CASH MANAGEMENT

Dr. A. K. ASTHANA Director

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INSTITUTE OF COOPERTIVE MANAGEMENT

E – 8/77, TRILANGA ROAD, SHARPUR BHOPAL ( INDIA)

Phone – 0755 – 2725477 / 4034733

WEB: icmbpl.com

Facebook: icmbhopal

E-mail: icmpbl@gmail.com

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Introduction

• Cash is one of the current asset of business

• Any business organisation need it all the time.

• A business organisation need to keep sufficient cash.

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• Any shortage of cash will hamper the business operation

• on other hand excess of cash is also not going to help

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Cash Management

• business organisation desires to utilise available cash in most effective way

• But management of cash is not as simple

• It is challenging to decide how much cash is needed for day to day operation and how much cash should be put aside to meeting any exigency.

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• objective of cash management is to maintain sound cash position to maintain liquidity and use excess cash in profitable way.

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Cash Management and Entrepreneurial Skill

• cash management is science

• A person need entrepreneurial skill to bring out good performance cash management like searching and arranging financial source, cash planning, cash budgeting, etc

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Problem of Cash Management

• Problem in cash management has been identified in these four areas:

1. Controlling Level of Cash

2. Controlling in-flow of cash

3. Controlling out-flow of cash

4. Optimal investment of excess cash

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• 1. Controlling Level of Cash

• Every organisation try to keep minimum level of cash balance

• For deciding minimum level of cash the following things are taken into consideration:

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• A. Predictable Discrepancies

Some discrepancies in business organisations are predictable

comes from discrepancy between in-flow and out-flow of cash.

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B. Unpredictable discrepancy:

Labour strike, sudden rise in cost of input material, market recession

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Such incidence may affect sudden in-flow of cash or out-flow of cash

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C Source of Fund Cash level depends on source of funds also from which companies obtain cash at short notice. credibility of company becomes important.

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D. Relationship with bank:

Level of cash also depends on the relation of company with bank.

Relationship with bank depends much on the credibility of company

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• this connection other major important points are financial condition of bank, its location, managerial ability of its chief officer .

• financial products like cash credit management, collection of bills, discounting of bills etc. that it sells to company

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• 2. Controlling of In-flow of cash:

Adequate control on cash in-flow is also problematic area

. It is concerned with speedy collection of cash and also with preventing fraudulent diversion of cash in-flow.

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• Fraudulent diversion of cash can be stopped by installing internal check system.

• Cash receipt activities are break down in several stages ….. each stage job is assigned to different employees.

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• For speedy Collection

• Lock- Box System:

• This system of collection of in-flow cash is very popular in USA.

• company open deposit accounts in several banks are different geographical locations.

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• Lock box in post office serves as regional bank for company.

• Customers sends their remittance to the lock box.

• The bank collect cheques from lock box several time in a day and clear the cheque and deposit the amount in the account of customer

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• Collection through regional branch offices:

• In case company work thought regional branch offices at different geographical location, then this system is very effective.

• officer of regional branch office is authorised to collect in-flow cash on behalf of head office

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• After collecting the cheque, officer deposit it to local bank which inter alia transfer the fund to the bank of head office.

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• 3. Controlling Out-flow of cash:

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• In order to control out flow of cash, most company follow centralised cash payment system

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• all payments from regional branch office is transferred to head office and head office in turn pay the bills directly to the parties.

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• 4. Optimal Investment of Excess cash

• The proper investment of excess cash in company at short notice is also a problem area.

• Finance manager use its prudence and discretion for investment of excess cash.

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Cash Planning and Cash Control

• In order to maintain flow of cash, cash planning is done.

• well in time to maintain adequate cash balance in hand to meet present expenditure and unforeseen contingency

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• Tools for cash Planning

• A. Net cash forecast: • B. Cash Budget: • C. Forecasting of overall working capital

management

• A. Net cash forecast:

• It means forecast of cash inflow and cash out flow over a period of time.

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Cash Control

• Planning and control are twin function of management.

• Formulation of cash management policy, procedure and practice

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• Tools for cash Control:

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A. Cash budget report:

B. Cash Flow statement

C. Ration Analysis:

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Cash Budget

• It is systematic analysis of “ requirement of cash” over a period of time. It is prepared with help of cash inflow and cash out flow statement.

• Cash budget may be short term cash budget and long term cash budget.

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Importance of Cash Budget

• 1. Evaluation of Performance: Cash budget acts as a standard for evaluating financial performance by comparing the actual performance with the budgeted figure.

• If deviation is positive then it is said that performance is good.

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• 2. Sound Dividend Policy: Cash budget plan for cash dividend to shareholders in consistent with liquid cash position.

• 3. Help in planning: Cash budget indicate either cash surplus or cash deficiency. Accordingly planning is done.

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• 4. Controlling Cash Expenditure: Cash budget controls expenditure of various department as they are not allowed to exceed the limit set in budget.

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• 5. Testing Influence of Proposed Expansion plan

• Cash budget forecast the inflow of cash from the investment plan and testify its impact on the cash

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