cash management.ppt

7/17/2019 cash management.ppt

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CASH MANAGEMENT

Team Members

Reagan S

Satish A

Shriram RRavi Chandran R

Siva raman A

1



LEARNING OBJECTIVES

• Explain the reasons for holding cash

• Underline the need for cash management

• isc!ss the techni"!es of preparing cashb!dget

• #oc!s on the management of cashcollection and disb!rsement

• Emphasi$e the need for investing s!rpl!scash in mar%etable sec!rities

2



Cash Management

• Cash management is concernedwith the managing of: – cash fows into and out o the rm,

– cash fows within the rm, and

– cash balances held by the rm at a point o timeby nancing decit or investing surplus cash

3



Cash management cycle

4



Four Facets o CashManagement

• Cash planning

• Managing the cash ows

• Optimum cash level• Investing surplus cash

5



Mot!"es or #ol$!ngCash

• The transactions motive

• The preca!tionar& motive

• The spec!lative motive

6



Cash %lann!ng

• Cash &lann!ng !s a techn!'ue to&lan an$ control the use o cash(

• Cash Forecast!ng an$ Bu$get!ng – Cash )u$get !s the most s!gn!*cant $e"!ce

to &lan or an$ control cash rece!&ts an$

&ayments( – Cash orecasts are nee$e$ to &re&are cash

)u$gets.

7



Short+term CashForecasts

– The important functions of short-term cash forecasts

• To determine operating cash

re"!irements• To anticipate short'term (nancing

• To manage investment of s!rpl!s cash)

– Short-term Forecasting Methods• The receipt and disb!rsements method

• The ad*!sted net income method)

8



The Rece!&t an$,!s)ursements Metho$

• The "!rtues o the rece!&t an$ &aymentmetho$s are-

+t gives a complete pict!re of all the items ofexpected cash ,o-s)

+t is a so!nd tool of managing dail& cashoperations)

• Th!s metho$. ho/e"er. su0ers rom theollo/!ng l!m!tat!ons-

.) +ts reliabilit& is red!ced beca!se of the!ncertaint& of cash forecasts) #or example/collections ma& be dela&ed/ or !nanticipateddemands ma& ca!se large disb!rsements)

0) +t fails to highlight the signi(cant movementsin the -or%ing capital items)

9



The A$1uste$ Net IncomeMetho$

• The )ene*ts o the a$1uste$net !ncome metho$ are-+t highlights the movements in the -or%ing

capital items/ and th!s helps to %eep a controlon a (rm1s -or%ing capital)+t helps in anticipating a (rm1s (nancialre"!irements)

• The ma1or l!m!tat!on o th!smetho$ !s-+t fails to trace cash ,o-s/ and therefore/ its!tilit& in controlling dail& cash operations islimited)

10



Long+term CashForecast!ng

• The ma1or uses o the long+termcash orecasts are-

+t indicates as compan&1s f!t!re (nancial needs/

especiall& for its -or%ing capital re"!irements) +t helps to eval!ate proposed capital pro*ects) +t

pinpoints the cash re"!ired to (nance these pro*ectsas -ell as the cash to be generated b& the compan&to s!pport them)

+t helps to improve corporate planning) 2ong'termcash forecasts compel each division to plan for f!t!re

and to form!late pro*ects caref!ll&)

11



Manag!ng Cash Collect!ons an$,!s)ursements

• Accelerat!ng Cash Collect!ons – Decentralised Collections

– oc!-"o# S$stem

• Controlling Dis"ursements – Dis"ursement or %a$ment Float

12

F t I t t



Features o Instruments oCollect!on !n In$!a

13



Clear!ng

• The clear!ng &rocess refers to the exchangeb& ban%s of instr!ments dra-n on them/thro!gh a clear!nghouse)

• +nstr!ments li%e che"!es/ demand drafts/interest and dividend -arrants and ref!ndorders can go thro!gh clearing)

• oc!mentar& bills/ or promissor& notes do not

go thro!gh clearing)• The clearing process has been highl&

a!tomated in a n!mber of co!ntries)

14



Controll!ng,!s)ursements

• ela&ing disb!rsement res!lts in maxim!m availabilit& off!nds) Ho-ever/ the (rms that dela& in ma%ing pa&mentsma& endanger its credit standing)

