CASH &

MARKETABLE SECURITIES MANAGEMENT

MOTIVES FOR HOLDING CASHJohn Maynard Keynes suggested 3 reasons:

Transactions motive

Speculative motive

Precautionary motive

METHODS TO IMPROVE

CASH MANAGEMENT

EFFICIENCY

Speeding up cash receipts

Slowing down cash

payouts

SPEEDING UP CASH RECEIPTS

Vaibhav ChaudharyMBA-Tech Manufacturing(Mumbai)

SPEEDING UP CASH RECEIPTS

Methods of speeding up cash receipts:

Collections Concentration Banking

COLLECTIONS

Methods to speed up the collection process:

Collection float

Earlier Billing

Customer mails cheque

Firm receives cheque

Firm deposits cheque

Firm’s bank Account credited

Mail float:Time the cheque is in the mail.

Processing float:Time it takes aCompany to process the cheque internally.

Availability float:Time consumed in clearing the cheque Through the bankingSystem.

Deposit float: Time during which the cheque received by the firm remains uncollected funds

Collection float: Total time between the mailing of the cheque byThe customer and the availability of cash to the receiving firm.

A time-line explanation of the collection float and its components

CONCENTRATION BANKING

3 principle methods to move funds between banks:

• Depository transfer checks(DTC)

• Automated clearinghouse(ACH) electronic transfer

• Wire transfer

It improves control over inflows and outflows of corporate

cash

It reduces idle balances

It allows for more

effective investments

EFFECTS OF CASH CONCENTRATION

SLOWING DOWN CASH PAYOUTS

Siddharth DevnaniMBA-Tech Manufacturing(Mumbai)

SLOWING DOWN CASH PAYOUTS

• Cash management-– Collection,– Disbursement,– Temporary Investment of cash.

• Aim of cash management is to hold cash for a longer period.

• Motives to hold cash.– Speeding up cash receipts is just one side of the coin.– Slowing down payouts is as important to hold cash.

HOW AND WHY TO SLOW DOWN PAYOUTS?

Solution 1:• Strategically delay all disbursements.• Make a payment towards the end of the credit

period.• Payment should be released just before-

1. It causes you to pay a penalty for late payment.2. It will damage goodwill and reputation as far as credit

standing is concerned.

HOW AND WHY TO SLOW DOWN PAYOUTS?

Solution 2:• The balance in the account from which

disbursements are made should be ideal, not idle.• Ideal case is never possible.• But closer the cash management system is to ideal,

more you are making your money make profits for you.

HOW AND WHY TO SLOW DOWN PAYOUTS?

Solution 3:• Dividends and salaries are not instantly encashed.• Trend of number of days taken for depositing of

cheques should be observed.• Accordingly, in the future, funds need not be put in

the account at once. • Strategically transfer funds into payroll and

dividend account according to prediction/trends

HOW AND WHY TO SLOW DOWN PAYOUTS?

Solution 4:• Choosing geographically remote banks.• This increases the net float available.• There is a delay between making a check and

account being debited.• This is exploited and increased.• It is highly unethical. It will tarnish image and

reduce goodwill• It may also be illegal

ELECTRONIC COMMERCE

-Abbas Sheik DawoodMBA-Tech IT(Shirpur)

ELECTRONIC COMMERCE

Business information in electronic format

Computer networks emphasis

Paper system Alternative

E- COMMERCE..

Electronic Data Interchange

(EDI)

Transfer of biz info in

computer readable format

Computer transfer + Physical

Transfers

COST & BENEFITS

Benefits Cost

Float Elimination!!

Convince Supplier & Client network for

changing

Train Personnel

Hardware + Software

Eliminates float

Better cash forecasting & mgmt

Reduces mail, doc & storage

Faster Cash & info movement; reliable

INDIAN SYSTEMS FOR E-COMMERCE

NEFT RTGS

ECS

CTS (only in Delhi as of now)

OUTSOURCING

Bhavuk ChandakMBA-Tech IT(Shirpur)

•Subcontracting a certain business operation to an outside firm, whether abroad or at home instead of doing it “in-house.”

Outsourcing

•All essential but non core areas of business are candidates for outsourcing.

Who?

•Lockbox service – (oldest corporate cash management service)Example

OUTSOURCING

Why outsource?

