirable items are stocked in small amounts and purchase is
based on usage estimates.
 VED ANALYSIS
• VED ranking may be done on the basis of the shortage costs of
materials, which can be either quantified or qualitatively
expressed.
• The fundamental question behind VEDanalysis is: what items
could your business not operate without?
• In most manufacturing environments there are a few
components without which production will grind to a halt.
• Failing to order those items on time is clearly an expensive
mistake.
• In VED method (vital, essential, and desirable), each stock items
is classified on either vital, essential or desirable based on how
critical the item is for providing health services.

• The vital items are stocked in abundance , essential items are

stocked in medium amounts and desirable items we socked in
small amounts .

• Vital and essential items are always in stock which means a

minimum disruption in the services offered to the people.
 Advantages

• It is useful for monitoring and control of stores and spares

inventory by classifying them into three categories.
• Determine the criticality of an item and its effect on production
and other services.
• It is useful for controlling and maintain the stock of various
types.
 Just-in-Time Management

• Just-in-time (JIT) manufacturing originated in Japan in the

1960s and 1970s; Toyota Motor Corp.
• The method allows companies to save significant amounts of
money and reduce waste by keeping only the inventory they
need to produce and sell products.
• This approach reduces storage and insurance costs, as well as
the cost of liquidating or discarding excess inventory.
 JIT
• JIT inventory management can be risky.
• If demand unexpectedly spikes, the manufacturer may not be able
to source the inventory it needs to meet that demand, damaging
its reputation with customers and driving business toward
competitors.
• Even the smallest delays can be problematic; if a key input does
not arrive "just in time," a bottleneck can result.
 Materials Requirement Planning

• This method is sales-forecast dependent, meaning that

manufacturers must have accurate sales records to enable accurate
planning of inventory needs and to communicate those needs with
materials suppliers in a timely manner.
• Inability to accurately forecast sales and plan inventory acquisitions
results in a manufacturer's inability to fulfill orders.
 Other Techniques

• FSN
• LIFO
• FIFO
• HIFO
• NIFO
 Receivable Management
OR
Accounts Receivable Management
 Receivables

• Receivables represent amounts owed to the firm as a result

of sale of goods or services in the ordinary course of
business.
• Receivables are also known as
accounts receivables, trade receivables, customer
receivables or book debts.
• The purpose of maintaining or investing in receivableis to
meet competition, and to increase the sales and profits.
 Cost of maintaining receivables

• Cost of financing receivables

• Administrative cost
• Opportunity cost
• Cost of collection
• Bad debts / DefaultCost
• 1. Cost of Financing, Receivables. When goods and services
are provided on credit then concern's capital is allowed to be
used by the customers. The receivables are financed from
the funds supplied by shareholders for long term financing
and through retained earnings. The concern incurs some
cost for collecting funds which finance receivables.

• 2. Cost of Collection. A proper collection of receivables is

essential for receivables management. The customers who
do not pay the money during a stipulated credit period are
sent reminders for early payments. Some persons may have
to be sent for collecting these amounts. In some cases legal
recourse may have to be taken for collecting receivables. All
these costs are known as collection costs which a concern is
generally required to incur.
Factors influencing the size of receivables
• Size of credit sales
• Credit policies
• Terms of trade
• Expansion plans
• Relation with profit
• Credit collection efforts
• Habits of customers
 Receivables Management

Receivables Management is the process of making decisions

relating to investment in trade debtors.

