Cash Management sgfdgdfg

7/29/2019 Cash Management sgfdgdfg

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Presented byAshish Jaiswal

Pankaj AggarwalShailendra Kumar


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What is cash management

Cash management is a term that covers a number of functionsthat help individuals and businesses process receipts andpayments in an organized and efficient manner.Administering cash assets today often makes use of a number ofautomated support services offered by banks and other financial

institutions. When it comes to cash collections, there are a few popular

options today that can make the process of receiving paymentsfrom customers much easier. Automated clearing houses make itpossible to transact a business to business cash transfer thatdeducts the payment from the customer account and deposits

the funds in the vendor account. Generally, this service isavailable for a fee at local banks.
http://www.wisegeek.com/what-are-cash-assets.htmhttp://www.wisegeek.com/what-are-cash-assets.htm


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Key areas of Public CashManagement

Organization

Collection and disbursement of funds

Netting of interagency paymentsInvestment of excess funds

Optimal level of cash balances

Cash planning and budgetingBank relations


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Treasury Management of CashBalances

Operate with smaller amount of cash

Supervision is centralizedBetter service from banks

Proper allocation of funds


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How much cash should a organization

keep on hand? Enough cash to make payments when needed.

(transactions motive)

(Daily or Weekly Cash Budget helpful)

Additional cash may be held for unexpectedrequirements. (precautionary motive)


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The size of theminimumcashbalance depends on:

How quickly and cheaply a organization canraise cash when needed.

How accurately managers can predict cashrequirements. (Cash Budget helpful)

How much precautionary cash the managersneed for emergencies.


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The organizations maximumcashbalance depends on:

Available (short-term) investmentopportunities e.g. money market funds, CDs, commercial paper

Expected return on investment opportunities. e.g. If expected returns are high, organizations

should be quick to invest excess cash

Transaction cost of withdrawing cash and

making an investment Demand for Cash for daily transactions

(Cash Budget helpful)


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Consider Cash an Inventory

Grantsville has a daily demand for cash of $10,000.Grantsvilles treasurer invests excess cash in the state investment pool that earns

.01% per day. In order to transfer funds from the state pool, Grantsville must paya transaction cost of $20. How much cash should it transfer when it runs out.(Grantsville can complete the cash transfer electronically so it waits until the cashbalance is zero).

An inventory approach to CashBalance decisions:

the trade-offs: - hold little cash = invest remainder inM/S to earn interest

- if hold too little cash = incur transactions costs tomeet cash needs

- hold lots of cash = forgo investing in M/S and

earning interest


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50000000 1002 504 339.3333333 258 210

Order Quantity (Z)

Cost ($)

Z*

Total Costs

Holding Costs:(Z/2)*r

Order Costs:(M/Z)*TC

Optimal Cash Balance via Baumol Mod

Z*Z*= [(2M*TC)/r]

M = $10,000 r = .01% .0001 TC = $20

Z = $63,246


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Problems with the Baumol Model

Cash flows may not be very predictable, much less

constant

Treasurers may want a safety stock of cash


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The Miller - Orr Model

The Miller-Orr Model provides a formula fordetermining the optimum cash balance (Z),the point at which to sell securities to raise

cash (lower limit L) and when to invest excesscash by buying securities and lowering cashholdings (upper limit H).

Depends on:

transaction costs of buying or selling securities variability of daily cash (incorporates uncertainty)

return on short-term investments


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Days of the Month


Lower Limit

Upper Limit

Z

Sell Securities

Buy Securities

H

L


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The Miller-Orr Model- Target Cash Balance (Z)

3 x TC x V

4 x rZ = + L

3

where: TC = transaction cost of buyingor selling securities

V = variance of daily cash flowsr = daily return on short-term

investmentsL = minimum cash requirement


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Example: Suppose that short-term securitiesyield 5% per year and it costs theorganization $50 each time it buys or sellssecurities (TC). The daily variance of cash

flows is $1000 (V) and your bank requires$1,000 minimum checking account balance(L).*

The Miller-Orr Model- Target Cash Balance (Z)

3 x 50 x 10004 x .05/360Z = + $1,000

= $3,000 + $1,000 = $4,000

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The Miller-Orr Model- Upper Limit

The upper limit for the cash account (H) isdetermined by the equation:

H = 3Z - 2Lwhere:

Z = Target cash balanceL = Lower limit

In the previous example:H = 3 ($4,000) - 2($1,000) = $10,000


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Days of the Month


Lower Limit

Upper Limit

$4000

Sell Securities

Buy Securities

$10,00

$1000


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Investment of excess funds


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Cash Planning and Budgeting


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Cash Planning andBudgeting (contd.)


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Cash Management sgfdgdfg