Cash Management PPT SEM-6.pdf pptx. Docs

Cash management Model PPTX

1. Copyright 2008 Prentice Hall Publishing Company
CASH MANAGEMENT

2. Copyright 2008 Prentice Hall Publishing Company
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CASH MANAGEMENT
•Meaning and Nature of Cash,
•Motives for holding cash,
•Objectives of cash Management,
•Dimensions of cash management
✓Cash Planning,
✓Managing the cash flows,
✓Determining optimum level of cash &
✓Investing surplus cash

3. Copyright 2008 Prentice Hall Publishing Company
INTRODUCTION
Cashisthemostliquidasset,isofvital
importancetothedailyoperationsofbusiness
firms.Itiscrucialforthesolvencyofthefirm
&thus,itisreferredtoasthelife-bloodofthe
businessfirm.
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4. Copyright 2008 Prentice Hall Publishing Company
CashistheimportantCA&basicinputneeded
tokeepthebusinessrunningonacontinuous
basis&itisalsotheultimateoutputexpectedto
berealizedbysellingtheserviceorproduct
manufacturedbythecompany.
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5. Copyright 2008 Prentice Hall Publishing Company
Cashisthemoneywhichafirmcandisburse
immediatelywithoutanyrestriction.Itincludes
coins,currencynotes&chequesheldbythefirm
&balancesinitsbankaccount.Sometimes
marketablesecuritiesorbanktime-depositsare
alsoconsideredascash.Thebasicfeatureofthis
typeofnearcashassetsisthattheycanbeeasily
convertedintocash.
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6. Copyright 2008 Prentice Hall Publishing Company
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Cashmanagementisconcernedwith
themanagingof:
•cashflowsintoandoutofthefirm,
•cashflowswithinthefirm,and
•cashbalancesheldbythefirmatapointof
timebyfinancingdeficitorinvestingsurplus
cash
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7. Copyright 2008 Prentice Hall Publishing Company
•Commoncauseofbusinessfailure:Cashcrisis!
•Abusinesscanbeearningaprofitandbeforcedto
closebecauseitrunsoutofcash!
•67percentofsmallbusinessownershaveatleast
occasionalproblemsmanagingcashflow.
•19percentreportcashflowasacontinuing
problem.
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8. Copyright 2008 Prentice Hall Publishing Company
•Cashmanagement–forecasting,collecting,
disbursing,investing,andplanningforthecasha
companyneedstooperatesmoothly.
•Young,growingcompaniesare“cashsponges.”
•Knowyourcompany’scashflowcycle.
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9. Copyright 2008 Prentice Hall Publishing Company
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MOTIVESFORHOLDINGCASH
•Thetransactionmotive
•Theprecautionarymotive
•Thespeculativemotive
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10. Copyright 2008 Prentice Hall Publishing Company
•TheTransactionMotive:
Itrequiresafirmtoholdcashtoconductits
businessinnormalcourse.Thefirmneedscash
primarilytomakepaymentsforpurchases,wages
&salaries,otheroperatingexpenses,taxes,
dividends,etc.fortransactionpurposeafirm
mayinvestitscashinmarketablesecurities,i.e.,
itwillpurchasethosesecuritieswhosematurity
equalswithanticipatedpaymentsinfuture.The
transactionmotivereferstoholdingcashtomeet
anticipatedpaymentswhosetimingsisnot
properlymatchedwithcashreceipts.
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11. Copyright 2008 Prentice Hall Publishing Company
•ThePrecautionaryMotive:
Itistheneedtoholdcashtomeet
contingenciesinfuture.Itprovidesabufferto
meetsomeunexpectedemergency.The
precautionaryamountofcashdependsupon
thepredictabilityoscashflows,i.e.,iftheCFs
canbepredictedwithaccuracy,lesscashwill
bemaintainedforanemergency.The
precautionarybalancemaybekeptincash&
marketablesecurity.
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12. Copyright 2008 Prentice Hall Publishing Company
•TheSpeculativeMotive:
Itrelatestotheholdingofcashforinvestingin
profit-makingopportunitiesas&whenthey
arise,i.e.,whenthesecuritypricechange.The
firmwillholdcashwhenitisexpectedthat
interestrateswillrise&securitypriceswillfall.
Securitiescanbepurchasedwhentheinterest
rateisexpectedtofall:;thefirmwillbenefited
bythesubsequentfallininterestrates&
increaseinsecurityprices.
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13. Copyright 2008 Prentice Hall Publishing Company
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ObjectivesofCashManagement
Whydoweneedtomanagecashflowinthe
organization?Whatistheuseofcash
managementinthebusiness?
Followingpurposesofcashmanagementwill
resolvetheabovequeries:
✓FulfillWorkingCapitalRequirement.
✓PlanningCapitalExpenditure.
✓HandlingUnorganizedCosts.
✓InitiatesInvestment
✓BetterUtilizationofFunds.
✓AvoidingInsolvency.

