The geography of jobs: Mapping the US economic recovery (infographic)
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Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 1
CASH MANAGEMENT
17
Chapter
CASH MANAGEMENT
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 2
CASH MANAGEMENT
Learning Objective
Give the nature of cash
List out the motives for holding cash
Discuss the objectives of cash management
Narrate the aspects of cash management
Explain the factors determining cash needs
Say cash budget, procedure, purpose of cash budget
Discuss the types of cash forecasting
Know the strategies for accelerating cash inflows, and slowing down payments
Determine optimum cash balance
Explain the models of cash management
Identify the investment avenues for investing surplus cash
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 3
CASH MANAGEMENT
Nature of Cash
Cash is the medium of exchange for purchase of goods and services and for
discharging liabilities. In cash management the term cash has used in two
senses.
Narrow Sense: Under this cash covers currency and generally accepted
equivalents of cash, viz., cheques, demand drafts and banks demand deposits.
Broad Sense: Here, cash includes not only the above stated but also near cash
assets. There are Bank’s time deposits and marketable securities. The
marketable security can easily sold and converted into cash. Here cash
management is in broader sense.
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 4
CASH MANAGEMENT
Catherine's business is growing and she's making a good profit. However, she never seems to have enough money to pay her bills. This month she had to pay the business
insurance premium with her credit card.
“ What is wrong with this picture? “
Here is a Here is a small storysmall story
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 5
CASH MANAGEMENT
Catherine has what is known as a "cash flow Catherine has what is known as a "cash flow problem. " That means that the cash flowing problem. " That means that the cash flowing into her business is out of synch with the cashinto her business is out of synch with the cashmoving out. The result is that she is moving out. The result is that she is temporarily caught short when her bills cometemporarily caught short when her bills comedue. Catherine needs to plan ahead so she willdue. Catherine needs to plan ahead so she willknow whether or not she will have enough know whether or not she will have enough cash available when she needs it.cash available when she needs it.
This is not a story Larsen & Toubro in FY 99
the company showed a net profit before tax of Rs.441 crores. But after
considering changes in working capital, the cash generated from operations was a
mere Rs. 36 crores. To sustain its growth, the company had to invest Rs. 632 crores in
fixed assets - leading to a negative free cash flow (even before considering
dividends and investments).
ACC in FY 2002
made Rs.137.5 cr where as the cash generated from operating activity was Rs.
483.98 which shows their good WCM which gave them cash balance of Rs.27.49cr
Telco in FY 2002
Made a Loss of Rs. 48914cr but cash generated from operations were actually
2863.4cr.
Excel BooksExcel Books11 – 6 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
“Cash Pays No Interest”
Why do Individuals & Corporations hold billions of dollars in cash?
Why don’t we take all cash & invest in interest bearing securities?
- “cash” gives you more liquidity than securities, You can use it to buy things.
Excel BooksExcel Books11 – 7 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 8
CASH MANAGEMENT
What is cash
Cash is ready money in the bank or in the business.
It is not inventory, it is not accounts receivable and it is not property. These might
be converted to cash at some point in time,
But it takes cash on hand or in the bank to pay suppliers, to pay the rent, and to
meet the payroll. Profit growth does not necessarily mean more cash.
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 9
CASH MANAGEMENT
Motives for holding Cash
Transaction Motive
Precautionary Motive
Speculative Motive
Compensating Balance
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 10
CASH MANAGEMENT
Does that mean it doesn’t matter how much cash you hold?“no”,
as a financial manager you need to hold cash balance upto the point where marginal value of the liquidity is equal to value of interest foregone.
Cost of holding cash
Opportunity cost – the opportunity cost of excess cash held in currency or bank
deposits is the interest income that could be earned in the next best use, such as
investment in marketable securities.
The firm has to therefore weigh the cost of holding cash with the benefits of holding it.
Excel BooksExcel Books11 – 11 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 12
CASH MANAGEMENT
Cash Cycle
Information & control
collections
Payments
Borrow or invest
Understanding Float
Float – difference between cash balance recorded in the cash account and the cash
balance recorded at the bank
Disbursement float :
Generated when a firm writes checks
Available balance at bank – book balance > 0
Collection float :
Checks received increase book balance before the bank credits the account
Available balance at bank – book balance < 0
Net float = disbursement float + collection float
Excel BooksExcel Books11 – 13 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
Cash Collection
Payment Payment Payment CashMailed Received Deposited Available
Mailing Time Processing Delay Availability Delay
Collection Delay
Excel BooksExcel Books11 – 14 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 15
CASH MANAGEMENT
Collections Pre authorized Payment arrangement
Float
Order Processing Float Buyer Float Deposit Float
Lock – Box System Decentralized collections
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 16
CASH MANAGEMENT
One of the goals of float management is to try and reduce the collection
delay. There are several techniques that can reduce various parts of the
delay.
Controlling Disbursements Disbursement Float
Zero- Balance Account
Controlled Disbursement Account
Electronic Fund Transfer
Excel BooksExcel Books11 – 17 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 18
CASH MANAGEMENT
Credit Management: Key Issues
Granting credit increases sales
Costs of granting credit
Chance that customers won’t pay
Financing receivables
Credit management examines the trade-off between increased sales and the costs
of granting credit
Cash flow from granting credit
Credit Sale Check Mailed Check Deposited Cash Available
Cash Collection
Accounts Receivable
Excel BooksExcel Books11 – 19 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
Collection Policy
Monitoring receivables
Keep an eye on average collection period relative to your credit terms
Use an aging schedule to determine percentage of payments that are being
made late
Collection policy
Delinquency letter
Telephone call
Collection agency
Legal action
Excel BooksExcel Books11 – 20 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2006, Dr Sudhindra Bhat
CASH MANAGEMENT
Excel BooksExcel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright © 2008, Dr Sudhindra Bhat
2 ND
17 – 21
CASH MANAGEMENT
Case for Class Discussion
Case 1 :
BHATT ENTERPRISES CASE :
CASH FORECASTING AND INVESTING
Case 2 :
BAJAJ ELECTRONICS CASE :
CASH FORECASTING