Cash Management of Hero Moto Corp.

Effective Cash Management - Motives & Objectives for Holding Cash

Having an efficient and effective cash management policy in place is vital for a business no
matter its net worth.
In theory, there are 3 motives for holding cash:
1 Transactions Motive
Cash balances are kept in order to meet routine cash needs of the business, such as the
purchase of raw materials, payment of employees wages, etc
2 Precautionary Motive
Unanticipated cash demands require that an additional amount is kept to be able to meet such
unexpected demands. Unanticipated cash demands can vary from unexpected rise in the
prices of raw materials, debtors delaying their payment further than expected, strikes, etc
3 Speculative Motive
Speculative balances are kept in order to allow the business to take advantages of any
opportunities which may present themselves at unexpected times. Suppliers at times may try
to attract companies by giving special discounts, but you must pay in cash.
Objectives of Cash Management
In order to ensure you meet the objectives of an effective cash management policy, the
financial manager must ensure that the company meets the payment schedule and also
minimize idle funds committed to cash balances.
Meeting Cash Balances
The financial manager must ensure he has enough cash in hand to pay suppliers, creditors,
employees, shareholders, banks, etc
Most financial managers at times go a step further and keep even more than required. This
can be the result of various factors such as:

Enhancing the companys reputation settling payments on time keeps creditors and
suppliers happy
Taking advantage of trade discounts by paying your debts on time

Stronger negotiating power when dealing with suppliers

Unexpected cash requirements can be met with no problem at all

 Minimising idle balances

Too much cash tied up in idle balances waiting for something to happen involves an
opportunity cost and hence loss of profits. As you minimise the cash balance, you increase
the chance of a shortfall and of failing to meet your payments schedule. A company must
always try to find a suitable cash management policy and this at times can be facilitated by
having a cash budget in place. By doing so, a company could forecast its cash inflows and
outflows for the coming period and thus estimate with reasonable precision the amount of
cash balance that it must keep idle.
The 5 basic principles of cash management include:
1. Increase the speed of receivables collection; by lowering the average collection period
for funds, you will have more money to use for operations or investing. Offering a
discount for early payment is one method that can be used to speed up the payment
process.
2. Keep inventory levels low; maintaining the proper levels of inventory are crucial to

maintaining your available cash levels. The cost of inventory and warehousing it is a
huge expense; this is why right-on-time is a good way to go if it is feasible for your
company. It is also important to consider the shelf life and the depreciation of your
products. Most foods have a short shelf life, and items such as computers and
computer related items have a fast depreciation rate.
3. Monitor the timing of payment of liabilities; you should take advantage of the full
payment period, but do not pay them late, this could damage your credit rating.
4. Plan timing of major expenditures; you should plan the timing of major expenditures;
they should be made when you normally have excess cash which is typically during
the slow season.
5. Invest idle cash; leaving cash in your safe will earn you nothing. Letting large
amounts of cash just sit without reinvesting it is not good money management.
Things can be clearer through the below given diagram:

Cash VS Marketable Securities (Transaction cost VS Opportunity cost trade off analysis
of Hero Moto Corp)
If Hero Moto Corp. is maintaining too small a working balance, it may run out of cash

.If then must liquidate marketable securities, if available, or borrow from outside.
Both the options entails the costs that are known as transaction cost.
If Hero Moto Corp. is maintaining too high working balance, it may help in reducing
the liquidity crunch but in maintaining such a balance the firm forgoes the opportunity
to earn interest on marketable securities.

Cash management data & Analysis of Hero Moto Corp.

Years

2014

2013

2012

2011

2010

Net cash flow

-70.84

101.22

-5.59

-23.38

49.7

Beginning cash

135.40

34.18

39.77

63.15

13.45

Total cash

64.56

135.40

34.18

39.77

63.15

Investment
securities

in

marketable

Borrowing

Source: moneycontrol.com

Conclusion
As per the above data analysis the total cash available for the Hero Moto Corp. is
positive in all the years from 2010 to 2014.
Thus it signifies that the firm has ideally gone for investment in the marketable
securities in order to minimize the opportunity cost.
It also reflects that there were no borrowings by Hero Moto Corp in these five years.