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✓FulfillWorkingCapitalRequirement:The
organizationneedstomaintainampleliquidcash
tomeetitsroutineexpenseswhichpossibleonly
througheffectivecashmanagement.
✓PlanningCapitalExpenditure:Ithelpsin
planningthecapitalexpenditureanddetermining
theratioofdebtandequitytoacquirefinancefor
thispurpose.

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✓HandlingUnorganizedCosts:Therearetimes
whenthecompanyencountersunexpected
circumstanceslikethebreakdownofmachinery.
Theseareunforeseenexpensestocopeupwith;
cashsurplusisalifesaverinsuchconditions.
✓InitiatesInvestment:Theotheraimofcash
managementistoinvesttheidlefundsintheright
opportunityandthecorrectproportion.

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✓BetterUtilizationofFunds:Itensuresthe
optimumutilizationoftheavailablefundsby
creatingaproperbalancebetweenthecashin
handandinvestment.
✓AvoidingInsolvency:Ifthebusinessdoesnot
planforefficientcashmanagement,thesituation
ofinsolvencymayarise.Itiseitherduetolackof
liquidcashornotmakingaprofitoutofthe
moneyavailable.

17. Copyright 2008 Prentice Hall Publishing Company
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DIMENSIONSOFCASHMANAGEMENT
(FACETSOFCASHMANAGEMENT)
Themanagementofcashisimportantbecauseitis
difficulttopredictcashflowsaccurately,
particularlytheinflows&thereisnoperfectco-
incidencebetweeninflows&outflowsofcash.
Inordertoresolvetheuncertaintyaboutcash
flowsprediction&lackofsynchronisationbetween
cashreceipts&payments,thefirmshoulddevelop
appropriatestrategiesofcashmanagement.
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18. Copyright 2008 Prentice Hall Publishing Company
Thefirmshouldevolvestrategiesregardingthe
fourfacetsofcashmanagement:
•Cashplanning
•Managingthecashflows
•Optimumcashlevel
•Investingsurpluscash
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19. Copyright 2008 Prentice Hall Publishing Company
•CashManagement:Cashinflows&outflows
shouldbeplannedtoprojectcashsurplusordeficit
foraspecificperiod.Cashbudgetispreparedfor
thispurpose.
•ManagingtheCashflows:thecashflowsshouldbe
managedproperly,itmeansthattheinflowsshould
beacceleratedwhilecashoutflowsshouldbe
decelerated.
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20. Copyright 2008 Prentice Hall Publishing Company
•Optimumcashlevel:thefirmshoulddecideabout
theappropriatelevelofcashbalance.Itdealswith
determiningtheoptimumlevelofcashbalances,
i.e.,avoidingthecostofexcesscash&dangersof
cashdeficiency.
•InvestingSurpluscash:Thesurpluscashbalance
shouldbeproperlyinvestedtoearnprofitby
investingtheminbankdeposits,marketable
securities,etc.
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21. Copyright 2008 Prentice Hall Publishing Company
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CASHPLANNING
•CFsareindispensablepartsofbusiness
operationsofallfirms.
•CPisatechniquetoplanandcontroltheusesof
cash.
•Itprotectsthefinancialconditionofthefirmby
developingaprojectedcashstatementfroma
forecastofexpectedcashinflows&outflowsfor
agivenperiod.
•Theforecastsmaybebasedonthepresent
operationsortheanticipatedfutureoperations.
•CPmaybedoneondaily,weeklyormonthly
basis.
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22. Copyright 2008 Prentice Hall Publishing Company
•ACashbudgetisthemostsignificantdeviceto
planforandcontrolcashreceiptsand
payments.
•Itisasummarystatementofthefirm’s
expectedcashinflows&outflowsfora
projectedtimeperiod.
•Itgivesinformationonthetimings&
magnitudeofexpectedcashbalances&CFs
overtheprojectedperiodwhichhelpsthe
financialmanagerforfinancingthem&
ultimatelytoexercisecontroloverthecash&
liquidityofthefirm.
Chapter 12: Cash Mgt 22

