CIUPTER - IX W H MANAGEMENT

One of t h e main tasks of a f inanc ia l manager is

t o hold and maintain an optimum cash balance. Cash is

an obvious and inescapable input i n t o company's opera-

t ions and a s such it has t o be available i n s u f f i c i e n t

doses according t o needs, on a continuing basis . Cash

i s a l s o t h e major and much awaited output o r r e s u l t of

t h e canpanyla operations and there is t h e need f o r e f f -

e c t i v e plan t o deploy t h i s l iqu id resources t o utmost

productive use.' I n t h e l a s t th ree decades, an ever in-

creasing sophis t ica t ion i n cash management by corporations

has shown a trend towards reducing cash t o a minimun. The

funds released a r e invested i n earning asse t s . This

trend can be a t t r i b u t e d t o r i s i n g i n t e r e s t r a t e s on se-

c u r i t i e s , which make the opportunity cos t of holding cash

more expensive. It i s due a l s o t o innovations i n cash

management and t o economies of sca le i n cash management

a s corporat ions grow larger.'

SCOPE OF CASH MGEt4Em

The views of these tvo f inancial exparts show t h a t

cash management dea ls with the v o v i s i o n of uninterrupted

1. Rammoorthy V.E., &. g., p.121.

2. Van Horne, James.C.. 2. P * ~ ~ ~ *

supply of funds f o r t h e successful operat ions of

tirms. I t is a l s o concerned with the managing of

( i ) cashflows i n t o and out of t h e firm, (11) cash f l w s

within t h e f irm and ( i i i ) cash balances held by t h e

firm a t a po in t of time.' According t o John Maynard

Keynes, * i t i s t h e cash which keeps a business going,

Hence every e n t e r p r i s e has t o hold necessary cash t o r

i ts e ~ i s t e n c e * . ~ The e f f e c t i v e management of cash is

t h e key determinant of e f f i c i e n t working c a p i t a l mana-

gement. Cash, l i k e blood stream i n t h e hlnnan body gives

v i t a l i t y and s t rength t o a business enterprise. The

steady and healthy c i r c u l a t i o n of cash throughout t h e

business operat ion is t h e b a s i s of business solvency. 5

The cash management being such an important area,

an attempt has been made i n t h i s chapter t o evaluate

t h e l e v e l s of holding cash, its e f f i c i e n t u t i l l s a t i o n of

and a l s o t h e management/cash i n general of public enter-

prise..

Cash i s held by t h e individuals and corporate bodies

t o meet one o r more of t h r e e motives. Tney a r s r ( 1 ) t h e

3. Pandsy. I.M.. 9. E., P-355.

4. Keynes. J.M., The General theory of Emplownt , In te r - o s t and Monq, Jevsnovlch, New York, 1936, p. 19.

5. Howard. B.B. and Upton.M.. Introduction t o Business Finance, McGraw ill Book Campany i n c New ~ o r k . 1 9 5 5 , p . l ~ ~ .

t r a n s a c t i o n s motive ; ( 2 ) precautionary motive and

( 3 ) t h e specula t ive motive.

The t r a n s a c t i o n motive a r i s e s from t h e ready

funds t o make paynsnts following due i n t h e ordinary

course of business such a s payment f o r purchases, wages

opsra t ing expenses and a l s o payment of t axes and d iv i -

dends.

The precautionary motive comes f r a n a d e s i r e t o

keep a cash cushion t o meet unexpected contingencies.

The degree of precaution w i l l normally bear an inverse

r e l a t i o n s h i p t o t h e degree of p r e d i c t a b i l i t y of cash

flows of t h e business. As a measure of precaution,

f i rms e s t a b l i s h a l i n e of c r e d i t with bankers t o f a l l

back i n times of emergency while re leas ing t h e ava i lab le

cash resources f o r remunerative applicat ions.

The specula t ive motive covers instances where t h e

i n t e n t i o n is t o hold cash t o be a b l e t o take advantage

of changes i n s e c u r i t y pr ices , a r i s i n g from f luc tua t ions

i n i n t e r e s t r a t e s and o t h e r fac tors . This may be t r u e

i n cases of f inance and investment canpany's but may not

be a common phenomenon. The manufacturing company8 may

hold cash t o meet specula t ive motive t o t a k e advantage of

(1) M opportunity t o purchase raw m a t e r i a l s a t a

reduced p r i c e on payment of jnnnediate cash ( 2 ) any

o t h e r such opportunity. Therefore companys mainly

Concentrate upon t r a n s a c t i o n ard precautionary motives

of t h e cash.

A f t e r dec id ing t h e causes f o r holding l i q u i d

cash, t h e f i rm must dec ide t h e quantum of t ransac t ions

and precautionary balances t o be held.

T W OBJECTIVES OF CASH MANAGE=

The b a s i c o b j e c t i v e s of CMh management a r e a s

follows:

i ) t o meet t h e cash disbursement needs; and

i i ) t o minimise t h e funds c o m i t t e d t o cash

balances.

These a r e c o n f l i c t i n g and mutually contradictory.

The t a s k of cash management is t o reconc i le thcm. A

shrewd f inance manager is one who s t r i k e s a golden mean

between t h e two c o n f l i c t i n g goa ls of l i q u i d i t y and pro-

f i t a b i l i t y of t h e f i rm by managing cash flows i n t o t h e

company, cash flows o u t of t h e company and i n t r a company

cash flows a s well as cash balances he ld by t h e company. 6

6. Sriva#tava.R.~. , F inanc ia l Decision nakinq, Text problems and Cases, S t e r l i n g Publ i shers (P) Ltd., New Delhi , 1984, p.521.

FUIYCTIOUS OF CASH IUNAOEMEHF

I n o r d e r t o achieve t h e ob jec t ives of econo-

mical use of cash balances and minimising t h e funds

comnlttod t o it, t h e f irm should aevelop some s t r a -

t e g i e s f o r cash management. The s t r a t e g i e s t h a t may

be evolved t o p e r f o n t h e four func t ions of cash

management are: a s h planning, Managing cash flows,

Investments of excess caah aad Selec t ion of s e c u r i t i e a .

Cash P lumingr Cash inflows and outflows should

be proper ly planned t o p r o j e c t cash sorp lus o r d e f i c i t

f o r each per iod of t h e planning. Cash planning is a

technique f o r planning and c o n t r o l l i n g t h e use of cash.

It may b e done on a d a i l y , weekly o r monthly bas i s .

The popular nethods of cash planning are: (a) Cash

budget method1 (b) t h e ad jus ted n e t income method;

( c ) Proforma balance s h e e t method; and (d) working

c a p i t a l e x t r a p o l a t i o n method. 7

A cash budget is a sumnary statement of t h e

f irm's expected cash inflows and outflows over a pro-

jec ted t ime period. While t h e cash budget method is

7. n s t c h e l l . W.B., Cash Forecast ing, I n t e r n a t i o n a l t e x t books, ~ e m a y l v a n i a , 1967, pp.233.243.

s u i t e d f o r s h o r t period, t h e adjusted n e t i n c m e

method s u i t s f o r a longer period.

Shor t term cash f o r e c a s t s a r e made t o r

1) h e l p determine t h e opera t ing cash requirements!

2 ) h e l p a n t i c i p a t e s h o r t term financing;

3) h e l p manage money market investments: and

4 ) t o h e l p i n guiding c r e d i t p o l i c i e s .

I n t h e sane way long term cash f o r e c a s t s a r e

made t o g i v e an i d e a of t h e company's f i n a n c i a l needs

i n t h e d i s t a n t fu ture . The major uses of t h e long

term cash f o r e c a s t s a re :

1) they i n d i c a t e a company's f u t u r e f i n a n c i a l

needs e s p e c i a l l y f o r i t s working c a p i t a l

requirements!

2 ) h e l p t o e v a l u a t e proposed c a p i t a l p ro jec t s tand

3 ) help t o improve corpora te planning.

