1. Cash Management

2. Cash Cash is one of the current asset
It is needed at all times in the business
Business should always keep sufficient cash for meeting its obligations.
Cash is the most unproductive of all the assets. The cash in hand will not add anything to the concern.

3. Nature of Cash
Only currency – Cash in hand and cash at bank and also includes marketable securities too as part.
It does not produce goods or services
It is a medium to acquire other assets
It help the business in producing cash
There is a gap between cash inflows and cash out flows.

4. Motives for maintaining cash
Transaction motive
Precautionary motive
Speculative motive
Compensating motive

5. Transaction motive
To meet routine cash requirements to finance transaction in the ordinary course of business
To balance current receipts and disbursement
Example: Cash payment for purchasing, operating expenses, financial charges

6. Precautionary motive Defensive in nature
Holding cash/near-cash as a cushion to meet unexpected contingencies/demand for cash
Floods, strikes and failure of important customers
Earlier settlement of bills
Unexpected slow down in collection of accounts receivable
Cancellation of some orders
Sharp increase in cost of row materials

7. Speculative Motive
Holding cash/near-cash to quickly take advantage of opportunities typically outside the normal course of business
Positive and aggressive approach
Examples-
An opportunity to purchase raw materials
A chance to speculate on interest rate movements
Make purchase at favorable prices

8. Compensating motive
Holding cash/near-cash to compensate banks for providing certain services or loans
Example: compensation balances-
An absolute minimum
A minimum average balance

9. Objectives of cash management
To meet cash disbursement needs (payment schedule)
To minimize funds committed to cash management

10. Factors determining cash needs
Synchronization of cash flows
Short cost
Excess cash balance
Procurement and management
Uncertainty

11. Strategies require for effective Cash Management
Cash Planning – A technique to plan and control. A projected cash flow statement will help to determine the possible uses of cash.

12. Cash Forecasting and Budgeting – It is a technique or device for the control of receipts and payments of cash. It is an analysis of flow cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay. Long term and short term forecasts may be made with the help of the following methods.
Receipts and disbursements method
Adjusted net income method

13. Managing cash flows:
Cash management will be successful only if cash collections are accelerated and cash disbursements as far as possible delayed. The following methods of cash management will help.

14. Methods of accelerating cash inflows
Make the customers to pay promptly
Convert the payments which is in the form of Cheques or DD into cash quickly
Big firms operating in different areas can have collection centers in those area (Decentralized collections)
Lock Box system – firm hires post box from post office and the parties are asked to send the Cheques to that post box number.

15. Methods of slowing cash outflows:
Delaying the payments till last date
Making payments through drafts
Adjusting the payroll funds by making the weekly payment in to month etc.
Cheques shall be issued from the main office then it will take time for the Cheques to be cleared through post.
Inter – bank transfers shall be made to make efficient use of cash

16. Determining Optimum Cash Balance
The two approaches to determine the optimum cash balance are
i. Minimizing Cost models
ii. Preparing Cash budget
Cash budget is the most important tool for cash management.

17. Determining cash need Minimizing cost cash model Cash budget model
Baumol model
Miller-orr model
Orgler’s model

18. Baumol model Provides for cost-efficient transactional balances
Assumes that the demand for cash can be predicted with certainty
Determines the optimal conversation size/lot
Total cost associated with cash management has two elements-
Cost of converting marketable securities into cash
The lost opportunity cost
Total conversion cost per period= Tb/C
T- total transaction cash needs for the period
b- cost per conversion
C- value of marketable securities sold at each conversion

19. It is used in inventory management but has its application in determining the optimal cash balance also. It involves trade off between opportunity cost or cost of borrowing or holding cash and the transaction cost. The optimal cash balance is reached at appoint where the total cost is the minimum. The figure shows the optimum cash balance.

20. costs Optimum cash balance Transaction costs Opportunity/holding costs
Total cost

21. Baumol’s Model Assumptions
The cash needs of the firm are known with certainty
The cash disbursements of the firm occurs uniformly over a period of time and is known with certainty
The opportunity cost of holding cash is known ad it remains constant
The transaction cost of converting securities into cash is known and remains constant.
C =  2AF/O
C = Optimum balance
A = Annual or monthly cash disbursements
F = Fixed cost per transaction
O = Opportunity cost of holding cash

22. Miller and Daniel Orr model
Provides for cost-efficient transactional balances
Assumes uncertain cash flows
Determines an upper limit and return point for cash balances (optimum cash balance level)
C= bE (N)/t + iE (M)
b- the fixed cost per conversion
E(N)- the expected numbers of conversions
t- the number of days in the period
i- the lost opportunity cost
E(M)- the expected average daily cash balance
C- total cash management costs

23. Orgler’s model
Provides for integration of cash management with production and other aspects of the firm
Comprises three sections-
Selection of appropriate planning horizon
Selection of appropriate decision variables
Payment schedule
Short-term financing
Transaction of marketable securities
Cash balance
Formulation of cash management strategy itself

24. Case budget: management tool
“Cash budget is a statement of the inflows and outflows of cash that is used to estimate its short-term requirements”
Identifies the excess or shortage of cash
It pinpoints the period/ds
Assists in drawing capital financial plan
Helps in saving from cash crunch
Elements/preparation of cash budget-
Planning horizon
Selection of factors:
Operating cash flows
Financing cash flows
Cash receipts
Cash disbursements

25. Cash management: basic strategies
Cash cycle
Cash turnover
Minimum operating cash
Stretching accounts payable
Efficient inventory-production management
Speedy collection of accounts receivable
Combined cash management strategies

26. Thank you