23. Copyright 2008 Prentice Hall Publishing Company
The Cash Budget
•A “cash map,” showing the
amount and the timing of a
firm's cash receipts and cash
disbursements over time.
•Predicts the amount of cash a
company will need to operate
smoothly.
•A helpful tool for visualizing the
firm's cash receipts and cash
disbursements and the resulting
cash balance.
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24. Copyright 2008 Prentice Hall Publishing Company
Preparing a Cash Budget
•Determine a Minimum Cash
Balance
•Forecast Sales
•Forecast Cash Receipts
•Forecast Cash
Disbursements
•Estimate End-of-Month
CashBalance
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25. Copyright 2008 Prentice Hall Publishing Company
Forecast Sales
•The heartof the cash budget.
•Sales are ultimately transformed into cash
receipts and cash disbursements.
•Cash forecast is only as accurate as the sales
forecast from which it is derived.
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26. Copyright 2008 Prentice Hall Publishing Company
ForecastSales
•Preparethreesalesforecasts:
–MostLikely
–Pessimistic
–Optimistic
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DetermineaMinimumCash
Balance
•RememberGoldilocks,the
ThreeBears,andthe
porridge:
•Nottoomuch...
•nottoolittle...
•butacashbalancethat'sjust
right...foryou!

28. Copyright 2008 Prentice Hall Publishing Company
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Cashforecastsareneededtopreparecashbudgets.
Cashforecastingcanbedoneonshort&longterm
basis.
1.Short-termCashForecasts:Theimportant
functionsofshort-termcashforecasts
•Todetermineoperatingcashrequirements
•Toanticipateshort-termfinancing
•Tomanageinvestmentofsurpluscash.
–Short-termForecastingMethods
•Thereceiptanddisbursementsmethod.
•Theadjustednetincomemethod.
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29. Copyright 2008 Prentice Hall Publishing Company
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•TheReceiptandDisbursementsMethod
•Thevirtuesofthemethodare:
Itgivesacompletepictureofalltheitemsof
expectedcashflows.
Itisasoundtoolofmanagingdailycash
operations.
•Thismethod,however,suffersfromthe
followinglimitations:
Itsreliabilityisreducedbecauseofthe
uncertaintyofcashforecasts.Forexample,
collectionsmaybedelayed,orunanticipated
demandsmaycauselargedisbursements.
Itfailstohighlightthesignificantmovements
intheworkingcapitalitems.
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30. Copyright 2008 Prentice Hall Publishing Company
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•TheAdjustedNetIncomeMethod
•Thebenefitsoftheadjustednetincomemethod
are:
Ithighlightsthemovementsintheworking
capitalitems,andthushelpstokeepacontrolon
afirm’sworkingcapital.
Ithelpsinanticipatingafirm’sfinancial
requirements.
•Themajorlimitationofthismethodis:
Itfailstotracecashflows,andtherefore,its
utilityincontrollingdailycashoperationsis
limited.
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•Long-termCashForecasting
•Themajorusesofthelong-termcashforecasts
are:
Itindicatesascompany’sfuturefinancialneeds,
especiallyforitsworkingcapitalrequirements.
Ithelpstoevaluateproposedcapitalprojects.It
pinpointsthecashrequiredtofinancethese
projectsaswellasthecashtobegeneratedbythe
companytosupportthem.
Ithelpstoimprovecorporateplanning.Long-
termcashforecastscompeleachdivisiontoplan
forfutureandtoformulateprojectscarefully.
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32. Copyright 2008 Prentice Hall Publishing Company
Managing the Cash Flow
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33. Copyright 2008 Prentice Hall Publishing Company
•Types of floats :
•Disbursement Float
•Collection Float
•Net Float
(A)Accelerating cash collections :
•Concentration Banking
•Lock Box System
(B) Controlling Disbursement
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34. Copyright 2008 Prentice Hall Publishing Company
Afterpreparingthecashbudget,thefinance
managershouldensurethattheredoesnotexist
anydeviationbetweenprojectedcashflows&
actualcashflows.Theefficiencyofthefirm’s
cashmanagementprogrammecanbeenhanced
bytheknowledge&useofvariousprocedures
aimedat:
a.Acceleratingcashinflows,&
b.Controllingcashoutflows.
Thus,thetwinobjectivesinmanagingCFsshould
betoacceleratecashcollectiontoasmuchas
possible&todecelerateordelaycash
disbursement.
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35. Copyright 2008 Prentice Hall Publishing Company
Withreferencetothecontrolofinflows&
outflows,floatisanimportanttechniqueto
reducethelengthofthecashcycle.Whenafirm
receivesormakespaymentsintheformof
cheque,thereisusuallyatimegapbetweenthe
