ManagementofCash

Cash is the most important current assets for the operations of the business. Cash is the basic
input needed to keep the business running on a continuous basis, it is also the ultimate output
expected to be realized by selling the service or product manufactured by the firm. The firm
should keep sufficient cash, neither more, nor less. Cash shortage will disrupt the firms
manufacturing operation, while excessive cash will simply remain idle, without contributing
anything towards the firms profitability. Thus, a major function of the financial manager is to
keepasoundcashposition.
Cashmanagementisconcernedwiththemanagingof_
1. Cashflowsintoandoutofthefirm.
2. Cashflowswithinthefirm.
3. Cash balances held by the firmatapointoftimebyfinancingdeficitorinvestingsurplus
cash.
Itcanberepresentedbyacashmanagementcycle.
Motiveforholdingcash_
1. Thetransactionmotive
2. Precautionarymotive
3. Speculativemotive

CashManagement
Factordeterminingcashneed:
Thefactorsthatdeterminetherequiredcashbalancesare:
1. Synchronizationofcashflows.
2. Shortcosts i.TransactionCosts
ii.BorrowingCost
iii.LossofTradeDiscount iv.Rates
3. Excesscashbalancecosts.
4. Procurementandmanagement
5. Uncertaintyandcashmanagement.
Objectives:
1. Meetingthepaymentschedule
2. Minimizingfundscommittedtocashbalances.

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Cashbudget
A cash budget is the most significant device to plan for and control the cash receipts and
payments. It is a summary statement of the firms expected cash inflows and outflows over a
projected time period. It gives information on the timing and magnitude of expected cash flows
andcashbalancesovertheprojectedperiod.
The time horizon of a cash budget may differ from firm to firm. Monthly cash budgets may be
prepared by a firm whose business is affected by seasonal variations. Daily or weekly cash
budget should be prepared for determining cash requirement if dash flows show extreme
fluctuations. Cash budget for a larger extreme fluctuations. Cash budget for a larger intervals
maybepreparedifcashflowsarerelativelystable.
Cash forecasts are needed to prepare cash budgets. Cash forecasting may done on shorttermor
longtermbasis.

ShortTermForecast
It is comparatively easy to make shorttermforecasts.Theimportantusesofcarefullydeveloped
shorttermcashforecastsare_
1. Ithelpstodetermineoperatingcashrequirement.
2. Ithelpstoanticipateshorttermfinancing.
3. Ithelpstomanageinvestmentofsurpluscash.
ShortTermForecastingMethods
Commonlytwomethodsareusedforshorttermforecasting:
1. Thereceiptanddisbursementsmethods.
2. Theadjustednetincomemethods.
The receipts and disbursements methods is generally employed to forecast for limited periods
such as a week or month. The adjusted net income method is prepared for larger durations
rangingbetweenafewmonthstoayear.

ReceiptsandDisbursementMethod
Cash flows in andoutismostofcompaniesonacontinuousbasis.Theprimeaimofreceiptsand
disbursementsforecastsistosummariestheflowduringapredeterminedperiod.

#Threebroadsourcesofcashinflowscanbeidentified:
1) Operating
2) NonOperating
3) Financial

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# The next step in the preparation of a cash budget is the estimate of cash outflows. Cash
outflowsinclude:
1) Operating outflow: cash purchase, payments of payable, advances to suppliers,wages&
salariesandotheroperatingexpenses.
2) CapitalExpenditures.
3) Contractualpayments.
4) Discretionarypayments:Commonandpreferencedividend.Incaseofcreditpurchased,a
time lag will exist for each payments. This will depend on thecredittermofferedbythe
suppliers.
# One of the significant advantagesofcashbudgetistodeterminethenetcashinflowsothat
the firm is enabled to arrange its cash position. It also helps to utilize idle funds in better
ways. On the basis of cash budget, the firm can decide to invest surplus cash in marketable
securitiesandearnprofits.

Exercise
From the information and assumption that the cash balances in hand on 1 January, 1989 is
Tk.72500.Prepareacashbudget.
Month

Sales
(Tk.)

Material
Wages(Tk.) Production
Office&
Purchases
Overhead(Tk.)
Selling
(Tk.)
Overheads(Tk.)
January
72000
25000
10000
6000
5500
February
97000
31000
12100
6300
5700
March
86000
25500
10600
6000
7500
April
88600
30600
25000
6500
8900
May
102500
37000
22000
8000
11000
June
108700
38800
23000
8200
11500
Assume that 50% of total sales are cash sales. Assets are to be acquired the month of
February and April. Therefore, provisions should be made for the payment of Tk.8000 and
Tk.25000 for the same. Application has been made to the bank for the grand of a loan of
Tk.30000anditishopedthattheloanamountwillbereceivedinthemonthofMay.
It is anticipated that adividendofTk.35000willbepaidinJune.Debtorareallowedone
monthcredit.Creditorsfor materialspurchasesandoverheadsgrantonemonthscredit.Sales
commissionat3%onsalesispaidtothesalesmaneachmonth.

