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Management of cash & Marketable Securities

Presentation by-
GhanShyam
Naynika Gupta
99817-86817
Agenda……………
1. Introduction
2. Motives for holding cash
3. Objectives of cash management
4. Factors determining cash needs
5. Determining cash need
6. Cash management: Basic Strategies
7. Cash management techniques/processes
8. Marketable securities
9. Cash management practices in India
10.Check your presence and memory
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 Introduction

1. One of the key areas of working capital

management

3. Most liquid current asset

5. Common denominator

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 Motives for maintaining cash
1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Compensating motive

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 Transaction motive
1. To meet routine cash requirements
to finance transaction in the
ordinary course of business
2. To balance current receipts and
disbursement
3. Example: Cash payment for
purchasing, operating expenses,
financial charges

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 Precautionary motive
1. Defensive in nature
2. Holding cash/near-cash as a cushion to
meet unexpected contingencies/demand
for cash
3. Floods, strikes and failure of important
customers
4. Earlier settlement of bills
5. Unexpected slow down in collection of
accounts receivable
6. Cancellation of some orders
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7. Sharp increase in cost of row materials
 Speculative Motive
1. Holding cash/near-cash to quickly
take advantage of opportunities
typically outside the normal course
of business
2. Positive and aggressive approach
3. Examples-
i. An opportunity to purchase raw
materials
ii. A chance to speculate on interest rate
movementsGhanShyam & Naynika
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 Compensating motive

1. Holding cash/near-cash to
compensate banks for providing
certain services or loans
2. Example: compensation balances-
i. An absolute minimum
ii. A minimum average balance
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 Objectives of cash management
1. To meet cash disbursement needs
(payment schedule)
2. To minimize funds committed to
cash management

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 Factors determining cash needs

1. Synchronization of cash flows

2. Short cost
3. Excess cash balance
4. Procurement and management
5. Uncertainty
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 Determining cash need
1. Minimizing cost cash
model
2. Cash budget model
3. Baumol model
4. Miller-orr model
5. Orgler’s model

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 Baumol model
1. Provides for cost-efficient transactional
balances
2. Assumes that the demand for cash can be
predicted with certainty
3. Determines the optimal conversation size/lot
4. Total cost associated with cash management
has two elements-
i. Cost of converting marketable securities into cash
ii. The lost opportunity cost
Total conversion cost per period= Tb/C
T- total transaction cash needs for the period
b- cost per conversion
C- value of marketable securities sold at each
conversion
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 Miller-orr model
1. Provides for cost-efficient transactional
balances
2. Assumes uncertain cash flows
3. Determines an upper limit and return point for
cash balances (optimum cash balance level)

C= bE (N)/t + iE (M)

b- the fixed cost per conversion

E(N)- the expected numbers of conversions
t- the number of days in the period
i- the lost opportunity cost
E(M)- the expected average daily cash balance
C- total cash management costs
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 Orgler’s model
1. Provides for integration of cash
management with production and
other aspects of the firm
2. Comprises three sections-
I. Selection of appropriate planning
horizon
II. Selection of appropriate decision
variables
i. Payment schedule
ii. Short-term financing
iii.
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Transaction of marketable securities
GhanShyam & Naynika 14
iv. Cash balance
 Case budget: management tool
“Cash budget is a statement of the inflows
and outflows of cash that is used to
estimate its short-term requirements”
2. Identifies the excess or shortage of cash
3. It pinpoints the period/ds
4. Assists in drawing capital financial plan
5. Helps in saving from cash crunch

Elements/preparation of cash budget-

– Planning horizon
– Selection of factors:
• Operating cash flows
• Financing cash flows
Cash receipts
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Cash disbursements
Cash management: basic strategies
1. Cash cycle
2. Cash turnover
3. Minimum operating cash
a) Stretching accounts payable
b) Efficient inventory-production
management
c) Speedy collection of accounts
receivable
d) Combined cash management
strategies GhanShyam & Naynika
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 Cash management techniques
1. Speedy cash 1. Slowing
collection disbursements-
2. Prompt payment a) Avoidance of early
by customers payments
3. Early conversion b) Centralized
disbursements
of payments into
c) Float (Cheque-kitting)
cash
d) Paying from a distant
a) Postal float bank
b) Lethargy e) Cheque-encashment
c) Bank float analysis
d) Deposit float f) accruals
e) Concentration
banking
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f) Lock-box system
 Marketable securities
1. Breath of market Marketable security
2. Depth of market alternatives
3. Selection criterion- • Treasury bills
a) Financial/Default risk • Negotiable certificates of
b) Interest rate risk deposits
c) Taxability • Commercial papers
d) Liquidity • Bankers acceptances
e) Yield • Repurchase (Repo)
agreements
• Units
• Intercorporate deposits
• Bills discounting
• Money market mutual
funds/liquid funds
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 Cash management practices in India
1. Collection methods
a) Bulk collection
b) Post-dated cheque (PDC) management
c) Electronic clearing service- debit scheme
d) Cheque truncation
2. Payment mechanism
a) Cheque
b) Cheque payable at par
c) Customers’ or pay order
d) Demand draft
e) Real-time gross settlement (RTGS)
f) EFT
g) SEFT
h) ECS
i) Interest/dividend warrants
j) Payment outsourcing
3. Electronic banking

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 Check your presence
1. Formula given by Baumol’s Model?
2. Four Motives of cash management?
3. Maximum no. of marketable
securities mentioned in the ppt?
4. Cash management basic strategies?
5. No. of pictures used in the ppt?

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