Improving company

focus

Reduce and control

operating costs

Free resources for

other purposes

Restructure Cost

Continuity & risk

management

Develop internal staff.

Improve service quality

Make the business more

flexible

DisadvantagesPoor Quality control over process

Creates potential redundancies

Other companies may also be using the

service provider. The best interests of the

service provider may be diluted

Loss in customer focus.

Employees reaction

• It is a subset or a specialized form of outsourcing in which an entire business process is handed over to a third party service provider.

• BPO companies are often located in India ,China , Mexico & Eastern European nations.

• Leading BPO companies in India includes GENPACT, WNS SERVICES ,IBM DAKSH ,WIPRO ,TCS.

BUSINESS PROCESS OUTSOURCING(BPO)

Advantage- enhances flexibility of an organization in different ways.

BPO

Back office outsourcing

Includes internal business functions

such as HR & Finance

Front office outsourcing

Includes customer-related services such as contact center services.

CASH BALANCE TO MAINTAIN

Dharmendra ChoudharyMBA-Tech IT(Shirpur)

• Firms establish a target level of cash balances to maintain.

• Excess cash balances are avoided because interest can be earned when these funds are invested in marketable securities.

• Greater interest rate = Greater opportunity cost to idle cash balances.

The optimal level of cash should be the larger of:

(1) The transaction balances required when cash management is efficient.

(2) The compensating balance requirements of commercial banks.

• Establishing minimum level of cash balance depends on the compensating balance requirements of banks.

• Compensating bank for services is based on profitability of the account.

• Banks differ in determination of compensating balances , so firms chooses that bank which provides lowest compensating balances for a given level of activity.

COMPENSATING BALANCES AND FEES

• Paying cash for services rendered instead of maintaining compensating balances.

• Earn more on funds used on compensating balances than for the fee for the services.

RECENT TRENDS

MARKETABLE SECURITIES MANAGEMENT

Shruti P BihaniMBA-Tech Chemical (Mumbai)

CASHMARKETABLE

SECURITIES?• Compensating

Balance• Service Fee

• Remaining Excess Cash

CASH

SHORT-TERM

MARKETABLE

SECURITIES1. Earn Higher Interest

than Savings account

2. Liquid Assets: Cash

Equivalents

3. Preserve cash for

unanticipated events

• Maturity less than 3 months• Insignificant Risk of change in value

SAFETY

YIELD

MARKETABILITY

MATURITY

Criteria for selecting Marketable Securities1. Safety of Principal2. High degree of

safety required if to be considered

3. Treasury Bills

1. Interest of appreciation provided

2. BEY and EAY3. Interest-Rate Risk

1. Ability to convert to cash at a short notice

2. Sale without loss before maturity

3. Large Second hand market

1. Refers to Life of the security

2. Time before which principal amount remains due

MARKETABLE SECURITIES PORTFOLIO

Ready Cash Seg-ment

Con-trol-lable Cash Seg

ment

Free Cash Seg

ment

• To take care of probable deficiencies in the firm’s cash account

• Requires instant liquidity

• For unforeseen operating needs of the firm

Ready Cash Segment

MARKETABLE SECURITIES PORTFOLIO

Ready Cash Seg-ment

Con-trol-lable Cash Seg

ment

Free Cash Seg

ment

• For meeting controllable outflows

• Taxes• Dividends• Loans coming due• Interest Payments

Controllable Cash Segment

MARKETABLE SECURITIES PORTFOLIO

Ready Cash Seg-ment

Con-trol-lable Cash Seg

ment

Free Cash Seg

ment

• Available for as yet unassigned purposes

Free Cash Segment

COMMON MARKETABLE SECURITIES

Inter Corporate Deposits

Ready Forwards/

Repos/ Buybacks

Bills of Exchange

Treasury Bills

Certificate of

Deposits

Commercial Paper

Bill Discounting

READY CASH SEGMENT

TREASURY BILLS• Safety• High

Marketability

Auctioned by RBI 14,91,182,364 days Rs.25,000 and

multiples Procedure of

earning

CONTROLLABLE CASH SEGMENT

CDs, BILLS DISCOUNTING, REPOS

• Meet time constraints• Marketability less

important

Issued By? Maturity Time Denomination Procedure of Earning

FREE CASH SEGMENT

ANY MARKETABLE SECURITIES

Issued By? Maturity Time Denomination Procedure of Earning

THANK YOU