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Cash and Marketable Securities

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

 Compensating Motive:
To maintain a minimum balance of cash at
banks to compensate for providing services &
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 &


 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

 Strike a balance between liquidity &


 Make instant cash payments & avail of the

facilities of cash discounts.

 To take advantage of speculative

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


 Increase prices specially to slow payers

 Become more selective when granting credit

 Reduce the amount/time of credit given to

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


 Use more pro-active collection techniques

Marketable Securities
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


 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


 It helps to arrange needed funds on the most

favorable terms
Thank You….