Cash Management v2

8/7/2019 Cash Management v2

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Presented bySneha Sahu (45)

Rupali Thenge (55)

Nilesh Isal (15)

Sameer Borde (05)Hema Sayam (47)



Individual and business processes receipts and

payments in a more organized and efficient

manner

Cash management trust

Arranged in an accounting department

Investment professional handles



Transaction motive

Precautionary motive



Speculative motive

Compensating motive



Meeting payment schedules

Minimizing funds committed to cash balance



Synchronization of cash flows

Short costs

Excess cash balance costs

Procurement and management

Uncertainty and cash management





To minimize

o Fixed cost of transactions

o

Opportunity cost of holding

A position when cash balance is in most ideal

proportion

o To invest

o Sufficient liquidity for future needs





To determine the optimum amount of transaction cash

under conditions of certainty

Objective - To minimize the sum of the fixed costs of

transactions and the opportunity cost of holding cash

balances

There are 2 costs associated with this model:

a) Cost of converting marketable securities into cash

b) Opportunity cost



Cost of converting marketable securities into cash

Total conversion cost per period = T*b

C

Where,

b = cost per conversion

T = total cash needs for the time period involvedC = Value of marketable securities sold at each

conversion



Opportunity Cost

Total conversion cost per period = i * C

2

Where,

i = interest rate that could have been earned

C/2 = Average cash balance



Total Cost is expressed as

b [T/C] + i [C/2]

To minimize the cost, the model attempts to determine the

optimal conversion amount, that is, the cash withdrawal which

costs the least.

C = sqrt (2bT / i)



To determine the optimum amount of transaction cash

under conditions of uncertainty

The objective is to determine the optimum cash balance

level which minimizes the cost of cash management



Symbolically,

C = b * E (N) + i * E (M)

t

where b = the fixed cost per conversion

E (M) = the expected average daily cash balance

E (N) = the expected no of conversions

t = no of days in the period

i = the lost opportunity costs

C = total cash management costs



MO model assumes that cash balances randomly fluctuate

between upper bound (h) and lower bound (l)

When the cash balances hit the upper boundo Too much cash and company should buy marketable

securities to bring cash balances back to the optimal

bound (z)

When the cash balances hit zero

o They must be return to the optimum bound z by

selling/converting securities into cash



Days of the Month

Lower Limit

Upper Limit

z

Sell Securities

Buy Securities

h

l



According to MO model, the optimal cash balance z can be

expressed as

z = Sqrt (3*b*r2 / 4 * i)

where r2 = the variance of daily changes in cash balances





1. Short-term cash forecasting or Cash Budgeting² few days

to 1 year.

Methods³1) Receipts & payment method

2) P & L method

3) Balance sheet method

2. Long-term cash forecasting³2 to 5 years

Method² Adjusted net income method



DEFINITION:

Cash budget is an estimate of cash receipts and

disbursement for a future period of time





1. Receipts and payments Method.

2. Adjusted Profit and Loss Method.3. Projected Balance Sheet Method.



1. Receipts and Payment method

Receipts include

Total sales Interest & dividends Assets

Stocks and debentures



Payment includes:

Creditors

Payment for wages

Dividends paid

Capital expenditure- purchase of assets

Repayment of loans

Overhead expenses



RECEIPTS --- PAY MENT= Cash or Cash

Balance Deficit

If cash deficit then manager will have to arrange a

Bank Overdraft



1. Actual payment to be made next month

2. Actual timings of payment

Ex.-If the collection from sales is available only after 15th of the month, then enough cash balance must be maintained for

meeting payments for the first 15 days.



Adjusted Net Income method:

It estimates the firms need for cash at some future date andindicates whether the need can be met from internal sourcesor not.

Sources of funds- Expenses

Net income after taxes --Capital expenditure

Non cash charges --Increase in C.A

(Depreciation, Ammortisation) --Repayment of borrowing

Sale of equity shares --Dividend payment

Increase of borrowings

SOURCE ² EXPENSES =surplus/Deficit





Speedy Cash Collections

a. Encouraging the customers

b. Conversion of payments into cash

Prompt Payment by Customers

a. Prompt billing

b. Practice of offering cash discounts



Early Conversion of Payments into Cash

a. Transit or mailing time (postal float)

b. Lethargyc. Bank float

d. Deposit float

Decentralised Collection

a. Concentration Banking

b. Lock-Box System



Ready Cash Segment

Controllable Cash Segment

Free Cash Segment





Safety

Liquidity

Yield

Maturity



1) Fixed Deposits with Banks

2) Treasury Bills

3) Mutual Fund Scheme

4) Commercial Paper



5) Certificates of deposits

6) Inter-Corporate Deposits

7) Ready Forwards

8) Bill Discounting



Do Nothing

Make Ad Hoc Investment

Ride the Yield Curve

Develop Guidelines



Utilize Control Limits

Manage with a Portfolio Perspective Define the efficient frontier

Select the optimal portfolio

Follow a Mechanical Procedure



Documents

Cash Management v2