Chapter 5

Cash Management
 Cash Management

⚫ Provide margin of safety (i.e. Liquidity) to meet current

obligations

⚫ Risk-Return Trade-off: Low Risk, Low Return

⚫ Objectives –
⚫ Minimize the level of Cash
⚫ Maintain adequate level of Liquidity
 Cash Management
(cont..)
Reasons for Holding Cash

⚫ Transaction – support day-to-day operations (ie pay

bills, purchase material etc.)

⚫ Precautionary – emergency purposes (i.e. cash outflow

exceed cash inflow)

⚫ Speculative – make return from profit-making situation.

 Cash Management
(cont..)
The Steps of Efficient Management of Cash:

⚫ Determine Operating Cycle (OC)

⚫ Determine Cash Cycle (CC)
⚫ Determine Cash Turnover (CT)
⚫ Minimum Operating cash (OC)
 Cash Management
(cont..)
Operating Cycle (i.e. Days)
The lag time between the purchase of raw material and
Cash Receipt from Sales or Receivable
Average Age Average
OC = of Inventory + Collection Period

Cash Cycle (i.e. Days)

The lag time between the Cash Payment of Purchases and
Cash Receipt from Sales or Receivable
Average Average Average
CC = Age of + Collection - Payment
Inventory Period Period
 Cash Management
(cont..)
Cash Turnover
Number of Times (X) the Cash is Turned
CTO = 360
CC
Minimum Operating Cash
The amount of Cash that need to be held (i.e. to
avoid any Shortage in making Payments)
MOC = Annual Cash Outlays
Cash Turnover
Example 1
ABC Sdn Bhd has an average age of
inventories of 70 days, an average collection
period 40 days and an average payment
period of 30 days. The company annual cash
outlay is RM 300,000.
Cash Management (cont..)
Solution:
⚫ OC = AAI + ACP
= 70 + 40, 110 days
⚫ CC = AAI + ACP – APP
= 70 + 40 - 30, 80 days
⚫ CTO = 360 / CC
= 360 / 80, 4.5 times
⚫ MOC = Annual Cash Outlay / CTO
= 300,000 / 4.5, RM 66,666.67
So, the ABC needs RM 66,666.67 to support its short-
term obligations.
Example 2

JMD corporation, which has an annual cash

outlay of RM450, 000, is determining minimum
operating cash holding to avoid unnecessary idle
cash. All sales are on 45 days credit and all
credit purchases are settled on the 35th day after
date of purchase. However, its inventories take
an average 65 days store holding period before
they are sold. Calculate the following:
i. The cash cycle
ii. The cash turnover
iii. The minimum operating cash
Solution

Cc = AAI + ACP – APP

= 65 + 45 – 35 = 75 days
CTO = 360 / CC
= 360 / 75 = 4.8 times
MOC = Annual cash outlay/CTO
= 450,000 / 4.8 = RM93,750
Example 3

Integrity corporation is planning to purchase

raw materials on 6th April 2012 and the
payment will be on credit term net 60. the
goods will be sold on 4th July 2012. Total initial
outlay and account receivables are RM300,000
and RM15,000 respectively. The annual sales
of the company are RM100,000 with 60% of its
is on credit. Calculate the:
i. Cash cycle
ii. Cash turnover

iii. Minimum operating cash

Solution
CC = AAI + ACP –APP
AAI = Apr (6th – 30th) - 25 days
May (1st – 31st) - 31 days
Jun (1st – 30th) - 30 days
July (1st – 4th) - 4 days
Total = 25 + 31 + 30 + 4 = 90 days
ACP = (acc. Rec. /annual sales) x 360 days
= (15,000/60,000)x360 = 90 days
APP = credit term 60 = 60 days
= 90 + 90 – 60 = 120 days
CTO = 360/CC
= 360/120 = 3 times

MOC = Annual outlay/CTO

= 300,000/3 = RM100,000
⚫ The end………..