WHAT IS CASH

MANAGEMENT??????
 CASH MANAGEMENT
implies that all the business
generated revenues are effectively
controlled and utilized in the best possible
manner to result in gains for the
organization.
BASIC OBJECTIVES OF CASH
MANAGEMENT
 To ensure availability of
cash as per payment
schedule

And To minimize the amount of idle cash

CLASSIFICATION OF CASH
FLOWS
• Operational cash flows

• Priority cash flows

• Discretionary cash flows

• Financial cash flows

MOTIVES FOR HOLDING
CASH BALANCES
• Transaction motive

• Precautionary motive

• Speculative motive

• Future requirements

• Compensating balances
COST-BENEFIT ANALYSIS OF
CASH MANAGEMENT
 Since the basic purpose of any cash
management system is to reduce the cost. Cost
involved in cash management system like any
other system can be broadly divided in to fixed
cost and variable costs. Fixed costs of
maintaining any system may be like depreciation
on hardware used, fixed employee cost
etc.the variable cost of cash management
system normally depends on the
volume of funds handled by the company
MANAGEMENT OF LIQUIDITY
 LIQUIDITY is defined as the ability of the

organization to realize value in money, the most liquid of

assets. It refers ability to pay in cash, the obligations that
are due. it has 2 concepts quantitative as well as
qualitative, quantitative includes the quantum, structure
and utilization of liquid assets where as qualitative
concept is the ability to meet all the present and potential
demands on cash in manner that minimizes cost and
maximizes the value of the firm.
 REASONS FOR CASH SURPLUS

• Profitability from operations

• Low capital expenditure
• Absence of profitable avenues of
investment
• Sale of a part of a business
• Raising of funds from issue of stock and
bonds for long term capital projects,
temporary funds is not used
• Conservative dividend distribution policy
REASONS FOR CASH FLOW PROBLEMS

• Continuous operation losses

• Higher inflation rate
• Non recurring expenditures
• Higher seasonal or cyclical sales
• Over trading
• Continuous growth of business
• Inefficient working capital management
MODELS OF CASH
MANAGEMENT
Miller-Orr cash management
model
The Miller and Orr model of cash
management is one of the various cash
management models in operation. It is an
important cash management model as well. It
helps the present day companies to manage
their cash while taking into consideration the
fluctuations in daily cash flow. As per the
Miller and Orr model of cash management
the companies let their cash balance move
within two limits - the upper limit and the
lower limit
 The companies buy or sell the marketable
securities only if the cash balance is equal to
any one of these when the cash balances of
a company touches the upper limit it
purchases a certain number of salable
securities that helps them to come back to the
desired level. If the cash balance of the
company reaches the lower level then the
company trades its salable securities and
gathers enough cash to fix the problem.
It is normally assumed in such cases that the
average value of the distribution of net cash
flows is zero. It is also understood that the
distribution of net cash flows has a standard
deviation. The Miller and Orr model of cash
management also assumes that distribution
of cash flow is normal
 Application of Miller and Orr Model of Cash
Management

The Miller and Orr model of cash management is widely

used by most business entities. However, in order for it
applied properly the financial manages need to make
sure that the following procedures are followed:
• Finding out the approximate prices at which the salable
securities could be sold or bought

• Deciding the minimum possible levels of desired cash

balance

• Checking the rate of interest

• Calculating the SD (Standard Deviation) of regular

BAUMOLS EOQ MODEL
• Baumol Model of Cash Management
The Baumol model of cash management is one of many
by which cash is managed by companies. It is
extensively used and highly useful for the purpose of
cash management.
Use of Baumol Model
The Baumol model enables companies to find out their
desirable level of cash balance under certainty.
Relevance
At present many companies make an effort to reduce the
costs incurred by owning cash. They also strive to spend
less money on changing marketable securities to cash.
The Baumol model of cash management is useful in this
regard.
 Assumptions There are certain assumptions or ideas
that are critical with respect to the Baumol model of cash
management
The particular company should be able to change the
securities that they own into cash, keeping the cost of
transaction the same.

