A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

CHAPTER 2
LITERATURE REVIEW

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 A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

CASH MANAGEMENT

Cash management is a broad term that refers to the collection, concentration, anddisbursement of
cash. It encompasses a company's level of liquidity, its management of cash balance, and its
short-term investment strategies. In some ways, managing cash flow is themost important job of
business managers. If at any time a company fails to pay an obligationwhen it is due because of
the lack of cash, the company is insolvent. Insolvency is the primary reason firms go bankrupt.
Obviously, the prospect of such a dire consequence shouldcompel companies to manage their
cash with care. Moreover efficient cash managementmeans more than just preventing
bankruptcy. It improves the profitability and reduces the risk to which the firm is exposed. Cash
management is particularly important for new and growing businesses.

1.Nithinbalwani (2008) describes the cash flow statement help users of financial statement to
evaluate a companies ability to have sufficient cash both on a short- run and a long run basic
for this reason, the cash flow statement is useful ritually every one interested in the companys
financial health; short and long term creditors, inventories, management and both current and
prospective competitors.(Cash management is concerned with how a firm managers its cash
levels and operations (cash collection and payments) cash investments and dis investments and
cash borrowing and lending.

2. Eije and Westerman (2001) cash normally would not be needed if it were not for the
market imperfections and resulting transactions costs of urgently needing cash and short notice if
the need arises and these is no enough cash von.

3. David G. Coderre Ratio analysis identifies potential frauds by computing the variance in a
set of transactions and then calculating the ratios are; the ratio of the highest value to the lowest
value the ratio of the highest value to the next highest and the ratio of one numerical field to
another, such as the current year to the previous year or one operational area to another.

4. LakshmananSivakunmar. Financial reports are the primary means by which managers

communicate company result to investors, creditors and analysis. There parties user the reports
to judge company performance, to assets creditworthiness, to predict future. Financial
performance, and to analyze possible acquisitions and take over users of financial
statements must be able to meaning fully interpret financial reports, construct measures of
financial performance and analyze the reporting choice made by companies. Also, since
company managers choose accounting techniques when marketing their reports, users must learn
to undo the effects of this accounting choice. The purpose of this course is to give foundation for
such analysis.

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 A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

5.JawaharLal (2002) describes that Financial Statement Analysis an analysis which

highlights important relationship in the financial statement. It focuses on evaluation of past
operations as revealed by the analysis for basic statements. Financial Statement analysis
embraces the methods used in assessing and interpreting the results of past performance and
current financial position as they related to the particular factor of interest ijn investment
decision, it is an important means of assessing past performance and in forecasting and planning
future performance.

6. S N Maheshwari (1996) states that accounting ratios are relationship expressed in

mathematical terms between figures which are connected with each other in some manner.
Obviously, no purpose will be served by comparing two sets of figures which are not at all
connected with cash other. Moreover, absolute figures are also until for comparison.
7. Jule.Et,al,says that the cash flow provide considerable information about what is really
happening business beyond that contained in either be income statement or the balance sheet.
Analyzing this statement should not task, instead it will quickly become obviously that the
benefits of understanding the sources and uses of a companys cash for outweigh the costs of
undertaking some very straight forward analysis.

8. Maynard E.Rafure (1996) argues that attempts to improve working capital by delaying
paymant to creditors are counter-productive to individuals and to the economy as a whole.
Claims that attiring debtors and creditors levels for individual tiers with in a value system will
rarely produce any net benefit proposes that stock reduction generates system wide financial
improvements and other important benefits urgent those organizations seeking concentrated
working capital reduction strategies of focus on stock management strategies based on lean
supply chain techniques.

9. Smith and Ashburne (2006), financial statements as the end product of financial accounting
is a set of financial statements that purport to reveal the financial position of the enterprise, the
result of its resent activitiesand analysis of what has been done with earning. The financial
statements are the outcome of preparing final accounts and there statements reveal financial
position and profitability of the concern and the utilization of retained earnings

10. N P.Srinivasan and M SakthivelMurugan (2008) describe that cash flow Analysis is an
analysis based on the movement of cash and bank balance. Under cash flow analysis, all
movements of cash, rather than the movement of working capital would be considered such
movements of cash deposited in a statement of changes in financial position prepared on cash
basis.