The objective of receivables management is to take a sound

decision as regards investment in debtors
 Receivable Management

• Accounts receivable management incorporates is all about

ensuring that customers pay their invoices.
• Good receivables management helps prevent overdue
payment or non-payment.
• It is therefore a quick and effective way to strengthen the
company’s financial or liquidity position.
 A Good ReceivablesManagement

• Determining the customer’s credit rating in advance

• Frequently scanning and monitoring customers for credit risks
• Maintaining customer relations
• Detecting late payments in due time
• Detecting complaints in due time
• Reducing the total balance outstanding (DSO)
• Preventing any bad debt in receivables outstanding
Dimension of receivables management

Forming of credit
policy

Formulating
and Executing credit
executing policy
collection policy
 Forming of credit policy

• Quality of trade accounts or creditstandards

• Length of credit period
• Cash discount
• Discount period
 Executing Credit Policy

• Collecting credit information

• Credit analysis
• Credit decision
• Financing investments in receivables and factoring
 Formulating and executing credit policy

• The collection of amounts due to the customers is veryimportant.

• The concern should devise procedures to be followed when accounts
become due after the expiry of creditperiod.
• The collection policy be termed as strict and lenient.
• Astrict policy of collection will improve more efforts on collection.
• This policy will enable early collection of dues and will reduce bad
debt losses.
 Problem – solution model
Particulars Policy A Policy B Policy C
Credit Period XXX XXX XXX
Projected Sales XX XX XX
Less VariableCost XX XX XX
(Contribution = Sales - VC) XXX XXX XXX
Less FixedCost XX XX XX
( Profit ) XXX XXX XXX
Cost of sales = VC+FC XXX XXX XXX
Investment In Debtors = Cost of Sales x Credit Period/360 X X X
XX XX XX
Profit XX XX XX
Less cost of funds in debtors at 20% XX XX XX
X X X
Net Return XXX XXX XXX

Solution: Select the policy which has highest net return

 Problem – solution model
Particulars Current Policy A B C D
Credit Period 30
Projected Sales 50
Less Variable Cost 80% of 50 = 40
(Contribution = Sales - VC) 10
Less FixedCost 5
( Profit ) 5
Cost of sales = VC+FC 40+5 = 45
Invest. In Drs = Cost of Sales x Cr. Period/360 45 x 30/360 = 3.75
Profit 5
Less cost of funds in debtors at 20% 20% x 3.75 = 0.75
Net Return 4.25
 Cash and Marketable
Securities Management
 Cash Management

• Cash is an important component of current assets and is

most essential for businessoperations.
• Cash is the basic input needed to keep the
business running on a continuous basis.
• It is also the ultimate output expected to be realised by
selling the service and product manufactured by the firm.
 Cash Management
• Cash management has assumed importance because it is the
most significant of all the currentassets.
• It is required to meet business obligations and it is
unproductive when not used.
• Cash management deals with the following:
– Cash inflows and outflows
– Cash flows within the firm
– Cash balance held by the firm at a point of time.
MEANING AND DEFINATION OF CASH
• In the words of P. V. Kulkarni:
“Cash in the business enterprise may be compared to the
blood of the human body; blood gives life and strength to
the human body, and cash imparts life and strength to the
business organisation”.

• According to J. M. Keyens:
“It is the cash which keeps a business going. Hence every
enterprise has hold necessary cash for its existence”.
MOTIVES FOR HOLDING CASH

• The Transaction Motives

• The Precautionary Motive
• The Speculative Motive
• The Compensating Motive
1. Transaction motive
– It is a motive for holding cash or near cash to meet routine
cash requirements to finance transaction in the normal
course of business. Cash is needed to make purchases of
raw materials, pay expenses, taxes, dividends etc.

2. Precautionary motive
– It is the motive for holding cash or near cash as a cushion to
meet unexpected contingencies. Cash is needed to meet
the unexpected situation like, floods strikes etc.
3. Speculative motive
– It is the motive for holding cash to quickly take advantage of
opportunities typically outside the normal course of business.
Certain amount of cash is needed to meet an opportunity to
purchase raw materials at a reduced price or make purchase
at favorable prices.