• Under normal circumstances, all such deals have

variable costs and fixed costs.

• The company is capable of predicting its cash

necessities

• They should be able to do this with a level of certainty

• The company should also get a fixed amount of money.

They should be getting this money at regular intervals.
• The company is aware of the opportunity cost
required for holding cash. It should stay the
same for a considerable length of time.
• The company should be making its cash
payments at a consistent rate over a certain
period of time. In other words, the rate of cash
outflow should be regular.
HOW TO MANAGE CASH
• Setting cash balance

• Cash cycle

• Zero balance account

• Money market banking

• Petty cash imprest system

CASH MANAGEMENT OF DATANET
 Introduction
• Datanet's CMS system is a fast collection
system which enables the bank to offer a
powerful new service to its customers,
particularly its corporate customers. The product
and architecture are well proven and have
matured with considerable user feed back. It
incorporates many
• a) Operationally efficient features
• b) Customer information features
• c) Monitoring and reporting systems for the bank
etc.
• The system architecture and functioning is as follows:
There are essentially four organizational entities
involved:
• a) The Base Branch, in which the customers (of the
bank) have their accounts
• b) Collection Centers are branches where cheques are
presented in favor of BB customers
• c) HUB(s) which essentially store the float fund data and
• d) Head Office where IBR reporting, data mart etc are
built. Moreover, a branch can be configured to have dual
roles. That is, a branch can be a base branch as well as
a collection center.
 Distinguishing features of
Datanet's CMS
• It is completely workflow automation based and hence
the business processes are accurately and neatly
modeled in the system.

• The system is highly automated and is fully electronic

avoiding paper movement completely.

• Several flexible charging schemes are supported. It

supports four types of customers - this branch, other
branch, correspondent bank and non-customer.

• Whereas most of the CMS systems deploy a single

HUB, this system can support multiple HUBs. Overall,
the network is configured as a star for communication
purposes thus making it possible to communicate to any
unit in a max of two hops.
 For recovery from failure of any one HUB, an alternate
HUB can be built at a different geographical location.
• Both for the customer and for float fund managers,
viewing of account statuses is enabled on the browser /
server model, making it possible for the customer to
readily and remotely access his information.
• Transactions are conducted on this WAN with complete
security by using RSA PKI based, which is an integral
part of the workflow automation platform BPRO. The
bank will have its own Key Certification unit also as this
is a closed user group network.
• The workflow automation platform has built-in capability
to log all the states of every transaction occurring on the
system, thus providing a database for electronic auditing
and monitoring.
• Traditionally such inter-branch transactions result in the
burden of Inter Branch Reconciliation, which is a huge,
and time consuming task. But this product implements a
unique on-line IBR scheme which reconciles the
transactions as they occur and hence completely
eliminates the need for human intervention in
reconciliation.
Transactions and their key features
• Registration of customers: The registration of customers
can be done from the Base Branches as well as the
Head Office. Four customer types are supported.

• Credit by Clearing: Normally cheques are presented by

the representatives of the customer at the collection
centers. Provision for re-presented cheques is available.
Provision for receiving cheques from feeder branch of
the Collection Branch is also available. The credits stay
at the HUB for the specified duration as float fund. The
customer can choose to mark the collection into various
baskets. The customer can choose float delay based on
funded date or cheque lodged date. If on the basis of
lodged date, then the bank can set an exposure limit for
the customer.
• Reversal of Credit: If a cheque bounces,
reversal can be sent. Can be used to reverse
credits due to any other internal reasons also.
• Data Entry and cheque forwarding: Cheques
drawn on a collection center can be submitted at
another center. Data is entered about these
instruments at this center and electronically
transmitted to the actual collection center.
• Reports: A wide range of reports are available
at the BB, CC, HUB and the HO. Some of them
are -
• Datamart: A datamart can be built at the HO by
consolidating all the transaction data and
analyses of different have been built. These are
of type - customer based, branch based, region
based, system performance based etc.

• Back-up and garbage clearance: The system

automatically backs-up the databases at regular
intervals which is automatically moved / can be
moved onto a secondary backup device.