cash management

1. PALAK(ROLL NO.16)
TANVI(ROLLNO.17)
KARAN(ROLLNO.18)
PRACHI(ROLL NO.19)

2. INTRODUCTION
• Cash Management is concerned with minimizing
unproductive balances, investing temporarily cash
advantageously and to making the best possible
arrangement to meeting planned and unexpected demand
on the firm’s cash. It involves managing of cash flows in
and out of the firm i.e. cash flows within the firm and cash
balances held by the firm at a point of time.

3. OBJECTIVES OF CASH MANAGEMENT
• The basic objectives of cash management are two- fold:
(1) Meeting payments schedule.
(2) Minimising funds committed to
cash balances .

4. • MEETING PAYMENTS SCHEDULE :-
Firm needs cash to meets its routine expenses including wages, salary, taxes ,
etc. following are the advantages of adequate cash are –
1. To prevent firm from being insolvent
2. The relation of firm with the bank does not strained.
3. Contingencies can be met easily.
4. It helps firm to maintain good relation’s with suppliers.

5. • MINIMISING FUNDS COMMITTED TO CASH BALANCES :-
The second objective of cash management is to minimise cash
balances.
1. Excessive amount of cash balance
2. Cash available with the firm is less

6. FACETS OF CASH MANAGEMENT
• The firm should evolve strategies regarding the following four facets of cash management:
(1) Cash planning
(2) Managing the cash flows
(3) Optimum cash level
(4) Investing surplus cash

7. SYNCHRONISATION OF CASH FLOWS
SHORT COSTS
EXCESS CASH BALANCE
PROCUREMENT AND MANAGEMENT
UNCERTAINITY

8. The analytical models for cash management are as follows:
BAUMOL MODEL
MILLER –ORR MODEL
ORGLER’S MODEL

9. BAUMOL MODEL
Where
 C = Minimum cash balance to be maintained
B = Total cash required during a period
T = Transaction cost between cash and marketable
securities
 i = Interest rate which could have been earned

10. • The management of Popular Traders anticipates 15 lakh in cash outlays (demand)
during the next year . The recent experience has been that it costs 30 lakh to convert
marketable securities to cash and vice versa . The marketable securities currently
earns 8 percent annual return . Find the total cost of managing cash according to
Baumaol method.

11. MILLER – ORR MODEL

12. • Assuming for Popular Traders in previous question that variance
of daily net cash flows is estimated to be Rs. 27000, show the
cash balances as per Miller – Orr model.

13. ORGLER’S MODEL
The construction of model comprises three sections:
 Selection of the appropriate planning horizon
 Selection of appropriate decision variables
 Formulation of cash management strategy
DECISION VARIABLES:
o PAYMENT SCHEDULE
oSHORT TERM FINANCING
o PURCHASE AND SALE OF MARKETABLE SECURITIES
o CASH BALANCE ISTELF

16. MINIMUM OPERATING CASH
STRECHING ACCOUNTS PAYABLE
EFFICIENT INVENTORY-PRODUCTION
MANAGEMENT
SPEEDING COLLECTION OF ACCOUNTS
PAYABLE

17. CASH MANAGEMENT
MOTIVES

18. CASH
MANAGEMENT
MOTIVES
• In a narrow sense ,it is used broadly to cover
currency and generally accepted equivalents of
cash, such as cheque ,drafts and demand
deposits in banks. In broader sense it includes
near cash assets, such as marketable securities
and time deposits in bank.
• The main characteristic is that they can be readily
sold and converted into cash. They serve as a
reserve pool of liquidity that provides cash quickly
when needed. They also provide a short-term
investment outlet for excess cash and are also
useful for meeting planned outflow of funds.
Compensatin
g motive

19. MOTIVES FOR HOLDING CASH
• Transaction Motive :
• i.e. to purchase raw material & to pay for operating expenses.
• Precautionary Motive :
• to meet the future contingencies such as :Floods, strikes and failures of important
customers –
• Bills may be presented for settlement earlier than expected .
• Unexpected slow down in collection of accounts receivables.
:

20. MOTIVES FOR HOLDING CASH
• Cancellation of some order for goods as the customer is not satisfied.
• Sharp increase in cost of raw materials
• Speculative Motive : The speculative motive helps to take advantages of:
• An opportunity to purchase raw materials at a reduced price on payment of
immediate cash.
• A change to speculate on interest rate movements by buying securities when
interest rates are expected to decline.

21. MOTIVES FOR HOLDING CASH
• Delay purchase of raw materials on the anticipation of decline in prices.
• Make purchase at favorable prices.
Compensating Motive :
• Yet another motive to hold cash balances is to compensate banks for providing
certain services and loans.

22. MARKETABLE
SECURITIES

24. MONEY MARKETING SECURITIES
• A segment of the financial market in which financial instruments with high liquidity
and very short maturities are traded.
• Money market is used by participants as a means for borrowing and lending in
the short term, from several days to just under a year.
• Money market securities consist of negotiable certificate of deposits, treasury
bills, commercial paper etc,.

25. TYPES OF MONEY SECURITIES

26. CAPITAL MARKET SECURITIES
• A market in which individuals and institutions trade financial securities.
• In such securities, the maturity period is greater than one year and for some
securities, there is no definite maturity period.

27. TYPES OF CAPITAL MARKET SECURITIES
• Fixed income Securities
• Bonds
• Treasury Notes and Bonds
• Federal agencies securities
• Municipal Bonds
• Corporate Bonds
• Common Stocks

38. The main features of cash management practices in India are as follows:
COLLECTION METHODS
a) BULK COLLECTION
b) POST DATED CHEQUE MANAGEMENT
c) ELECTRONIC CLEARING SERVICES
d) CHEQUE TRANSACTION
e) PAYMENT MECHANISM
 PAYMENT OUTSOURCING
 ELECTRONIC BANKING

39. PAYMENT MECHANISM
• CHEQUE
• DEMAND DRAFT
• REAL TIME GROSS SETTLEMENT(RTGS)
• ELECTRONIC FUND TRANSFER(EFT)
• SPECIAL ELECTRONIC FUND TRANSFER
• ELECTRONIC CLEARING SERVICES
• INTEREST/DIVIDEND WARRANTS