CASH AND

ACCOUNTS
RECEIVABLE
MANAGEMENT
Group 3
Abubakar, Zahra
Alam, Alliana-mae
Ajahum, Nuridja
Angeles, Mariella
Bullecer, Graceljoy
Sali, Afrah
Solocio, Fatima Armina
CASH MANAGEMENT

OBJECTIVE OF CASH MANAGEMENT

The basic objective in cash management is

to keep the investment in cash as low as
possible while still keeping the firm
operating efficiently and effectively
REASONS FOR HOLDING
CASH BALANCES
a. Transaction motive
b. Precautionary motive
c. Compliance with Creditors’ Covenant
d. Investment Opportunities
DETERMINING THE TARGET
CASH BALANCES
The target cash balance may be derived with the use of the following
approaches, namely:
1. Cash Budget

2. Cash Break-even Chart

3. Optimal Cash Balance using the

a) Baumol Model
b) Miller-Orr Model
CASH BUDGET
The cash bugdet is the tool used to present the expected
cash inflows and cash outflows

CASH BREAK-EVEN CHART

This chart shows the relationships between the company’s cash needs
and cash resources. It indicates the minimum amount of cash that
should be maintained to enable the company to meet its obligations.
Sample Problem (Cash Break-even Chart)
XYZ Company manufactures plastic which it selss to other industrial
users. The monthly production capacity of the company is 1,200,000
kilos. Selling price is P2 per kilo.

Its cash requirements have been determined as follows:

a) Fixed monthly payments amounting to P250,000 while
b) Variable cash payments are 50% of sales.

Required:
1. Determine the Cash Break-even point (mathematical approach)
2. Prepare a Cash Break-even Chart to project the relationship between
the company’s cash needs and cash sources.
Solution
Fixed Monthly Payments
1. Cash Break-even Point =
Variable Costs
Sales
Sales

250,000
=
50%
100%
100%

250,000
=
50%

= P500,000 or 250,000 kilos of plastic

Solution
2.
OPTIMAL CASH BALANCE
BAUMOL MODEL

In managing the level of cash for transaction purposes versus near cash,
the following must be considered:
1. Fixed and Variable brokerage fees, and
2. Opportunity costs such as interest foregone by holding cash instead
of near cash
BAUMOL MODEL

The optimal cash balance can be found by using the following variables
and equations:

1. Total cost = Holding costs + Transaction Cost

= (Average cash balance) (Opportunity cost)
+ (No. of Transactions) (cost/transaction)

= 𝐶/2 (K) + 𝑇/𝐶 (𝐹)

BAUMOL MODEL

The optimal cash balance can be found by using the following variables
and equations:
2.
ILLUSTRATIVE CASE 1. DETERMINATION OF OPTIMAL AVERAGE CASH
BALANCE FOR BAUMOL MODEL

To illustrate, consider a business with total payments of P10 million for one year,
cost per transaction of P100, and the interest rate on marketable securities is 8
percent.2.The optimal cash balance is calculated as follows:

Optimal average cash balance

MILLER-ORR MODEL

This model bases its computation where:

MILLER-ORR MODEL

To compute for Z*, the following formula is applied:

To compute for H*, the following formula is applied:

ILLUSTRATIVE CASE 2. CALCULATION OF OPTIMAL RETURN POINT
AND UPPER LIMIT FOR MILLER-ORR MODEL

Suppose that ABC Inc., would like to maintain its cash account at a
minimum level of P100,000, but expects the standard deviation in net
daily cash flows to be P5,000; the effect annual rate on marketable
securities will be 8 percent per year, and the trading cost per sale on
purchase of marketable securities will be P200 per transaction. What
will be ABC’s optimal cash return point and upper limit?
Solution
The daily interest rate on marketable securities will equal to
CASH MANAGEMENT TECHNIQUES
1. Synchronizing cash flows

2. Using Float

3. Accelerating cash collection

4. Getting available funds to where they are needed

5. Controlling disbursement
FLOAT
Disbursement and Collection Float
- Bank vs Book balance

Net Float
- is the sum of disbursement float and collection float

Float Management
- Involves controlling the collection and disbursement of cash. The
objective in collection is to reduce the lag between the time customers
pay their bills and the time the checks are collected.
FLOAT
Mail Float
- It is the from the time the check is issued up to the time the check is received
by the payee. It is the part of the collection and disbursement process where
checks are trapped in the postal system.

Processing Float
- It is from the time the check is received by the payee until the time it is
deposited in the payee’s bank account.

Clearing Float
- It is from the date the check is deposited up to the date the check is cleared
and made available for use.
REDUCING THE NEED FOR PRECAUTIONARY BALANCE
ILLUSTRATIVE CASE 3. ACCELERATION OF CASH RECEIPTS
Solution
Solution
REDUCING THE NEED FOR PRECAUTIONARY BALANCE
ILLUSTRATIVE CASE 4. VALUING FLOAT REDUCTION
Solution
ACCOUNTS RECEIVABLE MANAGEMENT

Accounts receivable consists of money owed to a firm for goods and services
sold on credit.

Two forms
1. Trade or commercial credit. Credit which the firm extends to other firms.
2. Consumer or retail credit. Credit which the firm extends to its final
customers.
OBJECTIVES OF
ACCOUNTS RECEIVABLE
MANAGEMENT
to collect accounts receivable as quickly as
possible without losing sales

ensures that the firm's investment in accounts

receivable is appropriate and contributes to
shareholder wealth maximization
CREDIT POLICY
Credit policy is a set of guidelines for extending credit to customers.
Credit policy generally covers the following variables:
1. Credit Standards
Credit standards refer to the minimum financial 5C’s
strength of acceptable credit customer and the Character
amount available to different customer. Credit Capacity
policy can have a significant influence upon
Capital
sales.
Collateral
To measure credit quality and customer's credit
worthiness, the following areas are generally
Conditional
evaluated:
 2. Credit Terms
Credit terms involve both the length of the credit period and the discount given.
Credit period is the length of time buyers are given to pay for their purchases.
Discounts are price reductions for early payment.

3. Collection Policy
Collection policy refers to the procedures the firm follows to collect past-due
accounts. Credit analysis is instrumental in determining the amount of credit risk
to be accepted.

4. Delinquency and Default

Whatever credit policies a business firm may adopt, there will be some
customers who will delay and others who will default entirely, thereby
increasing the total accounts receivable costs.
COSTS ASSOCIATED WITH INVESTMENT
IN ACCOUNTS RECEIVABLE
1. Credit analysis, accounting and collection costs
2. Capital costs
3. Delinquency costs
4. Default costs (Bad debts)
SUMMARY OF
TRADE-OFFS IN
CREDIT AND
COLLECTION
POLICIES
ANALYZING PROPOSED CHANGES
IN CREDIT POLICIES

Changes in a business's credit policy, such as lengthening

credit periods, relaxing standards, or offering cash discounts,
can lead to increased sales, costs, and potentially higher bad
debt or discount expenses.
MARGINAL AND INCREMENTAL
ANALYSIS OF CREDIT POLICIES
Marginal analysis compares incremental returns and costs of a firm's credit
policy change. If profit exceeds required return or costs, change should be
implemented. Decisions are made using rules.
ILLUSTRATIVE CASE 1. RELAXATION OF CREDIT POLICY
Solution
ILLUSTRATIVE CASE 2. CHANGE IN CREDIT TERMS
THANK YOU
GROUP 3