timethechequeiswritten&whenitiscleared,
thistimegapisknownasfloat.
•Thefloatforthepayingfirmreferstothetime
thatelapsesbetweenthepointwhenitissuesa
cheque&thetimeatwhichthefundsunderlying
thechequeareactuallydebitedinthebank
account.
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36. Copyright 2008 Prentice Hall Publishing Company
•Forthepayeefirm,floatreferstothetime
betweenthereceiptofthecheque&the
availabilityofthefundsinitsaccount.So,float
denotesthefundsthathavebeendispatchedbya
payerbutnotinaformthatpayeecanspend.
•Togetanideaoffloatmechanism&itsutilityin
themanagementofCFs,onemustknowthe
relatedbankingprocedure.Whenachequeis
issuedbythepayingfirm,thebankbalanceof
thefirmisnotimmediatelyreduced,ratherthe
bankreducesthebalanceonlywhenthechequeis
presentedtoiteitherpersonallyorthroughthe
clearingsystem.
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37. Copyright 2008 Prentice Hall Publishing Company
•Similarly,whenthefirmreceivesachequefrom
thecustomer&depositsthechequeinthefirm’s
account,ratherthebankcreditsthecheque
amountonlywhenitisclearedbythepayingbank.
•Thecashbalanceshownbyafirmonitsbooksis
calledthebookorledgerbalancewhereasthe
balanceshowninitsbankaccountiscalledthe
availableorcollectedbalance.Thedifference
betweentheavailablebalance&theledgerbalance
isreferredtoasthefloat.
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38. Copyright 2008 Prentice Hall Publishing Company
TYPESOFFLOATS
DISBURSEMENT FLOAT:
Theamountofchequeissuedbutnotpresented
forpaymentisknownasthedisbursement
float.Foreg.,supposethatABCCo.hasabook
balanceaswellasavailablebalanceofRs.4
lacswithitsbank.SBI,asonMarch31.on
April1,itpaysRs.1lacbychequetooneofits
suppliers&hencereducesitsbookbalanceby
Rs.1lac.
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39. Copyright 2008 Prentice Hall Publishing Company
SBI,however,willnotdebitABCCo.accounttill
thechequehasbeenpresentedforpaymenton
say,April6.untilthathappensthefirm’s
availablebalanceisgreaterthanitsbook
balancebyRs.1lac.
Hence,betweenApril1&April6,ABCCo.hasa
disbursementfloatofRs.1lac.
DF=Firm’savailablebankbalanceMinus
Firm’sbookbalance
=Rs.4lac–Rs.3lac=Rs.1lac
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40. Copyright 2008 Prentice Hall Publishing Company
•COLLECTION FLOAT:
Theamountofchequedepositedinthebank,
butnotyetclearedisknownasthecollection
float.Fore.g.,supposethatXYZCohasbook
balanceaswellasavailablebalanceofRs.5lac
asonApril30.OnMay1,XYZCoreceivesa
chequeforRs.1.5lacfromacustomerwhichit
depositsinthebank.Itincreasesitsbook
balancebyRs.1.5lacs.Howeverthisamountis
notavailabletoXYZCo.untilitsbankpresents
thechequetothecustomer’sbankon,sayMay
5.So,betweenMay1&May5XYZCohasa
collectionfloatof(-)Rs.1.5lac.
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41. Copyright 2008 Prentice Hall Publishing Company
CollectionFloat=Firm’savailablebank
balance-MinusFirm’sbookbalance
=Rs.5lac–Rs.6.5lac
=(-)Rs.1.5lac
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42. Copyright 2008 Prentice Hall Publishing Company
•NETFLOAT:
•Thenetfloatatapointoftimeissimplythe
overalldifferencebetweenthefirm’savailable
bankbalance&thebalanceshownbytheledger
accountofthefirm.IftheNFis‘+’,i.e.,PFis
morethanRF(CollectionFloat),thenthe
availablebalanceexceedsthebookbalance&
vice-versa.Ifthefirmhas‘+’NF,itcanissue
morechequeevenifthenetbankbalanceshown
bythebooksofaccountmaynotbesufficient.A
firmwithapositiveNFcanuseittoits
advantage&maintainasmallercashbalance
thatitwouldhaveintheabsenceoffloat.
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43. Copyright 2008 Prentice Hall Publishing Company
Thecourseofactionadoptedbyafirmto
managethePF&theRF(ReceiptFloat)is
knownasplayingthefloat,whichhasemergedas
animportanttechniqueofcashmanagementin
mostofthefirms.
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44. Copyright 2008 Prentice Hall Publishing Company
ACCELERATING CASH COLECTIONS /
SPEEDINGUPCOLLECTIONS
Acompanycanconservecash&reduceits
requirementsforcashbalancesifitcanspeed-up
itscashcollection.Cashcollectionscanbe
acceleratedbyreducingthelagorgapbetween
thetimeacustomerpaysbill&thetimethe
chequeiscollected&fundsbecomeavailablefor
thefirm’suse.
Thecollectiontimecomprisesmailingtime,
chequeprocessingdelay&thebank’s
availabilitydelayasshownintheflow-chart:
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45. Copyright 2008 Prentice Hall Publishing Company
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Mailing
time
Availability delay
Processing
time
Cash
available
Company deposits
the cheque
Company receives
the cheque
Customer mails
the cheque

