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Cash and Marketable Securities

Management
Cash - A Definition

In a narrow sense, cash includes coins,


currency notes, cheques, bank drafts &
demand deposits.

In a broad sense, cash includes “near-cash


assets” such as marketable securities & time
deposits with banks.
Motives For Holding Cash

 Transaction Motive:
To meet cash needs that arise from doing business.

 Precautionary Motive:
Having cash on hand for unexpected purposes.
Motives For Holding Cash

 Speculative Motive:
To take advantage of potential profit-making
situations.

 Compensating Motive:
To maintain a minimum balance of cash at
banks to compensate for providing services &
loans.
Objectives of Cash Management

 To meet cash disbursement needs of the firm


on a continuous & regular basis.

 To minimize funds in the form of cash balance


which remains idle.

 To prevent bankruptcy

 Good relation with bank


Objectives of Cash Management

 Good relation with trade creditors &


suppliers.

 To lead strong credit rating

 To meet unexpected cash expenditure

 To maintain balance level


Importance of Cash Management

 To maintain adequate cash balance

 Helps in identifying surplus cash & investing


them in marketable securities.

 Helps in identifying the points of shortfalls &


to plan & arrange adequate cash

 Improves the profitability of the firm


Importance of Cash Management
 Keeps the bank overdraft limit under
control

 Strike a balance between liquidity &


profitability

 Make instant cash payments & avail of the


facilities of cash discounts.

 To take advantage of speculative


opportunities
Cash Management Models

Baumol’s Model

Baumol suggested that cash may be


managed in the same way as any other
inventory & stated that the Economic
Order Quantity (EOQ) could be applied to
cash management.
Cash Management Models

Miller- Orr Model

The Miller- Orr Model specifies the


following 2 limits:
d) Upper Control Limit (UCL)
Marketable securities are sold
f) Lower Control Limit (LCL)
Marketable securities are bought
Ways of Improving Cash Flow

 Increase sales (particularly cash sales)

 Reduce direct & indirect costs & overhead


expenses

 Increase prices specially to slow payers

 Become more selective when granting credit

 Reduce the amount/time of credit given to


customers
Ways of Improving Cash Flow
 Improve systems for billing & collection

 Improve systems for paying suppliers

 Use the 80/20 rule to control inventories,


receivables & payables

 Add late payment charges or fees where


possible

 Use more pro-active collection techniques


Marketable Securities
Meaning:
Marketable securities consist of
investments that are both readily
marketable & are expected to be converted
into cash within a year.

They should possess 2 basic characteristics:


 Ready market & safety of principal
 Little or no loss in the value over time.
Types of Marketable Securities

 Term deposits with scheduled banks


 Treasury Bills
 Certificates of deposit
 Commercial papers
 Bill discounting
 Mutual Fund Scheme
 Municipal Bonds
 Inter-Corporate Deposits
Cash Budget

 Cash Budget is the most important tool in cash


management

 It is a device to help a firm to plan & control the


use of cash

 Cash Budget may be prepared annually, half-


yearly, quarterly, monthly, fortnightly, weekly or
even on a daily basis
Purpose of Cash Budget
 To co-ordinate the timings of cash needs

 It pinpoints the period when there is likely to be


excess cash

 It enables a firm to take advantage of excess cash


available

 It helps to arrange needed funds on the most


favorable terms
Thank You….