Cash Management

Cash is used in 2 senses:

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Narrow sense: currency & equivalents of cash( cheques, drafts, demand deposits in banks) Broad sense: includes near-cash assets ( marketable securities & time deposits in banks)

Introduction
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Important current asset for the operations of the business. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle. Major function of Financial manager is to maintain a sound cash position. The term cash includes coins, currency and cheques held by the firm & balances in its bank accounts.

Aspects of Cash Management

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Cash Management is concerned with the managing of : i) Cash flows into & out of the firm ii) Cash flows within the firm iii) Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Aim of Cash Management is to maintain adequate control over the cash position to keep the firm sufficiently liquid & to use excess cash in some profitable way.

Cash collections

Business Operations

Deficit Surplus

Borrow Invest

Cash Payments

Cash Management Cycle

Four Facets of Cash Management

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Cash Planning: to project cash surplus or deficit Managing the cash flows: Cash inflows- accelerated, cash outflows- decelerated. Optimum Cash Level: Cost of excess cash & danger of cash deficiency should be matched to determine the optimum level of cash balance. Investing surplus cash: to earn profits

Motives for Holding Cash

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Transaction Motive e.g. payment for purchases, wages & salaries, other operating expenses etc. Precautionary Motive i.e. to meet contingencies in future. Example: strike etc Speculative Motive i.e. investing in profit- making opportunities as and when they arise.

Factors determining cash needs

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Synchronization of cash flows ( cash budget) Short costs ( borrowing costs, loss of cash discount, cost of deteriorating credit-rating) Excess cash balance cost. Procurement & management Uncertainty

Cash Budgeting & forecasting

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Cash Budget is the most significant device to plan for & control cash receipts & payments. Cash Budget is a summary statement of the firms expected cash inflows & outflows over a projected time period. Cash forecasts are needed to prepare cash budgets Cash forecasting may be done on short or long term basis.

Preparation of cash budget

Select the planning horizon. ( time period) ` Selection of factors that have bearing on cash flows. (only cash items) these factors are classified as: 1. Operating cash flows 2. Financial cash flows
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Operating cash flow items:

CASH RECEIPTS/ INFLOWS 1. Cash sales 2. Collection of Accounts receivable 3. Disposal of fixed assets CASH OUTFLOWS/ DISBURSEMENTS 1. 2. 3. 4. 5. Accounts payable Purchases of raw material Wages & salary Factory expenses Administrative & selling expenses 6. Purchase of fixed assets

Short Term Forecasts

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Important functions of carefully developed short-term forecasts are: 1) To determine operating cash requirements i.e. how much cash balance is to be kept in hand 2) To anticipate short term financing 3) To manage investment of surplus cash i.e. select securities with appropriate maturities and reasonable risk, avoid over and under investing etc.

Other uses of Forecasting

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

Short Term Forecasting Methods

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The receipt & disbursement method- for limited period such as a week or a month The adjusted net income method- preferred for longer durations ranging between a few months to a year.

the cash flows can be compared with budgeted income and expense items if R & D approach is followed and AIA is appropriate in showing a companys working capital and future financing needs.

Receipts & Disbursements Method

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In this method the receipts & payments of cash are estimated. The R&D method are to be equaled over a short as well as long periods. It may be easy to make estimates for payments but cash receipts may not be accurately made. Because of uncertainty, the reliability of this method may be reduced.

Adjusted Net Income Method

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This method may also be known as Sources & Uses approach It generally has 3 sections: sources of cash, uses of cash & adjusted cash balance The adjusted net income method helps in projecting the cos need for cash at some future date & to see whether the co. will be able to generate sufficient cash. If not, then it will have to decide about borrowing or issuing shares etc. In preparing its statement the items like net income, depriciation, dividends, taxes can easily be detemined from cos annual operating budget. This method helps in keeping a control on WC & anticipating financial requirements.

Methods of Accelerating Cash Flows

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Prompt payment by customers Quick conversion of payment into cash- cheque Decentralised Collections Lock Box System

Methods of Slowing Cash Outflows

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Paying on Last Date Centralized disbursements ( more transit time) Accruals