The recond func t ion of cash management is

Managing Cash flows. The e f f i c i e n t management, i n t h i s

regard, a t tempt t o economize i n t h e use of cash by such

meana a s synchroniaa t ion of t h e inflows and outf lows of

funds t o t h e e x t e n t poss ib le . The inflow of cash should

be a c c e l e r a t e d whi le t h e outflow of cash should a s f a r

a s p o s s i b l e be dece le ra ted .

The c a s h flow statement i s an important

planning t o o l and has an a n a l y t i c a l value. It provides

d e t a i l s of cash genera t ions and appl ica t ions during a

period. "The cash flow statement can t r a c e t h e various

sources which b r i n g i n cash, such a s operat ions, s a l e

of c u r r e n t and f ixed a s s e t s , issuance of share c a p i t a l

and long term borrowings etc. , and t h e a p p l i c a t i o n s

which cause outflow of cash such as , purchase of

c u r r e n t and f i x e d a s s e t s , redemption of debentures, pre-

fe rence s h a r e s f o r cash and so on. The bottom l i n e

of t h e s ta tement of cash flow, therefore , would ind i -

c a t e t h e i n c r e a s e o r decrease i n cash, r a t h e r working

c a p i t a l . "

But, however, s i n c e t h e informations l i k e p r o f i t

o r l o s s i n t h e s a l e of f ixed a s s e t s a r e not accounted

f o r by t h e p u b l i c e n t e r p r i s e s , t h e cash i s no t analysed

here wi th t h e he lp of t h e cash flow statement. Resear-

c h e r s on f inance l i k e Canashyam Panda a l s o of t h e

view t h a t i t cannot be prepared by an o u t s i d e a n a l y s t

due t o lack of access t o de ta i l s . '

8. Ghaneshyam Panda, Management of Working C a p i t a l i n Small S c a l e I n d u s t r i e s , Deep and Deep Publ ica t ions , New Delhi , 1986, p.92.

A firm can conserve cash and reduce i t 8

requirements i f it can speed up i t s cash collections.

Cash col lec t ions can be accelerates by reducing the

lag o r gap between the payment and col lec t ion of a

cheque1 by reducing the mailing and processing time.

An e f f i c i e n t f inancia l manager may be able t o reduce

the firms deposit f l o a t by speeding up the mailing,

processing and col lec t ion times. The greater the

aepovit f l o a t , the longer the time taken i n converting

cheques i n t o usable funds. This can be reduced by

resor t ing t o decentralised collections ana lock box

system.

The decentralised col lec t ion procedure, a l so

ca l led concentration banking is a system of operation

through a number of col lec t ion centres, instead of a

s ing le centra l ised col lec t ion centre. In t h i s system

the firm w i l l have a large nunber of bank accounts

operated i n the areas where the f i n has i t s branches.

The col lec t ion centres w i l l be required t o co l l ec t

cheques from the customers and aeposit them i n t h e i r

local bank accounts. The col lec t ion centres w i l l

t r ans fe r funds above c e r t a i n limit t o a control o r

corcontratdon bank acc~wn", qc~r.-i-ally, at: t h e

firms head off ice . each day, A ccncentratiori bank

is one where the firm has a major bank account usually

the disbursement account .9

Another technique of s p a d i n g up mailing ana

processing and c o l l e c t i o l times sc.111 fur-ther is 'Lock

box system*. ~ o c k box system helps the firm t o elimi-

na t e the time between t h e receipt of cheques and t h e i r

deposit i n the bank. I n a lock box systent t he firm

es t ab l i shes a number of col lec t iok~ centres conrridering

customer locat ions and vol~ana of rgnittanccs. A t t h e

cen t r e the firm h i r e s a post ofifcc box and ins t ruc t s

i t s customers t o mail t h e i r remittances t o the box,

The f i n a s loca l bank i e given the author i ty t o pick up

the r en i t t ances d i r e c t l y rrom the Lock box. The back

pick up the mail s eve ra l times a day hnd deposits the

chaques i n t h e kirms account. For the in t e rna l accoan-

t ing,purposes of t he firm, t h e hdnk prepares the de ta i l ed

records of t he cheques picked up. The mujor advan-

t age of accelera ted co l l ec t ions i s t o reduce t h e firms

t c t a l f inancing requirements.

9. 'la? Home, James.C., &. zt., p.358,

Yet another function of Cash nmagsment is t h e

Investment o f excess cash i n market.ble s e c u r i t i e a .

B a s i c a l l y t h i s is r t a s k of balancing Liquidity and pro-

f i t a b i l i t y needs. The f i rm p u r c h ~ s e e a~orke tab le secu-

r i t i e s t h a t can e a s i l y be convn:%vi i n t o cash with a

minim- o f d i f f i c u l t y o r t ranroc t i snu coa ts . At t h e

same time, t h e f i rm seeks a reasonable r e t u r n a t ur

accept&le r i s k level.1° There is a c l o s e r e l a t i o m h i p

between c a s h and marketeble s e c u r i t i e s . Excesa cash

should normally b e inves ted i n marketable s e c u r i t i e s

which can be conveniently and promptly convsrted i n t o

cash. Cash i n excess of Working Cash balance requireme-

n t s may be he ld f o r two reaaons. F i r s t l y , t h e wsrk.?ng

cash requirements of a firm f l u c t u a t e because of t h e

elements of s e a s o n a l i t y and bus.+.ness cycler;. Tho ex-

c e s s cash may b u i l d up dur iny s lack seasons bu t it would

be needed when t h e demand p icks up. Thus, excess cash

dur ing s l a c k seasons is i d l e temporari ly, bu t has pro-

d i c t a b l e requirement l a t e r on. Secondly, excdss cash

may b e h e l d a s a b u f f e r t o meet un-predictable f i n a n c i a l

needs. A f i rm holds e x t r a cash because c a s h flows

10. Hwlpton. J.J., Financ ia l Decision Making, Concm~ts Problems and c a s e r , P r e n t i c e Hal l of I n d i a (P) ~ t d . , New Dolhi, 1986, p.326.

cannot b e pred ic ted with c e r t a i n t y . Cash ba lance he ld

t o cover t h e f u t u r e exigencies is c a l l e d t h e precautio-

nary ba lance and usua l ly is invested i n marketable se-

c u r i t i e s u n t i l needed?'

I n s t e a d Of holding excess cash f o r t h e above

purposes, t h e f i rm may meet i ts precautionary require-

ments a s and when they a r i s e by making s h o r t term

borrowings. The excess amount of cash held by t h e f irm

t o meet its v a r i a b l e cash requirements and f u t u r e con-

t i n g e n c i e s should be temporari ly invested i n marketable

s e c u r i t i e s which can be regamed a s near moneys. Among

t h e a v a i l a b l e marketable s e c u r i t i e s , t h e f i n a n c i a l

manager should a e c i d e about t h e proro l io of marketable

s e c u r i t i e s i n which t h e f i rms ' surp lus cash shoula be

invested.

A f i rm can i n v e s t i t s excess cash i n many types

of s e c u r i t i e s . As t h e f i rm i n v e s t s i t s temporary t ran-

s a t i o n ba lances o r p recaut ionary balances o r both, i ts

primary c r i t e r i a i n s e l e c t i n g a s e c u r i t y w i l l be its

q u i c k e s t c o n v e r t i b i l i t y i n t o cash, when t h e need f o r

cash a r i s e s . Besides t h i s , a f i n would a l s o be

i n t e r e s t e d i n t h e f a c t t h a t when it s e l l s t h e s e c u r i t y ,

a t l e a s t , i t g e t s t h e amount of cash equal t o t h e c o s t

of secur i ty . Thus i n choosing among a l t e r n a t i v e secu-

r i t i e a , t h e f i rm should examine t h e four b a s i c fea tures

of s e c u r i t y , Safety, maturi ty and marketabil i ty.