46. Copyright 2008 Prentice Hall Publishing Company
•Whenacompanyreceivespaymentsthrough
chequethatarrivebymail,allthe3
componentsofcollectiontimearerelevant.The
financialmanagershouldtakestepsforspeedy
recoveryfromdebtors&forthispurpose
properinternalcontrolsystemshouldbe
installedinthefirm.
•Oncethecreditsaleshavebeeneffected,there
shouldbeabuilt-inmechanismfortimely
recoveryfromthedebtors.Periodicstatements
shouldbepreparedtoshowtheoutstanding
bills.Incentivesofferedtothecustomersfor
early/promptpaymentsshouldbewell
communicatedtothem.
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47. Copyright 2008 Prentice Hall Publishing Company
•Oncethecheques/draftsarereceivedfrom
customers,nodelayshouldbetherein
depositingthesereceiptswiththebanks.The
timelagincollectionsofreceivablescanbe
considerablyreducedbymanagingthetime
takenbypostalintermediaries&banks.
•Withinthesetimegap,thedelayisgenerally
duetothemailingtime,i.e.,thetimetakenby
chequeintransit&theprocessingtime,i.e.,the
timetakenbythefirminprocessingchequesfor
internalaccountingpurposes.Theamountof
chequessentbycustomeryetnotcollectedis
knownas‘DepositFloat.’
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48. Copyright 2008 Prentice Hall Publishing Company
•Tospeedupcollection,companiesmayuse
concentrationbanking&lockboxeswhich
areessentialsystemsforexpeditious
decentralisedcollection.
1.ConcentrationBanking.
2.LockBoxes/LockBoxSystem.
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49. Copyright 2008 Prentice Hall Publishing Company
A)ConcentrationBanking:
Afirmmayopencollectioncentres(banks)indifferent
partsofthecountrytosavethepostaldelays.Thisis
knownasCB.Underthissystem,thecollectioncentres
areopenedasneartothedebtorsaspossible,hence
reducingtheetimeindispatch,collection,etc.thefirm
mayinstructthecustomerstomailtheirpaymentstoa
regionalcollectioncentre/bankratherthantothe
centraloffice.Thechequesreceivedbytheregional
collectioncentrearedepositedforcollectionintoalocal
bankaccount.Surplusfundsfromvariouslocalbank
accountsaretransferredregularly(mostlydaily)toa
concentrationaccountatoneofthecompany’s
principalbanks.
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50. Copyright 2008 Prentice Hall Publishing Company
•Withinthevastnetworkofbranchesset-upbybanks,
regional/localcollectioncentrescanbeeasilyestablished.
Toensurethatthesystemofcollectionworksaccordingto
plan,itishelpfultoperiodicallyaudittheactualtransfers
bythecollectingbanks&seewhethertheyarein
conformitywiththeinstructionsgiven.
•Thecollectioncentre(concentrationbanking)resultsin
savingoftime,&henceresultsinbettercash
management.However,theselectionofcollectioncentres
mustbebasedonthevolumeofbilling/businessina
particulargeographicalarea.Itmaybenotedthatthe
concentrationbankingalsoinvolveacostintermsof
minimumcashbalancerequiredwithabankorinform
ofnormalminimumcostofmaintainingacurrent
account.
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51. Copyright 2008 Prentice Hall Publishing Company
B)LockBox/LockBoxSystem:
Incaseofconcentrationbankingchequesare
receivedbyacollectioncentre&aredeposited
inthebankafterprocessing.Lockboxsystem
helpsthefirmtoeliminatethetimebetweenthe
receiptofcheque&theirdepositsinbank.Here,
thefirmestablishesanumberofcollection
