Cash Management

1. Cash Management

2. Course Objectives • Cash in business • Cash Flow cycle • Cash budgets – Genesis of Forecasting • Cash budgets – Formatting • Cash budgets – Short term • Cash budgets – Long term • Cash Management Techniques • Liquidity and Efficient Use of Cash • Management of Receivables • Management of Inventory • Investment of Short Term Surplus

3. Introduction Glen Louis is a first generation entrepreneur. He has recently started a textile showroom. Although the market is very competitive, Glen is confident of achieving good business.

4. Introduction Glen has invested nearly $1 million in inventory and furniture. Further, he has obtained a credit period of 25 days from his suppliers.

5. Introduction To attract customers, Glen offered considerable discounts. He also started offering 35 days credit to his customers.

6. Introduction Both the discounts and the credit drew in a large number of customers. The first month sales was much higher than Glen anticipated.

7. Introduction In spite of this booming sales, Glen had a problem – shortage of cash.

8. Introduction Glen had borrowed money from a bank to decorate the showroom and to buy a few mannequins.

9. Introduction With these commitments, Glen had no money to buy stocks for the oncoming festival season. Customers also failed to pay up within the specified credit period. Many of these sundry debtors soon turned out to become bad debts.

10. Introduction As Glen was unable to pay his suppliers on time, they declined to offer him goods on credit. Moreover, he had to pay heavy interest for the loan taken from the bank.

11. Introduction Due to depleting stocks to offer customers, Glen had very low sales during the festive days. The business sank into deep losses.

12. Introduction The mistakes done by Glen are:- The credit time given was 35 days but availed by him from supplier was only 25 days time. The cyclical flow of cash will be affected by this. Glen did not forecast the requirement of cash during the festival season. If he had forecasted well, he could have invested the money borrowed from bank for getting stock instead of decorating the shop or purchasing mannequins. Let us now learn “Cash Management” Glen’s business did not have cash liquidity to meet the immediate needs.

13. Origin of cash • All business transactions involve give and take. • Earlier this give and take was settled through commodities. • One commodity was exchanged with another. • Barter system had two difficulties – presence of two persons who could satisfy each other’s needs; determination of the rate of exchange

14. Present day cash With the growth in business and trade it became increasingly difficult to use commodities as the medium of exchange. Search started to develop a new medium, devoid of the experienced pitfalls. Thus started the era of paper money.

15. Management of cash In a business virtually all activities have an impact on finance and cash. Cash to business is like blood to a living body. A business cannot operate without its life-blood cash, and without cash management, there may remain no cash to operate.

16. Features of long term cash flow cycle The basic features of long term cash flow are:- The quantum of cash flow involved is much bigger than that of short term cash flow cycle It covers normally fixed assets and long term liabilities The orbital time is much longer than that of short term cash flow It is less volatile

17. Characteristics of cash budget The following are the characteristics of cash budget:- Statement contains forecasted figures Forecasts are made for a predetermined period known as budget period It is designed and presented in an orderly format

18. Scope of cash management techniques • These cash management techniques cover both payables and receivables and have significant impact on the cash flow cycle. • Let us now look at a diagram in the next slide to understand the cash flow movement and the steps involved in cash management techniques.

19. Phases in cash management techniques • The first phase relates to payables and have four steps A1 to A4. The activity starts with the placing of order for the materials which are received after 10 days (A1 - A2). • Credit period of 10 days has been allowed by the supplier (A2 – A3), after the expiry of which cheque is despatched.

20. Parties to cash management techniques Bank, the second party, plays a commanding role in contemporary cash management strategies. Many steps involved in these techniques are under the control of the banks.

21. 1 Types of Float When the customer deposits a cheque, he credits his books of accounts, but the bank credit his account only on realization. These cause differences in the balances shown in the books of the business and the bank accounts. These differences of balances are known as “Collection float”. Collection float Collection float

22. Concentration banking The important cash collection techniques are as follows:- • Concentration banking • Under this system, local sales offices are entrusted with the collection of receivables in the geographical areas falling under their purviews. The collected cheques are deposited in the local bank of the sales office. The local banks are instructed to keep a predetermined limited amount with them and transfer the balance to a central or ‘concentration’ bank account on a daily basis. 1 • Lock Box system 2 • Pre Authorized Cheques 3 7 6 4 5 • Post-Dated Cheques • Pre Authorized Debits • Pay Order by Bank • Letter of Credit Let us now look at each in detail.

23. Credit policy and cash flow It increases sales and profit but requires relatively more cash to be tied up with the customers for a longer period. A liberal or loose credit policy is expansionary in nature. The credit policy followed by a business is crucial to its cash flow.

24. Credit investigation Extension of credit is an important and sensitive issue. Credit cannot be accorded in a blanket manner. It has to be selective. Whom to give and how much to give credit, is based on effective investigation prior to extending the term.

25. Real Life Example A study made by the business shows that in case it extends the credit period to 45 days, it is likely to have a increase 20% in the sales. It is also presumed that the fixed costs remain unchanged.

26. Stock and cash 1 • Management of stock aims at counter balancing two conflicting objectives. It tries to keep the minimum balance of inventory so as to reduce the investment costs and it attends to ensure that production does not suffer due to lack of raw materials. • Stock like cash, too, move in a circular fashion. The iterative process of stock is akin to circular track of cash flow. • The motive of holding stock is similar to those of holding cash. Stock is held for transactions motive to cater to the demands of day-to-day production schedule. 2 3

27. Economic Order Quantity (EOQ) Various inventory management techniques are:- 1 2 3 4 5 2 ABC analysis Economic Order Quantity Economic Order Quantity Reorder point Safety stock • EOQ determines the optimum order quantity where the total cost - both the ordering costs and carrying costs are minimal. • There are two approaches, they are trial and error approach and mathematical approach. Just-In-Time Let us look at each in detail.

28. Cash movement statement Cash budgets are formulated on a monthly basis. This places a limitation on this budget’s capability to tackle intra-month fluctuations. Cash Movement Statement helps to overcome this and facilitate the ways for profitable short-term investment. Data here is reflected in a detailed manner. Daily cash movement can also be projected if heavy transaction are occurring on special occasions.

29. This is a DEMO Course On – Cash Management. The Complete PPT consists of 218 Slides. • Become a Member and Get Access to Complete Powerpoint Presentations for more than 140 Subjects. • What Do you Get: • View All Courses Online. • Download Powerpoint Presentation for Each Course. • Do the Knowledge Checks for Each Course. ManagementStudyGuide.com