A f t e r i d e n t i f y i n g t h e cash required f o r meeting

t h e t r a n s a c t i o n s and precautionary motives, t h e b a s i c

r e s p o n s i b i l i t y of a f inance manager i s t o maintain su-

f f i c i e n t l i q u i d resources s o t h a t t h e c u r r e n t obliga-

t i o n s of a company is s e t t l e d a t the proper time. Deter-

mining t h e appropr ia te l e v e l of cash balances involves

fundamental dec is ions with respec t t o t h e company% li-

q u i d i t y and its cash payables. Such dec is ions a r e

influenced by a t r a d e o f f between r i s k and p r o f i t a b i l i t y .

However, t h e following models may he lp i n determining

t h e optimum l e v e l of cash balances, 1) Inventory Uodel

2 ) S t o c h a s t i c nodel; and (3) The m i l l e r and lor orr model.

THE INVENTORY -EL OP CASH UANAGEHENF

I n determining t h e optimum l e v e l of cash of a

f i n , economic order quant i ty model can be used as i n

t h e s tandard inventory s i t u a t i o n . According t o t h i s

model, optimal l e v e l of cash should be determined by

balancing ca r ry ing c o s t of holding cash aga ins t f i xed

c o s t of secur ing cash from c a p i t a l market. The l e v e l

a t which c o s t of carrying t h e inventory of cash and

c o s t of going t o t he market f o r s a t i s f y i n g cash requi-

rements i s minimum, w i l l be t h e optimal s i z e of cash 12

inventory.

The ca r ry ing c o s t of hold in^ cash r e f e r s t o t he

i n t e r e s t foregone on marketable s e c u r i t i e s whereas. c o s t

of going t o t h e market means c o s t of l i qu ida t ing mar-

ketable s e c u r i t i e s i n t o cash.

STOCHASTIC MODEL

This model i s based on t h e bas ic assumption t h a t

cash balances change randomly over a period of time both

i n s i z e and d i r e c t i o n and form a normal d i s t r i b u t i o n a s

t he number of pe r iods observed increases . The s t o c h a s t i c

na tu re of cash balances resembles t h e f igu re 9.A.

I Ft$ 4.a

12. Sr ivas t ava . R.M., 2. G., P-523.

The model p r e s c r i b e s two c o n t r o l l imi ts-upper

l i m i t and lower l i m i t . When t h e cash balances reach the

upper l i m i t a t r a n s f e r of ca sh t o investment account

should be made and when cash balances reach t h e lower

p o i n t a p o r t i o n of s e c u r i t i e s c o n s t i t u t i n g investment

account o f t h e company should be l i q u i d a t e d t o r e t u r n

t h e cash balances t o i t s r e t u r n po in t .

The upper and lower l i m i t s of c o n t r o l a r e s e t

a f t e r t ak ing i n t o account f i x e d c o s t a s s o c i a t e d wi th

conve r t ing s e c u r i t i e s i n t o cash and v i c e ve r sa , and t h e

c o s t of ca r ry ing s t o c k cash.

The M i l l e r and Or r have provided t h e s imp les t

model t o determine t h e opt imal behaviour i n a s t o c h a s t i c

s i t u a t i o n . The model i s e s s e n t i a l l y a c o n t r o l l i m i t

model des igned t o determine t h e t ime and s i z e of t r ans -

f e r s between an investment account and cash account.13

This model s p e c i f i e s two c o n t r o l l i m i t s des igna-

t i n g 'h ' f o r upper l i m i t and 0 (Zero) f o r t h e lower l i m i t

a s shown i n F igu re 9.6.

13. Ibid., p.527.

According t o t h i s model when cash balances of

t h e company reach t h e upper l i m i t , cash equal t o h-z

should be invested i n marketable s e c u r i t i e s (i.e.

Investment account) s o t h a t new cash balances touches

2 point. I f t h e cash balances touch 0 point , t h e

finance manager should immediately l iqu ida te t h a t much

of t h e Investment p o r t f o l i o which could re turn t h e cash

balance t o 2 point.

It may be i n t e r e s t i n g t o note t h a t cash balances

a r e allowed t o wander i n between h,z space and no con-

t r o l is c a l l e d f o r s o long a s the cash balances s tay

there. The model s e t s "2" a s the t a r g e t cash balance

level . Z and h, therefore, become leve ls determined t o

maximise p r o f i t s . The optimal value of Z is derived byusing

t h e following formula:

Where, b = Fixed c o s t associated with a secur i ty

t r a n s a c t i o n - variance of d a i l y n e t cash flows.

K - I n t e r e s t r a t e per day on marketable s e c u r i t i e s .

The optimal value of .hU is simply t h r e e tiroes of 2.

The average cash balances cannot be determined i n advance.

However, approximate f i g u r e w i l l be Z+h/3.

Cash management no t only d e a l with procuring of

adequate amount of funds and d isburse them according t o

t h e needs, nor investment Of excess funds, b u t it a l s o

d e a l wi th f inanc ing of cash shortage.

Shortage of cash is a s i t u a t i o n which i n d i c a t e tk

excess of cash outf lows over cash inflows dur ing c e r t a i n

period. Carelessness on t h e p a r t of t h e management t o

d e a l p roper ly wi th t h i s s i t u a t i o n may throw t h e concern

i n t o l i q u i d a t i o n i n s p i t e of its s u b s t a n t i a l a n t i c i p a t e d

cash inflows i n t h e future. "Cash flow statement i s made

t o show t h e impact of var ious t r a n s a c t i o n s on t h e cash

p o s i t i o n of a f i rm, it t a k e s i n t o cons idera t ion only

such t r a n s a c t i o n s t h a t have r e l a t i o n s h i p with

I n o t h e r words, a cash flow statement r e v e a l s t h e

repercussions of t r a n s a c t i o n s involving movement of caah.

I n c a s e of excess of outf lows over inflows of cash, t h e

concern may procure funds from anyone o r more of t h e

fol lowing sources t -

1. f a l l i n g back upon t h e l i n e of c r e d i t opened e a r l i e r .

2. l i q u i d a t i n g marketable s e c u r i t i e s

3. by r a i s i n g loans, d e p o s i t s from f i n a n c i a l i n s t i t u t i o n s

14. Oupta.R.L., Advanced Accountancy, Theory Method and A l i c a t i o n s Sul tan Chand & Sons, New Delhi, 1976, iiEs7r'

4. by de lay ing payments

5. by d i spos ing of surp lus f ixed a s s e t s stc.

As a mat te r of f a c t , when a cash shor tage

s i t u a t i o n is expected, it does not automatical ly and

n e c e s s a r i l y imply a search f o r e x t e r n a l f inancing.

I n i t i a l l y depending upon t h e f a c t o r s , s t e p s may be

taken t o avoid o r t o minimise t h e undesirable s i t u a t i o n

by e f f e c t i v e c o n t r o l of t h e i n t e r n a l resources. This

can be made p o s s i b l e by tak ing dec is ion on such mat te rs

a ) increased e f f o r t s t o speed up c o l l e c t i o n s

b) reduc t ion of purchasing excess inventory

C ) i n c r e a s i n g cash s a l e s

d ) s a l e of excess a s s e t s

a) s a l e of s h o r t term investments

f) deferment of c a p i t a l expenditure1 and f i n a l l y

g) postponing and de lay ing payments e tc . than e x t e r n a l

Because t h e s e can be done economically/ f inanc ing o r by

u t i l i z i n g bank c r e d i t l i n e . Even i f an e x t e r n a l source

has t o be found, t h i s might be seen a s br idg ing opera t ion

pending t h e a b i l i t y t o b r i n g on streams an a l t e r n a t i v e

i n t e r n a l source. 15

15. Hartlay.W.C.F., Cash Planninq, Forecas t inq and Cont ro l l ing , ~ o n a o n , 1976, p.85.

COST OF RUNJIUG OUI' OF CASH

I f a concern faces un-anticipated shortage of

cash, it has t o incur various cos ts on account of running

out of cash. No concern is, offorded t o run i n t o a

s i tua t ion wherein it i s subjected t o various types of

pressures a f f ec t ing managements'morale causing damage

t o its f inanc ia l reputation, and t o lose cash discount

on prompt payment, sometimes the enterpr ises a r e not

able t o negot ia te with suppl iers on a strong footing.

