TECHNIQUES OF CASH MANAGEMENT

CASH PLANNING
Cash planning is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash balances (which lowers firms profitability) and cash deficits (which can cause the firms failure)

 Cash planning may be done on daily, weekly or monthly basis. The period and frequency of cash planning generally depends upon the size of the firm and philosophy of the management. Large firms prepare daily and weekly forecasts. Medium size firms usually prepare weekly and monthly forecasts. Small firms may not prepare formal cash forecasts because of the non availability of information and small-scale operations.

CASH FORECASTING & BUDGETING

A cash budget is a summary statement of the firms expected cash inflows and outflows over a projected time period. It is the most significant device to plan for and control cash receipts and payments. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. This information helps the financial manager to determine the future cash needs of the firm, plan for the financing of these

needs and exercise control over the cash and liquidity of the firm. Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on short or long term basis. Generally, forecasts covering periods of one year or less are considered short term; those extending beyond one year is considered as long term

Short-term cash forecasts

Important functions are:
a) To determine operating cash requirements b) To anticipate short-term financing c) To manage investment of surplus cash

a) To know the operating cash requirements, cash flow projections have to be made by a firm. There is hardly a perfect matching between cash inflows and outflows. With the short-term cash forecasts, however, the financial manager is enabled to adjust these differences in favor of the firm.

b) It is well known that, for their temporary financing needs, most companies depend upon banks. One of the significant roles of the short-term forecasts is to pinpoint when the money will be needed and when it can be repaid. With such forecasts in hand, it will not be difficult for the financial manager to negotiate short-term financing arrangements with banks.

c) The third function of the short-term cash forecasts is to help in managing the investment of surplus cash in marketable securities.

 Other uses of these forecasts are:

Planning reductions of short and long term debt. Scheduling payments in connection with capital expenditure programs. Planning forward purchases of inventories. Checking accuracy of long-range cash forecasts. Taking advantage of cash discounts offered by suppliers. Guiding credit policies.

Short-term forecasting method

Two methods of short-term forecasting methods are:
The receipt and disbursements method The adjusted net income method

 The receipts and disbursement method is generally employed to forecast for limited periods, such as a week or a month. The adjusted net income method, on the other hand is preferred for longer durations ranging from a month to a year. The cash flows can be compared with budgeted income and expense items if the receipts and disbursement approach is appropriate in showing a compare of working capital and future financing needs.

 Receipts and disbursements method cash flow and out in most companies on a continuous basis have prime aim of receipts and disbursement forecasts to summarize these flows during a predetermined period. In case of those companies where each item of income and expense involves flow of cash, this method is favorable to keep a close control over cash.

Adjusted net income method

This method of cash forecasting involves the tracing of working capital flows. It is sometimes called sources and uses approach. Objectives are:
To project the companies need for cash at a future date and To show whether the company can generate the required funds internally, and if not how much will have to be borrowed or raised in the capital market.

 In preparing the adjusted net income forecasts items such as net income, depreciation, taxes, dividends, etc., can be easily determined from the companies annual operating budget. Normally difficulty is faced in estimating working capital changes; the estimates of accounts receivable(debtors) and inventory pose problem because they are influenced by factors such as fluctuations in raw material costs, changing demand for the companys products and possible delays in collections.

 Benefits of adjusted net income method are:

It highlights the movement in working capital items, and thus, helps to keep a control on a firms working capital. It helps in anticipating a firms financial requirements.

The major limitation of this method is

it tails to trace cash flows, and therefore, its utility in controlling daily cash operations is limited.

Long term cash forecasting

Long term cash forecasts are prepared to give an idea of the companys financial requirements in the distant future. Once a company has developed a long term cash forecast, it can be used to evaluate the impact of, say, new product developments or plant acquisitions on the firms financial condition, for three, five, or more years in the future.

 The major uses are:

It indicates as companys future financial needs, especially its working capital requirements. It helps to evaluate proposed capital projects. It pinpoints the cash required to finance these projects as well as the cash to be generated by the company to support them. It helps to improve corporate planning. Long-term cash compel each division to plan for the future and to formulate projects carefully.