CASH MANAGEMENT

PREPRARED & PRESENTED BY:-

Anuj Bansal Rajdeep Paul Sandeep S Kumar Saurab Kumar Vipul Vishal Bhardwaj

TABLE OF CONTENTS:

CONTENTS

PRESENTED BY

Rajdeep Paul Meaning Cash Mangt. Cycle Rajdeep Paul Importance Vipul Motives for holding Cash Saurab Kumar Facets Anuj Bansal CashPlanning ManagingCashFlo ws Sandeep S Kumar OptimumCashLe ve l Rajdeep & Sandeep Inve sting SurplusCash Vishal Bhardwaj

oCashMgt.Se rvic e s Applic atio nHCLT c h.& e oCo nc lusio n

Rajdeep Paul

CASH MANAGEMENT

CASH MANAGEMENT CYCLE

Business Operation

Cash Collect ion

Defi cit Surplu s

Borro w Inves t

Informatio n & Control

Cash Paymen ts

IMPORTANCE :-

Motives for holding cash

Facets of cash management

Cash planning

To

plan and control the use of cash

CASHBUDGET

Managing Cash Flows : Accelerate Cash Collections & Decelerate Cash Disbursements
Accelerating cash collections Decelerate Disbursements

Decentralized Collection . Lock Box System Clearing

Payment Float

Optimum cash level

BAUMOL S MODEL
ASSUMPTIONS

Holding Cost :- The opportunity cost ; the return foregone on the marketable securities . HC = K ( C / 2 ); where k = opportunity cost C / 2 = Average Cash Balance Transaction Cost :- The cost incurred to convert marketable securities into cash . Total no . of transaction during the year = T / C ; where T = Total Funds / Cash requirement C = Cash Balance If per transaction cost is c, then the total transaction cost will be : TC = c ( T / C ) 2c Total Cost = Holding Cost + Transaction C*= Tk Cost = k ( C / 2 )+ c ( T / C ) Optimum Cash Balance :- When the total cost is minimum .

Advani Chemical Ltd . Estimates its total cash requirement as Rs 2 , 00 , 000 , 00 next year . The co . opportunity cost of funds is 15 % per annum . The co . will have to incur a Rs 150 per transaction when it converts its short term securities to cash . Determine the optimum cash balance . How much is the total annual cost of the demand for the optimum cash balance? How many deposits will have to be made during the year? Soln :- Per Transaction Cost ( c )= Rs 150 Total Funds / Cash requirement ( T )= Rs 2 , 00 , 000 , 00 Opportunity Cost ( k )= 15 % or 0 . 15 Now , according to 2cT/k formula
2(150)(20000000) = 0.15

C *=

Rs 2,000,00

The Annual Cost will be : Total Cost = k ( C / 2 )+ c ( T / C ) = 0 . 15 ( 200000 / 2 )+ 150 ( 20000000 / 200000 ) = Rs 30 , 000 Thus during the year the co . will have to make 100 deposits i . e ( 20000000 / 200000 ) i . e converting marketable securities to cash .

Miller - orr model

UPPER LIMIT - LOWER LIMIT = ? ...... Depends on the following .

Transaction Cost ( c ). Interest Rates ( i ). Standard Deviation of net cash flows ( ).

Limit - Lower Limit ( Z )

Transaction Cost * Cash Flow Variance Interest per day

Upper

3/4 *

1/3

Z=

[ ]
*c i
2

1/3

UPPERLIMIT=LOWERLIMIT+3Z RETURNPOINT=LOWERLIMIT+Z AVERAGECASHBALANCE=LOWERLIMIT+4/3Z

Q :- PKJ co . has a policy of maintaining a minimum cash balance of Rs 5 , 00 , 000 . The standard deviation of the co . daily cash flows is Rs 2 , 00 , 000 . The annual interest rate is 14 %. The transaction cost of buying or selling securities is Rs 150 per transaction . Determine PKJ s upper control limit & the return point as per MO model . Soln :c = 150 = 2 , 00 , 000 i = 0 . 14 / 365

According to the formula

2

0 . 14 / 365 ]

Upperlimit=LowerLimit+3Z=500000+3(227227) =Rs1181680 ReturnPoint=LowerLimit+Z=500000+227227 =Rs727227 Av.CashBalance=LowerLimit+4/3Z=500000+4/3(227227) =Rs802969

Z = [ 3 /1/3 * 150 * ( 200000 ) 4

=Rs227227

INVESTING SURPLUS CASH

SELECTINGINVESTMENT OPPURTUNITIES TYPESOFINVESTMENT OPPURTUNITIES TreasuryBills CommercialPapers BankDeposits Certificateofdeposits

Safety Maturity Marketability

HCLTECHNOLOGIES

CASHCONTROL/CASHMANAGEMENT:

CASH MANAGEMENT SERVICES :-

CONCLUSION
Goodcashmanagementmeans:
Knowingwhen,where,andhowyourcashneedswill occur, Knowingwhatthebestsourcesareformeetingadditional cashneeds;and, Beingpreparedtomeettheseneedswhentheyoccur,by keepinggoodrelationshipswithbankersandother creditors.

Thank You

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