Because of t h i s , the enterpr ises invariably a re forced

t o enter i n t o fu r the r negotiations with banks and even

borrow funds on a higher r a t e of i n t e re s t .

ADEQUACY OF CASH

Every concern have t o keep adequate cash t o

(1) meet t h e i r da i ly operational requirements, and

( 2 ) t o maintain l i qu id i ty and solvency continually.

These a re important and inev i t ab le f o r every business

fo r i t s very existance, computation of various r a t io s have

been suggested t o find out t h e l i qu id i ty and solvency

posi t ion of business enterpr ises . Of these, t he two

very popular ones a r e r e l a t ed t o computation of t h e

current and quick r a t i o . 16

Professor Junes B, Walter has proposed t h a t

instead of matching current a s se t s with current l i ab i -

l i t i e s , b e t t e r r e s u l t s can be obtained by matching

current obl iga t ions with net cash f l o ~ s . ~ ' Net cash

flows a r e more important because they a r e flows, whereas

current l i a b i l i t i e s i nd i ca t e t h e outstanding obligations

on a p a r t i c u l a r da t e which a r e continually being repla-

ced. Hence, he has a l s o suggested the computation of

coverage of current l i a b i l i t i e s r a t i o , which takes i n t o

account t h e t u rn over r a t e of current l i a b i l i t i e s and

margin of p r o f i t on sa les . He c a l l s computation of t h i s

only a s t h e t e s t s of ac tual l i qu id i ty while t h e current

r a t i o and quick r a t i o s a r e only t e s t s of technica l sol-

vency and l i qu id i ty .

I n another study ~ . ~ . ~ i s h r a l ~ held out a view

t h a t an enterpr ise , t o be ac tua l ly l iquid , and solvent,

should have 100 per cent o r more net cash flows t o

current l i a b i l i t y ra t io .

16. Brigham, Eugene.P and Risk8 R.Bruce (Ed. ) Readinas i n Essen t i a l s of Managerial Finance, Hal t Rine hart and Wiston, VSA,'1968, ~ ~ . 3 2 - 3 3 .

17. Jame.9.E. Walter,nDetermination of Technical Solvencyn Journal o f Business, Vo1.30.(January 1975),pp.30-43.

18. Mishra.R.K., &. u., p.134.

1W OWPATIOBAL ADEQUACY OF CASH

The operational adequacy of cash may d i f f e r

from industry t o industry and from concern t o concern due

t o d i f ferences i n quantum of production, pat tern of

demand, payrolls, ava i l ab i l i t y of shor t , intermediate

and long term c r e d i t and prices of raw materials, s to re s

and spares etc. But, however, f inancia l analysts of

t he opinion t h a t a business enterpr ise should keep its

cash and near cash reserves below the requirement8 of

one months normal expenditure. I f cash and near cash

reserves happen t o be more than t h i s l i m i t , it can be

considered a s excess cash held i n the business. 19

Turnover of cash and cash i n terms of number of days

operational requirements indicate good r e su l t s regarding

operational adequacy of cash. For t h i s purpose, turn-

over of cash r a t i o can be calculated by dividing the

t o t a l operating expenses by cash and bank balances.

Cash i n tenas of number of days requirements, can a l so be

ca lcula ted by dividing 365 days by cash turn over ratio.20

19. Guthraan) Harry.0. and Doagha1jHerbert.E.. Financial ~ o l i c y , p n n t i c e Hall, New ~ 0 r k . e 1955, p.395.

CASH WAQEUBW PRACTICES IN THE PUBLIC ENPERPRISM

The cash management pract ices of t h e public

en te rp r i se s of Tamil Nadu a re t h a t they keep cash t o

meet obl igat ions and a l so for meeting any other contin-

gencier. The optimum level of cash balance is deter-

mined by means of cash budget. They a re not i n the

habit of preparing cash repor ts on a regular basis.

Whenever t h e i r cash balances go down, they u t i l i z e t h e

bank c r e d i t l i n e o r l iquidate t h e investments and a l so

they ge t ways and rneans advance from Oovernment. The

excess cash i f any, i s normally invested i n Government

s e c u r i t i e s or paying shor t and long term l i a b i l i t i e s .

For the purpose of col lec t ion of cash, generally the

public en te rp r i se s r e so r t s t o centra l ized cash col lec t ion

centres.

With t h i s back ground the cash management of

t he public enterpr ises of Tamil Nadu i s analysed.

CONTROL OF CASH PLOWs

One of t h e major object ives of cash management

is t o economize the cash holdings without impairing tk

overa l l l i q u i d i t y requiremnts of the concern. This is

poss ible by effect ing t i g h t e r control over cash flows.

The following r a t i o s have been used t o analyse t h e

c o n t r o l of cash flows:

1 ) c a s h t o c u r r e n t a s s e t s r a t i o ;

i i ) cash t u r n over r a t i o ; and

iii) l i q u i d funds t o c u r r e n t l i a b i l i t i e s r a t i o .

CASH TO CURRSWl' ASSETS RATIO

Holding of excess cash adversely a f f e c t s t h e

p r o f i t a b i l i t y of a concern, mince i d l e cash a s an a s s e t

i s not only devoid of earning power, bu t , on t h e cont ra ry

a l s o involves c o s t i n r e t a i n i n g it. I n an economy more

prone t o i n f l a t i o n , cash looses purchasing power a s wall.

A down ward t rend i n t h i s r a t i o over a period i n d i c a t e s

t h e t i g h t c o n t r o l while an upward t rend revea l a s lack

c o n t r o l over cash resources .21 The cash t o c u r r e n t

a s s e t s r a t i o s of publ ic e n t e r p r i s e s a r e shown i n Table I X . l .

Cash t o c u r r e n t a s s e t s r a t i o of t h e se lec ted

publ ic e n t e r p r i s e s shows t h a t t h e percentages of cash

and bank ba lances a r e not uniform among a l l t h e publ ic

e n t e r p r i s e s . %is may be, because of t h e var ied n a t u r e

of t h e indus t ry , t h e l e v e l of production of t h e p u b l i c

e n t e r p r i s e s and a hos t of o t h e r fac tors . But even

21. a., p.210.

TABLE - IX.1 CASH TO CURRENT ASSETS RATIO I N SELSCTED PUBLIC

ENTERPRISES OF TAMILNADU

Years TANS1 SSLtcl TACEL TASCO TAMIN Combined

1979-80 0.53 1.41 4.12 31.36 56.73 8.64

1980-81 2.99 1.09 5.00 6.19 18.02 3.41

1981-82 2.33 0.88 2.69 4.61 4.97 2.54

1982-83 3.09 0.49 4.63 1.39 6.99 2.55

1983-84 2.20 2.28 3.05 20.16 24.00 5.43

1984-85 3.80 2.13 18.29 28.77 10.99 8.32

1985-86 0.92 6.33 15.12 10.65 15.96 4.80

1986-87 2.75 1.02 12.88 11.41 11.41 4.60

1987-88 3.64 0.94 33.46 40.52 40.85 11.90

-- -

Average 2.32 1.68 12.43 16.77 23.63 6.18

Source: Computed from t h e annual r e v i e w s o f state BPE

with in themselves a l s o t h e r e is no uniformity during

t h e period. The percentage of cash balances changes

from y e a r t o y e a r without shoving any d i r e c t i o n o r

tendency.

The u n i t wise a n a l y s i s revea ls t h a t i n TANSI

t h e percentage ranges from 0.53(in t h e y e a r 1979-80)

t o 3.64(in t h e y e a r 1987-88). The year wise balances

a r e 0.53 p e r cen t , 2.99 p e r cen t , 1.33 per cent , 3.09

per cent , 2.20 per cent , 3.80 per cen t , 0.92 per cen t ,

2.75 per c e n t 3.64 per c e n t and 0.90 per cen t respec-

t i v e l y . On an average TANSI had cash balances t o an

ex ten t of 2.32 p e r cen t dur ing t h i s period.

