INTRODUCTION

FINANCIAL MANAGEMNENT CASH MANAGEMENT

Prepared By;Amrutha Menon

WHAT IS CASH?It is the money which a firm can disburse immediately without any restrictions.The term cash include coins, currencies and checks held by the firm in balance in its bank account.It includes near-cash assets, such as marketable securities and time deposits in banks.

CashNARROW SENSECash in hand i.e.currency notes & coins

BRODER SENSECash & its equipment i.e. Cash at Bank, Short term investment

CASH MANAGEMENTCash management is concerned with the managing of:cash flows into and out of the firm,cash flows within the firm, andcash balances held by the firm at a point of time by financing deficit or investing surplus cash

Business OperationsInformation & controlCash CollectionsCash Paymemts

Deficitsurplus

BorrowInvestCash Management Cycle

FOUR FACETS OF CASH MANAGEMENTCash planning Managing the cash flows Optimum cash level Investing surplus cash

MOTIVES FOR HOLDING CASHTransaction motivePrecautionary motiveSpeculative motive

TRANSACTION MOTIVESIt refers to the holding of cash required by a firm to carry its day to day business transactions in the ordinary course of business.

PRECAUTIONARY MOTIVE

The precautionary motive of holding cash is to meet the unpredictable cash obligations of a firm.A cushion to meet unexpected contingencies.Floods, strikes and failure of imp customersUnexpected slowdown in collection of accounts receivableSharp increase in cost of raw materialsCancellation of some order of goods

SPECULATIVE MOTIVE

This refers to maintaining cash balance ,the firm to take advantage of investing in profit making opportunities and which is typically outside the normal course of business.Helps to take advantage of:An opportunity to purchase raw materials at reduced priceMake purchase at favorable pricesDelay purchase on anticipation of decline in pricesBuying securities when interest rate is expected to decline

CASH PLANNINGCash Flow Planningis when a business forecasts short & long term business expenses against the projected incoming cash. It allows us to anticipate trouble by creating a cash flow cushion, for unexpected expenses.A method that an insured can use to control the premium payments that they must make on their policies.

CASH FORECASTING AND BUDGETINGCASH BUDGETSummary statement of the firms expected cash inflows and outflows over a projected time periodCASH FORECASTSEstimate of the timing andamountsofcash inflows andoutflows over a specificperiod

SHORT-TERM CASH FORECASTSThe important functions of short-term cash forecastsTo determine operating cash requirementsTo anticipate short-term financingTo manage investment of surplus cash.Short-term Forecasting MethodsThe receipt and disbursements methodThe adjusted net income method.

THE RECEIPT AND DISBURSEMENTS METHODThe virtues of the receipt and payment methods are:It gives a complete picture of all the items of expected cash flows.It is a sound tool of managing daily cash operations.This method, however, suffers from the following limitations:Its reliability is reduced because of the uncertainty of cash forecasts. For example, collections may be delayed, or unanticipated demands may cause large disbursements.It fails to highlight the significant movements in the working capital items.

THE ADJUSTED NET INCOME METHODThe benefits of the adjusted net income method are:It highlights the movements in the 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 fails to trace cash flows, and therefore, its utility in controlling daily cash operations is limited.

LONG-TERM CASH FORECASTINGThe major uses of the long-term cash forecasts are:It indicates as companys future financial needs, especially for 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 forecasts compel each division to plan for future and to formulate projects carefully.

FEATURES OF INSTRUMENTS OF COLLECTION IN INDIA

CLEARINGmutual settlement of claimsamong member banksagreed time and placeas per instruments drawn

Clearing can be classified asCounter clearingNon MICRMagnetic Ink Character RecognitionCheque Truncation System

TYPES OF RETURN CHEQUES:INWARD OR PAYING BRANCH When a particular branch receives instruments, which are on themselves and sent by other member bank for collection is treated as Inward Clearing of that branch.INWARD RETURNWhich are presented by collecting bank to other banks for payment but it has been returned and unpaid by them due to specified reason through the clearing house.

OUTWARD OR COLLECTING BRANCHWhen a particular branch receives instruments drawn on the other bank within the clearing zone and sends those instruments for collection through the clearing arrangement is considered

OUTWARD RETURNInstruments which are return by paying bank due to specified reason through the clearing house.

BAUMOLS MODELThe firm is able to forecast its cash needs with certainty.The firms cash payments occur uniformly over a period of time.The opportunity cost of holding cash is known and it does not change over time.The firm will incur the same transaction cost whenever it converts securities to cash.

Baumol's model for cash balance

ASSUMPTIONThe firm is able to forecast its cash with certainty.The firms cash payment occur uniformly once a period of time.The opportunity cost of holding cash is known and it does not change over time.The firm will incur the same transaction cost whenever it converts securities to cash.

TYPES OF COST

Holding Cost or opportunity costHolding Cost = k (C/2)k = Opportunity Cost, C/2 = Average cash balance

Transaction CostTransaction Cost = c(T/C)

Total cost Total Cost = k(C/2)+c(T/C)

Optimum cash balanceC*= 2cT/k

COST TRADE-OFF: BAUMOL'S MODEL

THE MILLERORR MODELIt provides for two control limitsthe upper control limit and the lower control limit as well as a return point. If the firms cash flows fluctuate randomly and hit the upper limit, then it buys sufficient marketable securities to come back to a normal level of cash balance.Similarly, when the firms cash flows wander and hit the lower limit, it sells sufficient marketable securities to bring the cash balance back to the normal level

LOWER CONTROL LIMIT=(3/4 x transaction cost X variance of cash flows )1/3 interest rate

Upper Limit= Lower Limit + 3ZReturn Point= Lower Limit + Z

Average Cash Balance = Lower Limit +4/3 Z

Symbolically (Z)= ( 3/4 x c/i )1/3

MANAGING CASH COLLECTIONS AND DISBURSEMENTSAccelerating Cash CollectionsDecentralised CollectionsLock-box System

Controlling DisbursementsDisbursement or Payment Float

ACCELERATING CASH COLLECTIONS Decentralised CollectionsNumber of collection centresCollection centres will collect cheques from customers and deposit in their local bank accountsThey will deposit the funds to a central bank Lock-box SystemCollection centers are established considering the customer locations and volume of remittancesAt each Centre the firm hires a post office box Remittances are directly picked from the bank whom the firm gives the authority

INVESTING SURPLUS CASH IN MARKETABLE SECURITIESSelecting Investment Opportunities:Safety, Maturity, andMarketability.

SHORT TERM INVESTMENTS OPPORTUNITIESTreasury bills Commercial papers Certificates of deposits Bank deposits Inter-corporate deposits Money market mutual funds