cash mgt system
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
17 1
CASHMANAGEMENT
17
Chapter
CASH MANAGEMENT
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
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
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
Catherine's business is growing and she's making a good profit. However, she neverseems 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 asmall story
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
Catherine has what is known as a "cash flowproblem. " That means that the cash flowing
into her business is out of synch with the cash
moving out. The result is that she is
temporarily caught short when her bills come
due. Catherine needs to plan ahead so she willknow whether or not she will have enough
cash available when she needs it.
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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 Books11 6 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2006, Dr Sudhindra Bhat
CASHMANAGEMENT
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Cash Pays No Interest
Why do Individuals & Corporations hold billions of dollars in cash?
Why dont we take all cash & invest in interest bearing securities?
- cash gives you more liquidity than securities, You can use it to buy things.
Excel Books11 7 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2006, Dr Sudhindra Bhat
CASHMANAGEMENT
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Copyright 2008, Dr Sudhindra Bhat
17 9
CASHMANAGEMENT
Motives for holding Cash
Transaction Motive
Precautionary Motive
Speculative Motive
Compensating Balance
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Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
Does that mean it doesnt 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.
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Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
Cash Cycle
Information &control
collections
Payments
Borrow or invest
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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 Books11 13 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2006, Dr Sudhindra Bhat
CASHMANAGEMENT
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Cash Collection
Payment Payment Payment Cash
Mailed Received Deposited Available
Mailing Time Processing Delay Availability Delay
Collection Delay
Excel Books11 14 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2006, Dr Sudhindra Bhat
CASHMANAGEMENT
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
Collections Pre authorized Payment arrangement
Float
Order Processing Float Buyer Float
Deposit Float
Lock Box System
Decentralized collections
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
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.
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Controlling Disbursements Disbursement Float
Zero- Balance Account
Controlled Disbursement Account
Electronic Fund Transfer
Excel Books11 17 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
17 18
CASHMANAGEMENT
Credit Management: Key Issues
Granting credit increases sales
Costs of granting credit
Chance that customers wont pay
Financing receivables
Credit management examines the trade-off between increased sales and the costs of
granting credit
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Cash flow from granting credit
Credit Sale Check Mailed Check Deposited Cash Available
Cash Collection
Accounts Receivable
Excel Books11 19 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2006, Dr Sudhindra Bhat
CASHMANAGEMENT
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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 Books11 20 FINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2006, Dr Sudhindra Bhat
CASHMANAGEMENT
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Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat
Copyright 2008, Dr Sudhindra Bhat
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CASHMANAGEMENT
Case for Class Discussion
Case 1 :
BHATT ENTERPRISES CASE :
CASH FORECASTING AND INVESTING
Case 2 :
BAJAJ ELECTRONICS CASE :
CASH FORECASTING
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