The t rend i n t h e Ind ian manufacturing i n d u s t r i e s

is t o keep t h e cash and bank balances a t 6 p e r cen t of

t h e t o t a l c u r r e n t assets .22 TANSIIS cash and bank

balances revea l t h a t t h i s is not a s per t h e t rends i n

India. Though t h e dec l in ing t rend of cash balances is

appreciated, TANSI does n o t show such a tendency also.

On t h e o t h e r hand when it i s judged from t h e adequacy

p o i n t of view, it is not s u f f i c i e n t . I n a comfortably

22. RBI Study on Ccmpany Finances, RBI B u l l e t i n , Sep. 1977.

financed business, it w i l l probably run not l e s s t h w

5 t o 10 p e r cen t of t h e cur ren t assets .23 Since cur ren t

l i a b i l i t i e s a r e not expected t o exceed one ha l f of t h e

c u r r e n t a s s e t s , cash percentage should not run under

10 t o 2 0 p e r cen t of t h e cur ren t assets.24 Judged from

t h i s , angle a l s o t h e percentage of cash balances i n TANSI

is not adequate.

The t r e n d s i n t h e Indian manufacturing indus t r ies ,

t h e d i f f e r i n g views of t h e f i n a n c i a l ana lys t s shows,

t h a t t h e r e can be no uniformity i n t h e cash requirements

of t h e manufacturing e n t e r p r i s e s . The publ ic e n t e r p r i s e s

cannot be an exception t o t h i s . Applying t h i s c r i t e r i a

t o t h e cash reserves p a s i t i o n of TANSI, i t can be con-

s idered a s an i n d i c a t i o n t o suggest t h a t it is e f f i c i e n t

i n managing t h i s p a r t of t h e working c a p i t a l , i n so f a r

as , its bus iness a c t i v i t y has no t been a f f e c t e d by t h e

d e a r t h of cash and bank balances.

The cash balances p o s i t i o n of Southern S t r u c t u r a l s

Limited a l s o e x h i b i t s a poor share i n t h e c u r r e n t asse t s .

Cash balances i n t h i s u n i t i s t h e lowest among t h e

24. Guthrnan.H.G. and Doughall.H.E., C o r w r a t e Financial , Prent ice Hal l of India (PI Ltd.,New Delhi,

selected public enterprises. The year wise percentage

shares a r e 1.41 per cent, 1.09 per cent, 0.88 per cent,

0.49 per cent, 2.28 per cent, 2.13 per cent, 6.33 per

cent, 1.02 per cent, 0.94 per cent and 0.22 per cent.

On an average the cash balances over t h i s period i s

1.68 per cent of the current asse ts of Southern Struc-

t u r a l Limited. Judged from both angles s t a t ed ea r l i e r ,

the cash balances held by i t i s not adequate. Applying

the c r i t e r i a adopted t o TANSI, SSL also evidences

efficiency i n the management of cash and bank balances.

In TACEL, the percentage shares of cash balances

are 4.12 per cent, 5.00 per cent, 2.69 per cent, 4.63

per cent, 3.05 per cent, 18.29 per cent, 15.12 per cent,

12.88 per cent, 33.46 per cent and 25.02 per cent res-

pectively during the period. The ten years average has

been 12.43 per cent. Judged from both the angles the

cash balance posit ion is sa t is fac tory .

The cash balance posit ion of TASCO i s comfor-

table. This a l so has been varying £ran year t o year.

There a re years i n which the percentage shares of cash

i n current a s se t s a re low (6.39 per cent) and high

(40.52 per cent) . The year wise shares a re 31.86 per

cent, 6.19 per cent, 4.16 per cent, 1.39 per cent, 20.16

p e r cent , 28.77 per cent , 10.65 per cen t , 11.41 per c a t ,

40.52 per c e n t and 12.64 per c e n t respec t ive ly . On an

average, it had been 16.77 per cent during t h i s period.

I n t h e case of TAMIN, t h e cash balance p o s i t i o n

is a l i t t l e more from t h e po in t of s tandards used. I n

TAMIN a l s o t h e cash and bank balances have been changing

from year t o year . The year wise p o s i t i o n s a r e a s followsr

56.73 per c e n t , 18.02 p e r cen t , 4.97 per cent , 6.99

p e r cent , 24 p e r cen t , 10.99 per cent , 15.96 per cent ,

11.41 per c e n t , 40.85 per c e n t and 46.36 per cen t res -

pec t ive ly . I n t h i s t h e changes a r e v io len t ( f rom 4.97

per c e n t t o 56.73 per c e n t ) . The average is 23.64 p e r

cent . This shows t h a t TAMIN keeps more of cash and bank

balances than t h e t r e n d s i n t h e manufacturing indus t ry

i n I n d i a a s wel l as t h e norms.

On t h e whole, t h e cash t o c u r r e n t a s s e t s r a t i o s

have shown t h a t t h e cash reserves a r e e f f i c i e n t l y mana-

ged i n two of t h e f i v e publ ic e n t e r p r i s e s and i n another

two it is j u s t s u f f i c i e n t , i n one (TAMIN) t h e cash balan-

ces a r e excess ive ly maintained.

The combined cash t o c u r r e n t a s s e t s r a t i o is

a l s o f l u c t u a t i n g between 2.54 p e r cen t (81-82) and 11.90

per cent(B7-88). On an average, it i s 6.18 per cent.

This shows t h a t the cash and bank balances of public

enterpr ises a r e a s per the trends i n the Indian Manu-

fac tur ing Indust r ies , but l e s s than the other norms.

The t e s t of ac tual l i qu id i ty of a firm may b e t t e r

be studied v i t h the help of cash posit ion r a t i o o r

l iquid funds t o current l i a b i l i t i e s r a t io . It analyses

t h e level of l iquid resources i n re la t ion t o current

obligations. The l iquid funds include cash and bank

balances and marketable secu r i t i e s .

The l iqu id funds i n the public enterpr ises of

Tamil Nadu cons i s t of cash and bank balances and occa-

s ional ly the l iquidat ion of investments i n Government

secu r i t i e s . The c r e d i t worthiness of a customer i s

normally appraised by the suppl iers of mater ia l before-

hand, but i n the case of public enterpr ises , the supp-

l i e r s a r e accustomed t o the redtapism, and do not

normally assay them by t h e i r capacity t o pay a t a par t i -

cu la r point of time. However, t o t e s t whether the

public en te rp r i se s have adequate l iquid funds t o meet

t h e i r current l i a b i l i t i e s o r not the cash posi t ion r a t i o

is prepared and presented i n Table IX.2.

TABLE - IX.2 LIQUID PUMlS TO CURREaP LIABILITIES RATIO

Years TANS1 SSLtd TACEL TASCO TAMIN Combined

Average 0.05 2.74 1.90 4.74 5.39 1.23

Source: Computed from the annual reviews of s t a t e BPE

The a n a l y s i s of t h e t & l e revea ls t h a t t h e

l i q u i d funds t o c u r r e n t l i a b i l i t i e s r a t i o s change from

u n i t t o u n i t and hence t h e r e is no uniformity i n t h e

maintenance of l i q u i d i t y t o pay f o r t h e c u r r e n t l i a -

b i l i t i e s . The cursory glance a t t h e t a b l e revea ls

t h a t t h e r e is no consistancy even wi th in t h e u n i t s

over t h e period.

The examination of t h e t a b l e revea ls t h a t i n

TANSI t h e l i q u i d i t y i n terms of cur ren t l i a b i l i t i e s

f l u c t u a t e s between 0.01 i n t h e y e a r s 1979-80

1 9 8 5 ~ 8 6 and 1988-89 and 2.13 ( i n t h e year

1987-88). On an average the r a t i o is 0.05. This means

t h a t f o r every l i a b i l i t y worth Re.one, t h e l i q u i d funds

a r e a v a i l a b l e upto pa ise 0.05 only. This shows t h a t

while TANSI i s so lvent it i s no t l i q u i d enough t o pay

f o r i ts c r e d i t o r s a t a p a r t i c u l a r po in t of time.