centres,consideringcustomerslocation&
volumeofremittances&accordinglyhiresa
post-officebox.Customersareadvisedtomail
theirpaymentstospecialpost-officeboxescalled
lock-boxes,whichareattendedbylocal
collectingbanks,insteadofsendingthemto
corporateheadquarters.
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52. Copyright 2008 Prentice Hall Publishing Company
•Thelocalbankcollectsthechequefromthelock
boxonceormoreaday,depositsthecheque
directlyintothelocalbankaccountofthefirm,
&furnishesdetailstothefirm.
•Thus,theLBSystem:
1.Cutsdownthemailingtime,becausecheques
arereceivedatanearbypost-officeinsteadofat
H/Q.
2.Reducestheprocessingtimebecausethe
companydoesnothavetoopentheenvelopes&
depositthechequeforcollection,&
3.Shortenstheavailabilitydelaybecausethe
chequesaretypicallydrawnonlocalbanks.
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53. Copyright 2008 Prentice Hall Publishing Company
•InIndia,theLBSisnotpopular.However,commercial
banksusuallyprovideservicetotheirlargeclientsof:
1.Collectingthechequesfromtheofficeoftheclients,&
2.Sendingthehighvaluechequestotheclearingsystemon
thesameday.Boththeseserviceshelpsinreducingthe
floatofthelargeclients.
However,thesebenefitsarenotfree.Usually,thebank
chargesafeeforeachchequeprocessedthroughthe
system.Thebenefitsderivedfromtheaccelerationof
receiptsmustexceedtheincrementalcostsoftheLBS,or
thefirmwouldbebetterwithoutit.
WhenisitworthwhiletohaveaLBS?
Theanswerdependsonthecosts&benefitsofmaintaining
theLBS.
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54. Copyright 2008 Prentice Hall Publishing Company
CONTROLLING DISBURSEMENTS
Theeffectivecontrollingofdisbursementscan
alsohelpthefirminconservingcash&reducing
thefinancialrequirements.Disbursementsarise
duetotradecredit.Thereisnoadvantagein
payingsooner,thenagreed.Thus,bydelaying
paymentsthefirmmakesmaximumuseoftrade
credit,whichisaninterest-freesourceoffunds.
Thetechniquegenerallyusedbythefirmhereis
knownas“playingthefloat”,tomaximisethe
availabilityoffunds.Whenthefirm’sactual
bankbalanceisgreaterthanthebalanceshown
inthefirm’sbook,thedifferenceiscalled
“paymentfloat”
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55. Copyright 2008 Prentice Hall Publishing Company
OPTIMUMCASHBALANCE
Oneoftheprimaryresponsibilityofthefinancial
manageristomaintainasoundliquidityposition
ofthefirmsothatduesmaybesettledintime.
ThefirmneedscashnotonlytopurchaseRM&
paywagesbutalsoforpaymentsofdividends,
interest,taxes,etc.thus,thetestofliquidity
meanstheavailabilityofcashtomeetthefirm’s
obligationswhentheybecomedue.
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56. Copyright 2008 Prentice Hall Publishing Company
Thefinancialmanagershoulddeterminethe
appropriateamountofcashbalance.Thus,itis
relatedtoatrade-offbetweenrisk&return.If
thefirmmaintainsasmallbalance,itsliquidity
positionweakens&itsuffersfrominadequacy
ofcashtomakepayments,butahigher
profitabilitycanbeattainedbyinvestingsurplus
fundsinprofitableopportunities.Ontheother
hand,ifthefirmmaintainsahighlevelofcash
balance,itwillhaveasoundliquidityposition,
forthatithastoforgotheopportunitiestoearn
interest.
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57. Copyright 2008 Prentice Hall Publishing Company
INVESTMENTINMARKETABLE SECURITIES
