cash mgt system

7/29/2019 cash mgt system

1/21

Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat

Copyright 2008, Dr Sudhindra Bhat

17 1

CASHMANAGEMENT

17

Chapter

CASH MANAGEMENT


2/21



17 2

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


3/21


4/21



17 4

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


5/21



17 5

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.


6/21

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


CASHMANAGEMENT


7/21

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.



CASHMANAGEMENT


8/21


9/21Excel BooksFINANCIAL MANAGEMENT, Dr. Sudhindra Bhat


17 9

CASHMANAGEMENT

Motives for holding Cash

Transaction Motive

Precautionary Motive

Speculative Motive

Compensating Balance




17 10

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.


11/21




17 12

CASHMANAGEMENT

Cash Cycle

Information &control

collections

Payments

Borrow or invest


13/21

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



CASHMANAGEMENT


14/21

Cash Collection

Payment Payment Payment Cash

Mailed Received Deposited Available

Mailing Time Processing Delay Availability Delay

Collection Delay



CASHMANAGEMENT


15/21



17 15

CASHMANAGEMENT

Collections Pre authorized Payment arrangement

Float

Order Processing Float Buyer Float

Deposit Float

Lock Box System

Decentralized collections


16/21



17 16

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.


17/21

Controlling Disbursements Disbursement Float

Zero- Balance Account

Controlled Disbursement Account

Electronic Fund Transfer




18/21



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


19/21

Cash flow from granting credit

Credit Sale Check Mailed Check Deposited Cash Available

Cash Collection

Accounts Receivable



CASHMANAGEMENT


20/21

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



CASHMANAGEMENT


21/21



17 21

CASHMANAGEMENT

Case for Class Discussion

Case 1 :

BHATT ENTERPRISES CASE :

CASH FORECASTING AND INVESTING

Case 2 :

BAJAJ ELECTRONICS CASE :

CASH FORECASTING

cash mgt system

Documents