4. Compensating motive
– It is a motive for holding cash to compensate banks for
providing certain services or loans. Banks provide variety of
services to the business concern, such as clearance of
cheque, transfer of funds etc.
• The speculative Motives:
• The financial manager would like to take advantage
of unexploited opportunities.
• Some reserve of money is always essential to enable the
firm to take advantage of cash when such opportunities
arise.
• The speculative motives helps to take advantage of:
– An opportunity to purchase raw materials at a reduced price on
payment of immediate cash.
– A chance to speculate on interest rate movements by buying
securities when interest rates are expected to decline.
– Delay purchases of raw materials on the anticipation of decline in
prices.
– To make purchases at favourable prices
– Any other opportunity.
• Yet another motive to hold cash balances is to compensate
banks for providing certain services and loans.
• Banks provide a variety of services to business firms, such as
clearence of cheque, supply of credit information, transfer of
funds, and so on.
• While for some of these services banks charge a commission
or fee, for others they seek indirect compensation.
• Usually clients are required to maintain a minimum balance of
cash at the bank.
• Since this balance cannot be utilised by firms for transaction
purposes, the banks themselves can use the amount to earn a
return. Such balances are compensating balances
 OBJECTIVES OF CASH MANAGEMENT

• The basic objectives of cash management are as

follows:

1) To meet the cash disbursement needs (payment schedule)

and;
2) To minimise funds committed to cash balance

These are conflicting and mutually contradictory and the task

of cash management is to reconcile them
 To meet the cash disbursement needs (payment
schedule)
• In the normal course of business, firms have to make
payments of cash on a continuous and regular basis to
suppliers of goods, employees and so on.
• At the same time, there is a consist inflow of cash
through collections from debtors.
• Cash is, therefore, aptly described as the ‘oil to lubricate the
ever- turning wheels of business: without it the process
grinds to a stop.‘
• A basic objective of cash management is to meet the
payment schedule, that is to have sufficient cash to meet the
cash disbursement needs of a firm
 To minimise funds committed to cashbalance
• In minimizing the cash balances, two conflicting aspects have
to be reconciled.
• A high level of cash balances will,
– ensure prompt payment together with all the advantages.
– But it also implies that large funds will remain idle, as cash is a
non- earning asset and the firm will have to forego profits.
• A low level of cash balances,
– on the other hand, may mean failure to meet the payment schedule.
• The aim of cash management, therefore, should
be an optimal amount of bank balances.
 Cash ManagementTechniques
• Cash management will be successful only if cash collections are
accelerated and cash disbursements, as far as possible are
delayed.
• The following methods of cash management will help::

A. Speedy CashCollections / Accelerating CashInflows

B. Slowing Disbursements.
Method of Accelerating CashInflows

1. Prompt Payment by Customers

2. Quick conversion of Payment into cash
3. Decentralized Collections
4. Lock Box System
1. Prompt Payment by Customers. In order to accelerate cash
inflows, the collections from customers should be prompt.
This will be possible by prompt billing.

2.Quick conversion of Payment into cash. Cash inflows can be

accelerated by improving the cash collecting process. Once
the customer writes a cheque in favour of the concern the
collection can be quickened by its early collection.

3.Decentralized Collections. A big firm operating over wide

geographical area can accelerate collections by using the
system of decentralised collections. A number of collecting
centres are opened in different areas instead of collecting
receipts at one place.
4. Lock Box System. Lock box system is another technique of reducing
mailing, processing and collecting time. Under this system the firm
selects some collecting centres at different places. The places are
selected on the basis of number of consumers and the remittance to be
received from a particular place.
• The firm hires a Post Box in post office and the parties are asked to send
the cheques on that post box number. A local bank is authorised to
operate the post box.
Methods of Slowing Cash Outflows

1. Paying on Last Date

2. Adjusting Payroll Funds
3. Centralisation of Payments
4. Inter-bank Transfer
5. Making use of Float
1.Paying on Last Date. The disbursements can be delayed on
making payments on the last due date only. If the credit is for
10 days then payment should be made on 10th dayonly.