(INVESTING SURPLUS CASH IN
MARKETABLE SECURITIES)
Excesscashshouldbenormallyinvestedin
marketablesecuritieswhichcanbe
conveniently&promptlyconvertedintocash.
Cashinexcessoftherequirementofoperating
cashbalancemaybeheldfortworeasons:
•TheWCrequirementoffirmfluctuatebecause
ofelementsofseasonality&businesscycles.
•Excesscashmaybeheldasabuffertomeet
unpredictablefinancialneeds.Afirmholds
extracashbecauseCFscannotbepredicted
withcertainty.
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58. Copyright 2008 Prentice Hall Publishing Company
Insteadofholdingcashforthese2reasonsthe
firmmaymeetitsprecautionaryrequirementas
&whentheyarisebymakingshort-term
borrowings.Theextracashheldbythecompany
shouldbeinvestedinmarketablesecuritieswhich
areconsideredasnearcashitems.
Thefinancialmanagershouldexamine3basic
featuresofsecuritywhilechoosingamong
alternativesecurities,viz.,safety,Maturity,
andmarketability.
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59. Copyright 2008 Prentice Hall Publishing Company
a)Safety:Afirmusuallyrequiresahighreturnonits
investmentbutthehigherreturnyieldingsecuritiesare
relativelymorerisky.Thefirmwouldinvestinsafe
securities.
b)Maturity:Itreferstothetimeperiodoverwhichinterest
&principalaretobemade.Thepriceoflong-term
securityfluctuatesmorewidelywiththechangesin
interestratethanthepriceofshort-termsecurity.Thus,
forsafetyreasonsexcesscashshouldbeinvestedin
short-termsecurities.
c)Marketability:itreferstoconvenience&thespeedwith
whichasecuritycanbeconvertedintocash.The2
importantaspectsofmarketabilityare‘price’&‘time’.
Ifthesecuritycanbesoldquicklywithoutlossofprice,it
istermedashighlyliquidormarketablesecurity.
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60. Copyright 2008 Prentice Hall Publishing Company
•CASHCONTROLREPORTS
Cashreportsprovidingacomparisonofactual
developmentwithforecastfigures,arehelpfulin
controlling&revisingcashforecastona
continualbasis.Severaltypesofcashreportsmay
beprepared,viz.,thedailycashreport,thedaily
treasuryreport,themonthlycashreport.
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Features of Instruments of Collection in IndiaInstrument Pros Cons
1.Cheques • No charge
• Payable through clearing
• Can be discounted after receipt
• Low discounting charge
• Requires customer limits which are
inter-changeable with overdraft limits
•Can bounce
•Collection times can be long
•Collection charge

2.Drafts • Payable in local clearing
• Chances of bouncing are less
•Cost of collection
•Buyers account debited on day one

3.Documentary bills • Low discounting charge
• Theoretically, goods are not released
till payments are made or the bill is
accepted
•Not payable through clearing.
•High collection cost
•Long delays
.
4.Trade bills • No charge except stamp duty
• Can be discounted.
• Discipline of payment on due date.
•Procedure is relatively cumbersome
•Buyers are reluctant to accept the due
date discipline.

5.Letters of credit •Good credit control as goods are
released on payment or acceptance of
bill.
•Seller forced to meet delivery
schedule because of expiry date.
•Opening charges
•Transit period interest
•Negotiation charges
•Need bank lines to open LC.
• Stamp duty on usance bills

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