I n Southern S t r u c t u r a l Limited a l s o t h e r a t i o

f l u c t u 8 t e s between 0.42 i n t h e year 1980-81 and 6.54

( i n 1988-89). On an average t h e l iqu id funds t o cur ren t

l i a b i l i t i e s r a t i o is 2.74. This shows t h a t t h e l i q u i d

funds a r e a v a i l a b l e near ly t h r e e times of t h e c u r r e n t

l i a b i l i t i e s . In te rpre ted i n another way, t h i s shows t h a t

nearly 1.74 times of the l i q u i d asse t s a re kept i d l e

i n t h e form of cash and bank balances without p rof i t ab ly

invest ing them i n some income-earning assets .

I n TACEL, also, the l iqu id funds a re more than

the cur ren t l i a b i l i t i e s . The l iqu id funds f luc tua te

i n between 0.80 (1988-89) and 2.80 times i n the year

1984-85. On an average, t h e l iqu id funds a r e 1.90

times a s t h a t of the cur ren t l i a b i l i t i e s . This shows

t h a t TACEL is l i q u i d but i ts l iqu id funds a r e more than

warrented by the cur ren t l i a b i l i t i e s . This i s a l s o an

ind ica t ion of excess l i q u i d i t y foregoing income from the

investments of it.

I n TASCO, it f luc tua tes between 1.97 i n the year

1984-85 and 8.72 i n the year 1987-88. On en average, the

l i q u i d funds a r e 4.74 times as t h a t of the cur ren t l i a b i -

l i t i e s , point ing out t h a t it maintains more of l i q u i d

a s s e t s than warrented by cur ren t l i a b i l i t i e s foregoing

income from investments of excess cash and bank balances.

The l i q u i d funds maintained by TAMIN i s the

highest of a l l t h e o ther publ ic en te rpr i ses examined.

The l i q u i d funds i n terms of cur ren t l i a b i l i t i e s a r e

f luc tua t ing between 3.12 i n the year 1979-80 and

7.86 times i n t h e year 1987-88. On an average t h e

l i q u i d i t y pos i t ron is 5.39 times than the current

l i a b i l i t i e s . This shows t h e solvency and excess l iqui -

d i t y of TAMIN foregoing income from investments of

excess cash and bank balances a t the same time incu-

r r i ng i n t e r e s t charges on such excess cash balances.

The combined r a t i o of l i qu id funds t o current

l i a b i l i t i e s of t he public enterpr ises is a l s o fluctua-

t i n g between 0.78 times and 2.37 times. On an average

the r a t i o is 1.23. This shows tha t t he public enter-

p r i s e s a s a whole have l i qu id funds 0.23 times more than

t h a t of t h e current l i a b i l i t i e s . By and large t h i s

r a t i o reveals t h a t t h e public en t e rp r i s e s a s a whole a r e

l iquid , capable of paying the current l i a b i l i t i e s a t

any time, but still have some excess l i qu id i ty .

The exception i s t h e TANSI. In t h i s un i t t h e

percentage of cash t o current a s s e t s is on an average

just 2.32, l i qu id funds t o current l i a b i l i t i e s i s on an

average 0.05 paise f o r every l i a b i l i t y worth Re.l/-

The current r a t i o being s a t i s f a c t o l y ( a s i s found i n

chapter IV) t h e poor share of cash and bank balances

may develop anxiety f o r t he credi tors . They may impose

s t r i c t e r terms of c r e d i t o r may go t o the extent

of f ix ing higher prices. But s ince so f a r TANS1 has not

experienced such adverse treatment, it has t o be

construed a s a s ign of e f f i c i e n t management of cash

and near cash resources.

The operat ional adequacy of cash i s measured

i n terms of number of days operational requirements

of the public enterprises. For t h i s purpose, the

cash i n terms of number of days requirements i s cal-

culated by dividing 365 days by cash turnover ra t io .

The cash turnover r a t i o i s calculated by dividing the

t o t a l operat ing expenses by cash and bank balances.

This may be ab le t o evaluate whether the public enter-

p r i ses have cash and near cash reserves j u s t equivalent

t o one month's operat ional expenditure a s prescribed by

the norm, o r more o r less .

The cash i n terms of number of days of operational

requirements of the public en te rpr i ses of Tamil Nadu

i s presented i n Table IX.3.

* loco c i t . P. St;-

TABLE - I X . 3

CASH I N TERMS OF NUMBER OF DXYS O P E R A T I O W

REQUIREMErnS

- - -. - - - - -

Y e a r s TANS1 S S L t d TACEL TASCO T A M I N C o m b i n e d

A v e r a g e 9 417 317 834 471 315

S o u r c e : C o m p u t e d f r o m the a n n u a l r e v i e w s of s t a t e BPE

The cursory glance of t h e t a b l e revea ls , t h a t

depending upon t h e na ture of business and l e v e l s of

production a c t i v i t y t h e cash requirements a r e d i f f e r e n t .

But t h e r e i s no consistency over t h e period i n t h e

respec t ive un i t s . The a n a l y s i s of t h e cash balances of

ind iv idua l u n i t s may throw more l i g h t on t h e l e v e l s of

cash i n terms of n m b e r of days opera t iona l requirements.

The r a t i o i n TANSI i s lowest i n t h e y e a r s 1979-80

and 87-88 i.e. t h e cash balances a r e j u s t equiva len t t o

3 days o p e r a t i o n a l requirements only and h ighes t 21

days i n t h e y e a r 1986-87. On an average, t h e cash balan-

ces a r e equiva len t t o 9 days opera t iona l requirement8

only per annum during t h i s period. While t h e f i n a n c i a l

e x p e r t s (Guthman and o t h e r s ) say t h a t it should n o t

exceed one month's requirements, t h e cash and bank balan-

c e s a v a i l a b l e i n TANSI is j u s t equivalent t o 9 days

o p e r a t i o n a l requirement$. The low l e v e l s of cash t o

c u r r e n t a s s e t s , low l i q u i d funds t o c u r r e n t l i a b i l i t i e s

and lower l e v e l s of cash i n terms of number of days

o p e r a t i o n a l requirements, prove t h a t t h e cash and bank

ba lances a v a i l a b l e i n TANSI is t h e minimum. I f it has

managed t h e bus iness with t h i s l i t t l e amount of funds,

without adversely a f f e c t i n g it, it is a s i g n of

e f f i c i e n t management of cash.

The cash i n terms of nuaber of days operat ional

requirements ava i lab le i n Southern S t r u c t u r a l Limited

d e p i c t s a d i f f e r e n t p ic ture . It holds high l e v e l s of

cash. The lowest (235 days requirements) is i n t h e

year 1982-83 and t h e highest (640 days requirements)

i s i n t h e year 1985-86. On an average, t h e cash and

bank balances a v a i l a b l e i n Southern S t r u c t u r a l Limited

is equiva len t t o 417 days operat ional requirements.

When judged it from t h e norm of not exceeding one months

requirements,Southern S t r u c t u r a l Limited holds cash and

bank balances equivalent t o nearly one year and two

months requirements. The investment pa t te rn , of Sou-

thern S t r u c t u r a l Limited has shown t h a t i t has invested

t h e surp lus funds i n Government s e c u r i t i e s only once

over t h e period (1984-85) and t h a t too a small sum of

Rs.1000/- only. This shows t h e poor a t t e n t i o n paid t o

t h e management of excess cash and bank balances.

The p o s i t i o n preva i l ing i n t h e o ther public

e n t e r p r i s e s l i k e TACEL, TASCO and TAMIN i e not d i f f e r e n t

from Southern S t r u c t u r a l Limited. The d i f f e r e n c e is

only i n degree and not i n kind.

I n TACEL, t h e lowest l e v e l (157 days requirements)

is i n t h e year 1988-89 and t h e h ighes t (405 days

requirements) i s i n t h e year 1984-85. The l e v e l s a r e

f l u c t u a t i n g i n between t h e s e two bounds. On an average

t h e l e v e l s a r e equiva len t t o 317 days opera t iona l re-

quirements. This i s more than approximately t e n tims

of t h e norm. This shows t h a t TACEL has n e i t h e r attem-

pted t o synchronise t h e cash flows properly, nor pro-

jected t h e cash surplus,nor planned properly t o i n v e s t

t h e surp lus funds s o a s t o earn some income o u t of t h e

excess cash flows and reduce t h e c o s t of maintaining

such high l e v e l s of cash and bank balances.