2.Adjusting Payroll Funds. Some economy can be exercised on

payroll funds also. It can be done by reducing the frequency of
payments. If the payments are made weekly then this period
can be done to amonth.
3.Centralisation of Payments. The payments should be
centralised and payments should be made through drafts or
cheques. When cheques are issued from the main office then
it will take time for the cheques to be cleared through post.

4.Inter-bank Transfer. An efficient use of cash is also possible by

interbank transfers. If the company has accounts with more
than one bank then amounts can be transferred to the bank
where disbursements are to bemade.
5. Making use of Float. Float is the difference between the balances
shown in company's cash book (Bank column) and balance in
passbook of the bank. Whenever a cheque is issued, the balance at
bank in cash book is reduced.
• The party to whom the cheque is issued may not present it for
payment immediately. If the party is at some other station then
cheque will come through post and it may take a number of days
before it is presented. Until the time, the cheque is not presented
to the bank for payment, there will be a balance in the bank.
• The company can make use of this float if it is able to estimate it
correctly.
 Determining Optimum Cash Balance
• A firm has to maintain a minimum amount of cash for settling the dues
in time.
• The cash is needed to purchase raw materials, pay creditors, day to day
expenses, dividend etc.
• The test of liquidity of the firm is that it is able to meet various
obligations in time.
• Thus, a firm should maintain an optimum cash balance, neither a small
nor a large cash balance.
• Cash budget is the most important tool in cash management.
 CashBudget
• A cash budget is an estimate of cash receipts and disbursements of
cash during a future period of time.
• It is a device to plan and control the use ofcash.
• It pin points the period when there is likely to be excess or shortage
of cash.
 It includes
• The cash receipts from various sources are anticipated.
– From sales, debts, bills receivable, interests, dividends and other
incomes and sale of investments and other assets will be taken into
account.

• The amounts to be spent on

– Purchase of materials, payment to creditors and meeting various
other revenue and capital expenditure needs should be considered
MANAGEMENT OF MARKETABLE SECURITIES

• The marketable securities are the short term highly liquid

investments in money market instruments that can easily be
converted into cash.
• A firm has to maintain a reasonable balance of cash to keep the
business going.
• Instead of keeping the surplus cash as idle, the firm should invest
in marketable securities so as to earn some income to the
business.
 Contd.
• As the amount of cash kept in the business earns no explicit
return
• The firm should hold a minimum level of cash and the excess
balance of cash may be invested in marketable securities
which earns some return as well as provide opportunities to be
converted easily into cash (through sale of securities) as and
when required.
 Contd.
• The management of investments in marketable securities is an
important function of financialmanagement.
• The basic objective of investment in marketable securities is to
earn some return for thebusiness.
• The return available is an important criterion while choosing
among the alternative securities, yet investment of surplus cash in
marketable securities need a prudent and cautious approach.
• The selection of securities should be carefully made so that cash
can be raised quickly on demand by sale of thesesecurities.
• Important factors that should be considered while
choosing among alternative securities to bepurchased:

1. Safety
2. Maturity
3. Liquidity and Marketability
4. Return or Yield
Important factors that should be considered while choosing
among alternative securities to bepurchased:

1. Safety. Since a firm invests cash in marketable securities to earn

some return on surplus cash but with the primary motive of
converting them back into cash easily through sale of securities
as and when required, the firm will tend to invest in very safe
marketable securities.
2. Maturity. The maturity of the marketable securities should be
matched with the length of time for which the surplus cash is
expected to be available.
 Contd.
3. Liquidity and Marketability. Liquidity refers to the ability to convert a
security into cash immediately without any significant loss of value. So
the securities selected should have ready market and may be realizable
in a very short period as and when required even before the maturity
date.
4. Return or Yield. Other things equal, a firm would like to choose the
securities which give higher return of yield on its investment. However,
it must be remembered that safety and liquidity risk are of greater
importance than the return risk in making decision about investments in
marketable securities.
Thank You