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CashBudget

Jan

Feb

Mar

Apr

May

Jun

Jul

36000

48500

43000

44300

51250

54350

36000

48500

43000

44300

51250

3000

SalesCommission
CapitalExpenditure

36000

10000

2160

84500
25000
12100
6000
5500
2910
8000

91500
31000
10600
6300
6700
2580

87300
25500
25000
6000
7500
2658
25000

125550
30600
22000
6500
8900
3075

105600
37000
23000
8000
11000
3261

Dividend
Total

12160

59510

57180

91658

71075

35000
117261

12160
72500
96340

24990 34320 (4358) 54475 (11661)

96340 121330 155650 151292 205767
121330 155650 151292 205767 194106

R
e
c CashSales
e
Collectionfromdebtor
i
p
BankLoan
t
s Total

P
a
y
m
e
n
t
s

PaymentsMaterials
Wages
ProductionOverheads
Office&Admin.Overheads

NetCashFlow
Balance,BeginningofMonth

Total

BasicStrategies
The cash management strategies are intended to minimize the operating cash balance
requirement.Thebasicstrategiesthatcanbeemployedtodotheneedfulare:
a) Stretching Accounts Payable: One basic strategy of efficient cash management is to
stretch the accounts payable. In other words, a firm should pay its accounts payable as
lateaspossiblewithoutdamagingitscreditstanding.

b) Efficient StrategyDuration Management: Another strategy is to increase the inventory

turnoverrate,avoidingstockouts,i.e.shortageofstock.
Thiscanbedoneinthefollowingways:
1. Increasing the raw materials turnover by using more efficient inventory
controltechniques.

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2. Decreasing production cycle through better production planning, scheduling

and control techniques, it will lead to an increase in the workinprogress
inventoryturnover.
3. Increasing the finished goods turnover through better forecasting of demand
andabetterplanningofproduction.

c) Speeding Collection of Accounts Receivable: Another strategy for efficient cash

management is to collect accounts receivables as quickly as possible without losing
futuresalesbecauseofhighpressurecollectiontechniques.
Theaveragecollectionperiodofreceivablescanbereducedbychangesin:
1. Creditterm
2. Creditstandard
3. Collectionpolicies

d) Combined Cash Management Strategies:Theforegoingdiscussionclearlyshowsthatthe

threebasicstrategiesofcashmanagement,relatedto
1. AccountPayable
2. Inventory
3. AccountReceivable
Lead to reduction in the cash balance. But, they imply certain problems for the
management. Firstly, it is the accounts payable are postponed too long, the credit
standing of the firm may be adverselyaffected.Secondly,alowlevelinventorymaylead
to a stoppage of production. Finally, restrictive credit standards creditterms and
collection policies may jeopardies sales. These implications should be constantlykeptin
viewwhileworkingoutcashmanagementstrategies.

SpeedyCashCollections
In managing cash efficiently the cash inflow process can be accelerated through
systematic planning and refined techniques. There are two broad approaches to do this. In the
first place, the customers should be encouraged to pay as quickly as possible. Secondly, the
paymentfromcustomersshouldbeconvertedintocashwithoutanydelay.
a) Prompt Payment by Customers: one the way to ensure prompt payment by customers is
prompt billing. What the customer has to pay the period of payment, etc. should be
notified accurately and in advance. The use of mechanical devices for billingalongwith
the enclosure of a selfaddressed return envelope will speed up payment by customers.

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Another and more important, technique to encourage prompt payments by customers is

thepracticeofofferingtradediscount.

b) Early Conversion of Payment into Cash: once the customer makes the payment by
writing a cheque is favour of the firm, the collection can be expected by prompt
encashment of the cheque. It will be recalled that there is a lag between the time, a
cheque is prepared and mailed by the customers andthetimethefundsareincludeinthe
cashreserveofthefirm.
Therearethreestepsareinvolvedforatimelagging.Theyare_
1. Transit or mailing time, i.e. the time taken by the post offices to transfer the
cheque from the customers to the firm. This delay or lag is referred to as
postalfloat.
2. Time taken in processing thechequewithinthefirmbeforetheyaredeposited
inthebanks,termedaslethargy.
3. Collection time within the bank, i.e. the time taken by the bank in collecting
thepaymentfromthecustomersbank.Thisiscalledbankfloat.
The early conversion of payment into cash, as technique to speedup collection of
accounts receivables, is done to reducethetimelagbetweenpostingofthechequebythe
customer and the realization of money by the firm. The postal float, lethargy and bank
floatarecollectivelyreferredtoasdepositfloat.

c) Concentration Banking:Inthissystemofdecentralizedcollectionofaccountsreceivables
large firms which have a large number of branches at different places, select some of
these which are strategically located as collection centres for receiving payments from
customers. Instead of all the payments being collected at the head office of the firm,the
chequesforacertaingeographicalareaarecollectedataspecifiedlocalcollectioncentre.

Concentration banking, as a system of decentralized billing and multiple collection

points, is useful technique to expedite the collection of accounts receivables. It reduces
thetimeneededinthecollectionprocessbyreducingthemailingtime.

d) LockBox System: Another technique of speeding up the mailing processing and

collection times which is quite popular in the USA and Europeancountriesisalockbox
system. In case of the concentration banking, cheques are received by collection centre
and after processing, are deposited in the bank. Lockbox system helps the firm to
eliminate the time between the receipt of cheques and their deposit in the bank. In the
lockbox system, the firm establishes a number of collection centres, considering
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customers locations and volume of remittances. At each centre, the firm hires a post
office box and instructs itscustomerstomail theirremittancetothebox.Thefirmslocal
bank is given the authority to pick up the remittances directly from the local box. The
bank picks up the mail several times day and deposits the cheques inthefirmsaccount.
For the internalaccountingpurposesofthefirm,thebankpreparesthedetailedrecordsof
thechequespickedup.

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