Of a l l , TASCO is t h e poorly manoged u n i t with

re fe rence t o holding of cash and bank balances. The

lowest i s 335 days requirements i n 1981-82 and h ighes t i s

1738 days requirements i n t h e y e a r 1987-88. On an

average, equiva len t t o 834 days opera t iona l requirements.

TASCO a l s o have proved t h a t over t h e period, i n only

one y e a r (1981-82) it has invested t h e surp lus cash

balances i n t h e Government s e c u r i t i e s , t h a t t o o a small

sum of Rs.15,000/- only. Therefore, TASCO a l s o have

n e i t h e r planned t h e cash flows nor pro jec ted t h e cash

surp lus nor planned t o i n v e s t t h e surp lus cash i n a

p r o f i t a b l e manner. It has no t attempted t o reduce

t h e c o s t i n maintaining such high l i q u i d i t i e s too.

TAMIN a l s o had t h e lowest (332 days opera t iona l

requi rements ) in t h e year 1980-81 and h ighes t (664

days requirements) i n t h e year 1988-89. The l e v e l s

of cash and bank balances a r e f l u c t u a t i n g i n between

t h e s e two l i m i t s . On an average, it is equiva len t

t o 471 days opera t iona l requirements.

This shows t h a t TAMIN a l s o has not planned

i ts cash flows properly nor has adopted t h e p r a c t i c e

of i n v e s t i n g t h e surp lus funds i n some s e c u r i t i e s ,

which i s p r o f i t a b l e and i s a l s o capable of being conver-

t e d i n t o cash s h o r t l y without l o s s of value.

On t h e whole t h e publ ic e n t e r p r i s e s have proved

t h a t , they a r e no t maintaining t h e cash and bank

balances l e s s than one months opera t iona l requirements p

nor i n v e s t t h e surp lus funds i n some income earn ing and

e a s i l y c o n v e r t i b l e s e c u r i t i e s . They hold t h e cash and

bank balances i n varying degrees ranging from 136 days

o p e r a t i o n a l requirements t o 529 days requirements. On

an average they hold cash and bank balances equiva len t

of e f f ic iency i s v i s i b l e i n one un i t (TANSI) t h e o ther

u n i t s have not properly planned t h e i r cash flows, nor

have developed t h e prac t ice of invest ing t h e surplus

funds i n p r o f i t a b l e s e c u r i t i e s . They have not taken

i n t o considerat ion t h e cos t of maintaining excess leve ls

of l i q u i d i t y o r attempted t o reduce it e i t h e r by redu-

cing i ts l e v e l s t o t h e optimum. This confirms t h e hy-

pothesis t h a t t h e public en te rpr i ses p t e f e r t o play a

s a f e game by holding excess l e v e l s of cash and bank

balances.

The r a t i o which can be used t o measure t h e

e f fec t iveness of t h e cont ro l o f cash flows is t h e cash

turnover r a t i o and/or a l s o known as cash t o s a l e s r a t i o .

CASH TURN OVER RATIO

Cash turnover r a t i o can be ca lcu la ted by dividing

t h e s a l e s by cash. "The increase i n s a l e s i s general ly

assoc ia ted with l a r g e r bank balances".25 According t o

T.Carlet Willard, t h e cash and bank balances w i l l

decrease a s t h e s i z e of business ~ n c r e a s e s . ' ~ I f a

business can turnover i ts cash, l a rger number of times,

it can f inance a g r e a t e r volume of s a l e s With r e l a t i v e l y

l e s s e r cash resources. This w i l l i nc rease t h e p r o f i t a b i l i t y

25. John Sangan.Toward8 a Theory of Working Capi ta l Mana- gement, The Journal of Finance, Vol.X., May 1955.

26. T. C a r l e t Willard, The Usefulness of a Transaction Demands and Models, A New I n t e r p r e t a t i o n , The Journal of Finance, Volme XXIV, Dec.1969, p.48j.

of a concern. On t h e o t h e r hand a d e c l i n i n g t rend i n

t h e cash tu rnover r a t i o w i l l show t h a t t h e f irm has

f a i l e d t o u t i l i s e i ts cash resources p r o f i t a b l y . The

cash tu rnover r a t i o of t h e publ ic e n t e r p r i s e s of Tamil

Nadu is presen ted i n Table IX.4 f o r ana lys i s .

The cash turnover r a t i o s of t h e publ ic en te r -

p r i s e s show d i f f e r e n t pa t te rns . There is no uniformity

i n t h e i r tu rnover with'ln t h e u n i t s over t h e per iod of

study.

The cash turnover r a t i o of TMSI shows t h a t it

ranges from 19.79 times (1984-85) t o 127.04 t imes

(1988-89). On an average t h e cash and bank balances

have tu rned over 51.73 t imes i n an year. This i s

b e t t e r t h a n some of t h e o t h e r publ ic e n t e r p r i s e s .

The lower share of t h e cash and bank ba lances i n

t h e t o t a l c u r r e n t a s s e t s , t h e low l i q u i d i t y and t h e

smal l amount i n terms of number of days o p e r a t i n g expen-

s e s he ld by TANSI, have r e f l e c t e d i n t h e high turnover

t h e cash and bank balances.

The cash turnover r a t i o i n Southern S t r u c t u r a l

Limited is t h e highest . I t ranges between 32.36 t imes

TABLE - IX.4

CASH TURN OVER RATIO OF SELECTED PUBLIC

ENTERPRISES OF TAMILNADU

Years TANS1 SSLtd TACEL TASCO TAMIN Combined

Average 51.73 135.39 18.06 19.22 11.56 16.72

Source: Computed from the annual reviews o f s t a t e BPE.

and 734.84 t imes. On an average it turnsover 135.39

t imes p e r annum dur ing t h i s period.

I n t h i s u n i t d l s o t h e low s h a r e of t h e cash and

bank ba lances i n t h e t o t a l c u r r e n t a s s e t s is a b l e t o

s u b s t a n t i a t e t h e f a c t t h a t it was i n d i f f e r e n t forms

( t u r n o v e r ) .

The c a s h t u r n r a t i o of TACEL shows i t s slowness

i n i ts movements. The r a t i o has been f l u c t u a t i n g

between 0.83 t imes i n t h e y e a r 1988-89 and 40.33 t imes

(1981-82). On an average cash has been t u r n i n g o v e r

18.06 t imes. The high l e v e l s of cash and bank ba lances

kept t o meet t h e o p e r a t i n g expenses is r e f l e c t e d i n

t h e slow t u r n o v e r of cash.

TASCO, which he ld h i g h e s t l e v e l s of cash and

bank b a l a n c e s i n terms of number of days o p e r a t i n g

expenses a l s o r e v e a l s t h e slow cash t u r n over. The

r a t i o has been f l u c t u a t i n g over t h e per iod between 2.69

t i m e s ( i n 1979-80) and 97.77 t imes ( i n 1982-83). On an

average t h e c a s h turned o v e r 19.22 timea p e r annum

d u r i n g t h i s period. Even though t h i s can b e accepted

i n view of t h e f a c t t h a t TASCO belongs t o a s e a s o n a l

i n d u s t r y , t h e h igh l e v e l s of cash ba lances h e l d i n t h e

i d l e form might have prevented i t from p r o f i t a b l y using

t h e cash and bank balances.

Ds. TAMIN is one of'sample public e n t e r p r i s e which

has t h e lowest turnover of cash and bank balances. I n

t h i s u n i t a l s o t h e r a t i o had been f l u c t u a t i n g between

1.13 times (1979-80) and 24.24 times (1981-82).