• 3hile/ for accelerated collections a decentrali$ed collection

proced!re ma& be follo-ed/ for a proper control ofdisb!rsements/ a centrali$ed s&stem ma& be advantageo!s)

• Some (rms !se the techni"!e of 4&lay!ng the 2oat1 tomaximi$e the availabilit& of f!nds) 3hen the (rm1s act!al

ban% balance is greater than the balance sho-n in the(rm1s boo%s/

the di5erence is called $!s)ursement or &ayment 2oat)

15



O&t!mum Cash Balance

• O&t!mum Cash Balance un$erCerta!nty- Baumol3s Mo$el

• O&t!mum Cash Balance un$er4ncerta!nty- The M!ller5OrrMo$el

16

B l3 M $ l



Baumol3s Mo$el5Assum&t!ons-

• The (rm is able to forecast its cashneeds -ith certaint&)

• The (rm1s cash pa&ments occ!r

!niforml& over a period of time)• The opport!nit& cost of holding cash

is %no-n and it does not change overtime)

• The (rm -ill inc!r the sametransaction cost -henever it convertssec!rities to cash)

17



Baumol3s Mo$el

• The (rm inc!rs a hol$!ng cost for %eeping the cashbalance) +t is an opport!nit& cost6 that is/ the ret!rnforegone on the mar%etable sec!rities) +f the opport!nit&cost is %/ then the (rm1s holding cost for maintaining anaverage cash balance is as follo-s7

• The (rm inc!rs a transact!on cost -henever it convertsits mar%etable sec!rities to cash) Total n!mber oftransactions d!ring the &ear -ill be total f!ndsre"!irement/ T / divided b& the cash balance/ C/ i)e)/ T/C) The per transaction cost is ass!med to be constant) +f pertransaction cost is c/ then the total transaction cost -ill be7

• The total ann!al cost of the demand for cash -ill be7

• The optim!m cash balance/ C8/ is obtained -hen the totalcost is minim!m) The form!la for the optim!m cashbalance is as follo-s7

Holding cost = ( / 2)k C

Transaction cost = ( / )c T C

* 2cT C

k

=

Total cost = ( / 2) ( / )k C c T C +

18



Baumol's model for cash balance Cost trade-off: Baumol's model

19



The M!ller5Orr Mo$el

• The M9 model provides for t-o control limits:the !pper control limit and the lo-er controllimit as -ell as a ret!rn point)

• +f the (rm1s cash ,o-s ,!ct!ate randoml& and

hit the !pper limit/ then it b!&s s!;cientmar%etable sec!rities to come bac% to anormal level of cash balance <the ret!rn point=)

• Similarl&/ -hen the (rm1s cash ,o-s -ander

and hit the lo-er limit/ it sells s!;cientmar%etable sec!rities to bring the cashbalance bac% to the normal level <the ret!rnpoint=)

20



M!ller+Orr mo$el

21



The M!ller+Orr Mo$el

• The di5erence bet-een the !pperlimit and the lo-er limit depends onthe follo-ing factors7

– the transaction cost <c=

– the interest rate/ <i=

– the standard deviation <σ = of net cash ,o-s)

•

7

22



The M!ller+Orr Mo$el

• The form!la for determining thedistance bet-een !pper and lo-ercontrol limits <called Z = is as follo-s 7

1/ 3(Upper Limit – Lower Limit) = (3/ 4 × Transaction ost × as! "low #ariance / $nterest %ate)

Upper Limit = Lower Limit & 3

%et'rn oint = Lower Limit &

T!e net eect is t!at t!e irms !old t!e a*erage t!e cas! +alance e,'al to-

.*erage

Z

Z

as! alance = Lower Limit & 4/3 Z

23



INVESTING S4R%L4S CAS# INMAR6ETABLE SEC4RITIES

• Select!ng In"estmentO&&ortun!t!es- – Safet$&

– Maturit$& and

– Mar!eta"ilit$ (

24

Short term In estment



Short+term In"estmentO&&ortun!t!es-

– Treasur$ "ills

– Commercial papers

– Certi'cates of deposits

– (an! deposits – Inter-corporate deposits

– Mone$ mar!et mutual funds

25



Than% &o!)

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cash management.ppt

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