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 A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

11. Christian Leuz(1999), he says that the incentives of German firms to voluntary disclose
cash flow statement overtime while cash flow statement are mandated under many GAAP
regimes, its disclosure has been mandatory in Germany until recently never the les, an increasing
number of firms provides cash flow statement voluntarily there firms are likely to be influenced
by recommendations of the German accounting profession, IAS7 as well as the respective
standards of the other countries. The idea of the paper is to study this influence by looking at the
adaptation pattern over time at the format of the cash flow statement. it documents the
development of voluntary cash flow statement discloser by German firm with respect to
milestone in the evaluation of German professional recommendations and respective
international standards. The cross sectional determinants of voluntary cash flow statements are
analyzed using profit regressions and factor analyzed. The results are generally consistent with
the idea that capital focuses derive the disclosure of cash flow statements that are in line with
international practice.
12. BolongCao, Financial Statements analysis is in of the modern financialanalysis. The
financial statements from firm provide the information upon the dynamic and innovative process
of contemporary business practice. By analyzing financial statement, investors, business pertness
managers and Government agencies can infer the efficiency and risks involved in thebusiness of
the firm. Which is extremely important in their decision according shenanigans from financial
statements becomes indispensable in todays business world. Researches in modern accounting,
corporate finance and investment really heavily on financial statement analysis techniques.
Proteciency in financial statement analysis is also essential in professional certificate like CPA or
CFA-exams.

13. KGC Nair and Jayan (2006) states ratio analysis is an important and useful technique to
check upon the efficiency with which working capital being used in the enterprise. Some ratios
indicate the trend or progress or downfall of the firm. It help the financial management in
evaluating the financial position and performance of the firm. The trade creditor, bank, lending
instructions and experienced inventor are use ratio analysis as their initial tool in evaluating the
firm as a desirable borrower as a potential investment outlet.

14. Pandey (2002) clearly explain the standards of ratio analysis. The standards of comparison
consist of past ratio; competitor ratios and projecting ratios. For that he describes the methods
under which ratios can be analyzed, cross sectional analysis and Performa analysis.

15. John.N.Myer (2006) financial statements provide a summary of the accounts of a

business enterprise, the balance sheet reflecting the asset and liabilities and income
statements showing the result of operations during a certain period. It emphasis the importance
of balance sheet and profit and loss account; but ignores the importance of other financial
statements like cash flow statement. Fund flow statement and statement of retained earnings

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 A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

KEY INDICATORS IN CASH MANAGEMENT

Without adequate cash flow, a firm can become technically insolvent even though assets far out
way the liabilities. To reduce the chances for a firm becoming technically insolvent, the
following parameters have been recommended to be employed in evaluating the effectiveness of
a cash management system. These include:

Cash conversion cycle

Operation cash flows
Increase of decrease in cash
Liquidity flow index

Cash conversion cycle

This is the time interval between actual cash payment/expenditure for the purchase of
productive/operational resources and the ultimate collection of cash from the sales of
products/services. The cash conversion cycle provides a valid alternative for measuring company
liquidity. The longer the time taken to get back the money paid out, the more the likely hood the
organization is to face technical insolvency and vice versa.

