2. WHAT IS CASH?
It is the money which a firm can disburse immediately
without any restrictions.
The term cash include coins, currencies and checks held
by the firm in balance in its bank account.
It includes near-cash assets, such as marketable securities
and time deposits in banks.
4. CASH MANAGEMENT
Cash management is concerned with the
managing of:
cash flows into and out of the firm,
cash flows within the firm, and
cash balances held by the firm at a point of time by
financing deficit or investing surplus cash
8. TRANSACTION MOTIVES
It refers to the holding of cash required by a firm to carry its
day to day business transactions in the ordinary course of
business.
9. PRECAUTIONARY MOTIVE
The precautionary motive of holding cash is to meet the
unpredictable cash obligations of a firm.
A cushion to meet unexpected contingencies.
Floods, strikes and failure of imp customers
Unexpected slowdown in collection of accounts
receivable
Sharp increase in cost of raw materials
Cancellation of some order of goods
10. SPECULATIVE MOTIVE
This refers to maintaining cash balance ,the firm to take
advantage of investing in profit –making opportunities and
which is typically outside the normal course of business.
Helps to take advantage of:
An opportunity to purchase raw materials at reduced
price
Make purchase at favorable prices
Delay purchase on anticipation of decline in prices
Buying securities when interest rate is expected to
decline
11. CASH PLANNING
Cash Flow Planning is when a business forecasts short &
long term business expenses against the projected
incoming cash.
It allows us to anticipate trouble by creating a cash flow
cushion, for unexpected expenses.
A method that an insured can use to control the premium
payments that they must make on their policies.
12. CASH FORECASTING AND BUDGETING
CASH BUDGET
Summary statement of the firm’s expected cash inflows
and outflows over a projected time period
CASH FORECASTS
Estimate of the timing and amounts of cash inflows
and outflows over a specific period
13. SHORT-TERM CASH FORECASTS
The important functions of short-term cash
forecasts
To determine operating cash requirements
To anticipate short-term financing
To manage investment of surplus cash.
Short-term Forecasting Methods
The receipt and disbursements method
The adjusted net income method.
14. THE RECEIPT AND DISBURSEMENTS
METHOD
The virtues of the receipt and payment methods are:
It gives a complete picture of all the items of expected
cash flows.
It is a sound tool of managing daily cash operations.
This method, however, suffers from the following
limitations:
1. Its reliability is reduced because of the uncertainty of
cash forecasts. For example, collections may be delayed,
or unanticipated demands may cause large
disbursements.
2. It fails to highlight the significant movements in the
working capital items.
15. THE ADJUSTED NET INCOME METHOD
The benefits of the adjusted net income
method are:
It highlights the movements in the working capital
items, and thus helps to keep a control on a firm’s
working capital.
It helps in anticipating a firm’s financial
requirements.
The major limitation of this method is:
It fails to trace cash flows, and therefore, its
utility in controlling daily cash operations is
limited.
16. LONG-TERM CASH FORECASTING
The major uses of the long-term cash forecasts are:
It indicates as company’s future financial needs, especially
for its working capital requirements.
It helps to evaluate proposed capital projects. It pinpoints
the cash required to finance these projects as well as the
cash to be generated by the company to support them.
It helps to improve corporate planning. Long-term cash
forecasts compel each division to plan for future and to
formulate projects carefully.
18. CLEARING
mutual settlement of claims
among member banks
agreed time and place
as per instruments drawn
Clearing can be classified as
i. Counter clearing
ii. Non – MICR
iii. Magnetic Ink Character Recognition
iv. Cheque Truncation System
19. TYPES OF RETURN CHEQUES:
◦ INWARD OR PAYING BRANCH
When a particular branch receives instruments, which are on themselves and sent by
other member bank for collection is treated as Inward Clearing of that branch.
◦ INWARD RETURN
Which are presented by collecting bank to other banks for payment but it has been
returned and unpaid by them due to specified reason through the clearing house.
◦ OUTWARD OR COLLECTING BRANCH
When a particular branch receives instruments drawn on the other bank within the
clearing zone and sends those instruments for collection through the clearing
arrangement is considered
◦ OUTWARD RETURN
Instruments which are return by paying bank due to specified reason through the clearing
house.
21. BAUMOL’S MODEL
The firm is able to forecast its cash needs with certainty.
The firm’s cash payments occur uniformly over a period of time.
The opportunity cost of holding cash is known and it does not change
over time.
The firm will incur the same transaction cost whenever it converts
securities to cash.
Baumol's model for cash balance
22. ASSUMPTION
The firm is able to forecast its cash with certainty.
The firm’s cash payment occur uniformly once a period of
time.
The opportunity cost of holding cash is known and it does
not change over time.
The firm will incur the same transaction cost whenever it
converts securities to cash.
23. TYPES OF COST
Holding Cost or opportunity cost
Holding Cost = k (C/2)
k = Opportunity Cost, C/2 = Average cash balance
Transaction Cost
Transaction Cost = c(T/C)
Total cost
Total Cost = k(C/2)+c(T/C)
Optimum cash balance
C*= √2cT/k
25. THE MILLER–ORR MODEL
It provides for two control limits–the upper control limit
and the lower control limit as well as a return point.
If the firm’s cash flows fluctuate randomly and hit the
upper limit, then it buys sufficient marketable securities
to come back to a normal level of cash balance.
Similarly, when the firm’s cash flows wander and hit the
lower limit, it sells sufficient marketable securities to
bring the cash balance back to the normal level
26.
27. LOWER CONTROL LIMIT
=(3/4 x transaction cost X variance of cash flows )1/3
interest rate
Upper Limit= Lower Limit + 3Z
Return Point= Lower Limit + Z
Average Cash Balance = Lower Limit +4/3 Z
Symbolically (Z)= ( 3/4 x cσ²/i )1/3
28. MANAGING CASH COLLECTIONS AND
DISBURSEMENTS
Accelerating Cash Collections
Decentralised Collections
Lock-box System
Controlling Disbursements
Disbursement or Payment Float
29. ACCELERATING CASH COLLECTIONS
Decentralised Collections
Number of collection centres
Collection centres will collect cheques from customers and
deposit in their local bank accounts
They will deposit the funds to a central bank
Lock-box System
Collection centers are established considering the customer
locations and volume of remittances
At each Centre the firm hires a post office box
Remittances are directly picked from the bank whom the firm
gives the authority
30. INVESTING SURPLUS CASH IN
MARKETABLE SECURITIES
Selecting Investment Opportunities:
Safety,
Maturity, and
Marketability.
31. SHORT TERM INVESTMENTS
OPPORTUNITIES
Treasury bills
Commercial papers
Certificates of deposits
Bank deposits
Inter-corporate deposits
Money market mutual funds