On an average the cash and bank balances turned over

11.56 times per annum over t h i s period. The higher

share of t h e cash and bank balances i n t h e t o t a l cur ren t

asse t s , t h e high l i q u i d i t y and t h e higher number of

days opera t ing expenses held i n t h e form of ready cash,

might have caused f o r t h e s l o w e r turnover. This f u r t h e r

revea ls t h a t i t has not p r o f i t a b l y used t h e cash and

bank balances.

The combined r a t i o a l s o has been f l u c t u a t i n g

between 8.32 times(1979-80) and 34.79 times(1982-83).

On an average t h e cash and bank balances of t h e public

e n t e r p r i s e s turned over 16.72 times per annum during

t h i s period. The wide v a r i a t i o n i n t h e turnover among

t h e publ ic e n t e r p r i s e s shows t h a t there i s s t i l l r o o m

f o r p r o f i t a b l e u t i l i z a t i o n of t h e cash and bank balances

One of t h e main t a s k s of a f inance manager is

t o hold and maintain adequate cash. It is t h e input

i n t o company's operat ions and a l s o t h e much awaited

output and hence has t o be deployed t o utmost produc-

t i v e use. Cash management is concerned with cash flows

i n t o and o u t of t h e f i n , wi th in t h e f irm and t h e cash

balances he ld by t h e f irm a t a point of time.

Its objec t ives a r e r ( 1 ) t o meet the cash disburse-

ment needs;and (2) t o minimise t h e funds c o m i t t e d t o

cash balances. Even though these appear a s c o n f l i c t i n g

and mutually cont rad ic tory , a shrewed f inance manager

has t o reconc i le them. He has t o s t r i k e a balance be t -

ween the two c o n f l i c t i n g goa ls of l i q u i d i t y and prof i ta -

b i l i t y of a f i rm by managing cash flows i n t o t h e company,

o u t of t h e company and i n t r a company and cash balances

held by them.

The func t ions of t h e cash management are: (1) cash

planning, ( 2 ) managing cash flows; (3) investment of

excess c a s h i n marketable s e c u r i t i e s e tc .

Af te r i d e n t i f y i n g t h e cash requirements, t h e

f inance manager has t o maintain s u f f i c i e n t l i q u i d resources

t o meet them. Determining t h a t appropriate l e v e l s

of cash balances involves t rade off between r i s k

and p r o f i t a b i l i t y . I n t h i s process the inventory,

s t o c h a s t i c and the Miller and O r r models may help

t h e f inance manager.

Cash management not only deals with procuring

of adequate amount of funds and disbursing them accor-

ding t o t h e needs, it a l s o dea ls with f inancing of cash

shortage.

Cash shortage s i t u a t i o n need not necessari ly

lead t o search f o r ex te rna l financing, but can a l s o

d e a l with tak ing decisions f o r speeding up of c o l l e c t i o n s .

In s h o r t every concern has t o keep adequate cash

t o meet t h e i r d a i l y operat ional requirements and t o

maintain l i q u i d i t y and solvency continually. The opera-

t i o n a l adequacy of cash may d i f f e r from indus t ry t o

indus t ry and concern t o concern depending upon t h e pro-

duction and a host of o t h e r requirements. But, however,

f i n a n c i a l a n a l y s t s a r e of t h e opinion t h a t a business

e n t e r p r i s e s should keep i ts cash and near cash resources

below t h e requirements of one month's normal expenditure.

Turnover of cash and cash i n terms of number of days

o p e r a t i o n a l requirements i n d i c a t e good r e s u l t s regarding

o p e r a t i o n a l adequacy of cash.

The p u b l i c e n t e r p r i s e s of Tamil Nadu admit t h a t

they dec ide t h e optimum l e v e l of cash ba lances by means

of p repar ing cash budget. Whenever t h e cash b a l a m e s

f a l l below t h e optimum l e v e l they admit t h a t t h i s w i l l

be made good by f a l l i n g back upon a l i n e of c r e d i t t h a t

have been e s t a b l i s h e d o r l i q u i d a t e t h e i r investments i n

Government s e c u r i t i e s , o r they approach t h e Qovernment

f o r ways and mean advances. Likewise t h e excess cash

i f any, i s inves ted i n government s e c u r i t i e s , o r f o r

paying s h o r t and long term l i a b i l i t i e s .

The cash management of t h e publ ic e n t e r p r i s e s a r e

analysed w i t h t h e h e l p of c o n t r o l t echniques and cash

tu rnover r a t i o . When t h e cash management is eva lua ted

w i t h t h e h e l p of c o n t r o l techniques t h e fo l lowing con-

c l u s i o n s a r e a r r i v e d a t t

( i ) t h e cash t o c u r r e n t a s s e t s r a t i o has revea led t h a t

they main ta in d i f f e r e n t l e v e l s of cash and bank balances.

On an average they main ta in 2.32, 1.68, 12.43, 16.77 and

23.63 per c e n t s of t h e c u r r e n t a s s e t s as c a s h and bank

balances. This has f u r t h e r revea led t h a t t h e r e was no

uniformity i n any of them over t h e period. I n TANSI

and SSL t h e cash and bank balances a n l e s s e r than t h e

norm, but i n TAMIN it was more than t h e norm. TACEL

and TASCO a r e found t o have cash and bank balances a s

per t h e norms. But h a f e v e r , t h e combined r a t i o being

6.18 per c e n t evidenced t h a t t h e public e n t e r p r i s e s

keep cash and bank balances a s per t h e t r e n d s i n t h e

Indian Manufacturing i n d u s t r i e s .

( i i ) t h e l i q u i d funds t o cur ren t l i a b i l i t i e s r a t i o a l s o

has revealed t h a t t h e r e i s no uniformity e i t h e r among

themselves, o r over t h e period i n any of them. On an

average they hold 0.05, 2.74, 1.90, 4.74 and 5.39

t imes of l i q u i d funds a s t h a t of t h e c u r r e n t l i a b i l i t i e s .

This has f u r t h e r revealed t h a t except TANSI, a l l t h e

o t h e r publ ic e n t e r p r i s e s a r e capable of meeting t h e i r

c u r r e n t l i a b i l i t i e s a t any poin t of time. The combined

r a t i o being 1.23 a l s o shows t h a t they a r e not only

capable of l i q u i d a t i n g t h e i r c u r r e n t l i a b i l i t i e s a t

any time b u t a l s o have excess cash and bank balances.

( i i i ) cash i n terms of number of days opera t iona l expen-

d i t u r e of publ ic e n t e r p r i s e s a l s o shows two opposite

extremes. I n one un i t (TANSI) t h e cash and bank balances

a r e on an average s u f f i c i e n t t o n ine days opera t iona l

requirements, where a s i n a l l t h e o t h e r sample un i t s ,

they f l u c t u a t e from 151 days requirements (TACEL i n

1988-89) t o 1738 days (TASCO 1987-88) requirements. The

combined r a t i o a l s o proves t h a t t h e cash and bank

balances a r e on an average s u f f i c i e n t t o ten months

requirements. This e x h i b i t s t h e excess l e v e l s of cash

balances held by t h e publ ic e n t e r p r i s e s without p r o f i t a -

b l y i n v e s t i n g them. They have paid poor a t t e n t i o n t o

t h e c o s t of maintaining such high l e v e l s of cash and

bank balances.

( i v ) when t h e e f f i c i e n c y of t h e cash management is ana-

lysed i n terms of cash tu rnover r a t i o , a mixed trend

i s a v a i l a b l e . I n two u n i t s (TANS1 and SSL) where t h e

l e v e l of cash balances i n terms of c u r r e n t a s s e t s a r e

low, t h e turnover is high. I n t h e o t h e r t h r e e , where

they a r e found t o have surp lus balances and excess

l i q u i d i t y , t h e turnover is low. The combined turnover

being 16.72 t imes, and t h e average turnover i n than

ranging from 11.56 and 135.39 proves t h a t t h e r e is

every p o s s i b i l i t y f o r t h e publ ic e n t e r p r i s e s t o i n v e s t

t h e s u r p l u s funds p r o f i t a b l y and use t h e cash and near

cash resources i n an e f f e c t i v e manner.