Operational cash flows

Cash flows from operations are the amount of cash a firm generates in a measured time from its
operation. Various methods are used to determine the amount of operating cash flow. The
prevalent methods use the income statement and the balance sheet to prepare the cash flow
statement (also called statement of sources and application of funds). (Kasilo, 1997)

Positive cash flows indicate how much cash the organization has generated from operations
during the financial year. Negative cash flows indicate how much additional cash has been used
to support the operations during the same period. Usually, a firm with negative cash flow from
operations is unable to finance its operations. De facto, it is consuming cash flows rather than
generating them. It becomes prone to technical insolvency problems and it may go bankruptcy.
(Kasilo op cit: 30, Vause and Woodward op sit: 99)

Cash flow accounting involves the reporting of classified list of last year's cash flows, and a set
of forecast cash flows, with supporting analysis of the variances between last year's actual and
forecast cash flows. It therefore emphasizes the most fundamental events in business activities,
cash flows into and out of the firm, and the segregation of past (cash) facts from future estimates,

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 A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

accounting time period allocation, based on estimates of consumption are avoided. (Vause and
Woodward, 2001)

The result is a set of statements that is objective, understandable and simple, and which meets the
needs of a variety of users concerned with stewardship, liquidity, performance appraisal and
investment. In particular, cash flow accounting meets one of the fundamental accounting
objectives, to provide information useful to investors and creditors for predicting, comparing
and evaluating potential cash flows to them in terms of amount, timing and related uncertainty.

Cash flows provide data, which, because it is properly dated, can be discounted at a rate, selected
by the user, and which does not required level adjustments, although comparisons over time
require, and the data permit general price level adjustment to a base period.

Finally, the use of a cash flow statement integrates trading activities and investments, dividends
and financing policies, unlike information presented in profit and loss account and balance sheet
format.

However, critics of the cash flow system argue that cash flow reports can be distorted, for
example, by delaying payments to creditors, and as they ignore non-cash changes in assets and
liabilities, including holding gains and losses, so that no estimate is provided of the extent to
which these flows were obtained by consumption of assets. Operating cash flows have also be
found to be poor predictors of failure. (Arnold and wearing 1988:313)

Increase or decrease in cash

A corporation's cash flow statement shows whether the firm has increase or decreases its cash
during the period for which the statement refers. Cautiously a decrease can be indicative of how
unsatisfactory the firms operations have been during the year and vice versa. Since profits are not
cash, a firm may realize profits but still be technically insolvent (Kasilo, op cit: 31, Vause and
Woodward, op cit: 95).

If cash flows are generated a firm may remain in business for several years while still making
losses. Usually, with meticulously handled double entry account system, the decrease or increase
in cash is simply the difference between opening cash balance and the closing balance.

Liquidity flow index (LFI)

The LIF indicates the relationship between the amount of cash that will be available for meeting
the obligations and the amount of cash required to meet such obligation during the same period.
It is cash budget's ratio of operating cash influence to the required cash outflows for a particular
period.

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 A Study On Cash Management at HLL Life Care Ltd, Akkulam, Trivandrum.

Maintaining liquidity may add value to a firm. A firm that faces variable demand can add value
by maintaining liquidity to permit it operating flexibly since changes in operating levels can be
more expensive than changes in liquidity or working capital.

Thus liquidity can enhance firm value by reducing the systematic components of its risk as it
reduces the firm's susceptibility to economic fluctuations. In addition, the value of a firm may be
enhanced by its liquidity because of its ability to act as a financial intermediary for its customers
and suppliers. A firm may be able to add value by doing this because of imperfections in
financial markets. Further, under asymmetric information, a liquid firm may be able to fund
valuable projects that may be difficult or costly to fund in financial markets. (Soenen and
Aggarwal, 1989:600)

In the case of firms operating in multinational settings, maintaining liquidity may additionally
allow a firm opportunity for arbitrage between segmented national capital markets and
institutional settings. Such firms also face additional opportunities and challenges in managing
liquidity under currency and political risks. Thus, because of the wide spread segmentation of
national financial markets, the ability to increase firm value by internalising the rates due to the
market imperfections through liquidity managements apply even to a great extent to firms
operating in multinational settings. (Ibid: 601)

To illustrate this difference between the domestics and the multinational settings, nations can be
defined as regions whose residents have different purchasing power indexes. National group of
investors, therefore delineated by deviations from purchasing power parity which causes them to
use different price indexes and deflating the monetary returns from the same security. In practice,
nations may further be separated by such manifestations of sovereignty as taxes, and exchange
and border controls, which restrict access to local capital markets.

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