Cash Management

Facets of Cash Management

Cash planning planning inflow and outflow,
preparing cash budget

Managing the cash flows inflows to be
accelerated and outflows to be decelerated

Optimum cash level

Investing surplus cash
Cash Management Cycle
Cash mgmt seeks to accomplish the below
given cycle at a minimum cost. At the same
time it also seeks to achieve liquidity and
control.
Deficit
Cash
Payments
Surplus
Cash
Collections
Borrow
Invest
Business
Operations
Information
And Control
Motives for holding cash

Transaction motive

Precautionary motive

Speculative motive
Cash planning
It is the technique to plan and control the use
of cash. It helps to anticipate the future cash
flows and needs of the firm and reduces the
possibility of idle cash balance and cash
deficit.
Cash Budget -> it is the most significant device
to plan for and control cash receipts and
payments.
Cash forecasts are needed to prepare cash
budgets.

Short term cash forecasting methods
Receipts and disbursements method
Adjusted net income method
Sensitivity Analysis
Optimistic, most probable and pessimistic
Long term cash forecasting
Gives an idea of the companys financial
requirements in the distant future. They are not as
detailed as the short term forecasting.
Managing Cash Collections &
Disbursements
Accelerating cash collections
Amt of cheques sent by customer which are not yet
collected is called collection or deposit float.
Decentralised Collections
It is operating in USA and is known as concentration
banking
It reduces deposit float and consequently the financing
requirements
Lock-box system
Lock-box system helps the firm to eliminate the time
between the receipt of cheques and their deposit in the
bank.
Controlling Disbursements
When a firms actual bank balance is greater than the
balance shown in the firms books, the difference is
called disbursement or payment float.

Determining optimum cash balance
Optimum Cash Balance under Certainty:
Baumols Model
Assumptions
Firm is able to forecast the cash needs with certainty
Firms cash payments occur uniformly over a period of
time
Opportunity cost of holding cash is known and it does
not change over time
Firm will incur the same transaction cost whenever it
converts securities to cash
Holding Cost = k (C/2)
Transaction Cost = c(T/C)
Total Cost = k(C/2)+c(T/C)
k
cT 2
C
*

Cost
C
*
Cash Balance

Transaction Cost

Holding Cost

Total Cost

Optimum Cash Balance under uncertainty :
Miller-Orr Model
It assumes that cash flows are normally
distributed with a zero value of mean and
standard deviation.
It gives Upper limit, Lower limit and the return
point.
Cash Balance
Time
Low Limit
Return Point
Upper Limit
Purchase of Securities
Sale of Securities
The firm sets the lower control limit as per its
requirement of maintaining minimum cash
balance.
Distance between Upper and Lower limit (Z) =

Upper Limit = Lower Limit + 3Z
Return point = Lower limit + Z
3 / 1
) i / xc 4 / 3 ( Z
Investing surplus Cash in
Marketable Securities
Three basic features of security
Safety
Maturity
Marketability
Types of Short-Term investment opportunities
Treasury bills
Commercial Papers
Certificate of Deposits
Inter-corporate Deposits
Money Market Mutual Funds