Presentation 1

Cash management
Introduction
Cash is the medium of exchange which allows

management to carry on the various activities of
business on day to day basis.
It includes coins, currency, cheques held by the firm
and the balance in its bank accounts.
In a boarder sense, it also includes Near Cash
Assets such as marketable securities and time
deposits with bank.
Cont
A firm should hold sufficient cash neither more nor

less.
If the firm holds surplus cash, this excessive cash

remains idle, which simply increases the cost
without contributing towards the profitability of the
firm.
Cont
Cash management involves the

following four factors :-
Ascertainment of the minimum cash balance

and controlling the level of cash.
2. Controlling cash inflows.
1.
3.
4.
Controlling cash outflows.

Optimum investment of surplus cash.
Advantage of cash budget

1.
Planned use of cash :-
If the management has a clear idea about cash

receipts and payments , they can plan out the use of
cash.
If cash payments are planned to be made when
sufficient cash is available.
It is possible to carry on business with the minimum
of working capital.
.
.
Cont .
2. Provision for capital expenditure :
It is useful in two ways.
It shows whether capital expenditure projects can be

financed internally.
Secondly it gives an idea about the timings when sufficient

cash is available or capital expenditure.
3. Investment of surplus fund:
It reveals the availability of excess cash.

This can be invested in short term in investment ,if
funds would be needed in near future in the business.
It may be considered even for long term investment

in some cases.
4. Dividend Policy
The cash budget may guide the management in

deciding the dividend policy for the year.
If the cash budget shows that the liquid position will

not be comfortable, the management may decided to
reduce the rate of dividend or skip over dividend for
the year.
5. Profitable use of cash.
It guided the management when to get the benefit

of cash discount or quantity discount for bulk
purchase.
It also will help the finance manager in making
enough provision for cash requirements of seasonal
purchases.
6. Timely payment of Debts
Cash budget enables the finance manager to

ascertain his cash position so that he can make
payment for debts on maturity dates.
Thus provision is made for enough cash for

payment of debts as when full due.
7. Arrangement For Obtaining Funds :
It guides the management in making decisions about

whether funds for short term and long term purposes
are to be borrowed or arranged in some other
manner, If they are to be borrowed in what manner.
8. Useful for control
If the estimates for cash receipts and payments are

made in advance they can be compared with cash
receipts and payments and the difference can be
investigated.
Thus the management can control the use of cash

resources.
9. Helps Co-ordination
In fact , Cash budget serves as coordinator of all

remaining budgets.
For example the revenue shown by sales budget

determines the limits within which production and
other services departments can spend money.
10. Easy to obtain funds
A concern preparing cash budget is able to meet its

obligations in time on maturity.
This creates good will for the concern in the money

market.
Difficulties or Limitation of cash budget
Cash budget If properly framed and implemented is

immensely useful. But following difficulties and
limitation must also be taken into account.
1.Estimates are difficult :
There are many uncertainties in business.
It is therefore, Difficult to have near accurate
estimates of cash receipts and payments ,particularly
for a long period.
2. Carelessness in implementation :
If proper care is not exercised in implementing the
cash budget , it will become only a mental exercise.
The actual cash receipts and payments would not conform to

the estimates , Leading to frequent changes in them.
3. Rigidity :
If the finance manager does not show flexibility in
implementing the cash budget, It will lead to undesirable
situation.
A manger strictly believing in his estimates of cash inflow ,
may resort to strict collection policy which may result in
losing customers.
4. Expensive :
Difficult mathematical models are used for long term
estimates of receipts and payments.
It requires collection of data from various sources employing
experts in operations research etc.
Methods of preparing Cash budget
The method to be used for preparing cash forecast

depends upon the circumstances and needs of the
business.
There are generally three methods used for preparing
cash budget.
1. Receipts and payments Method
2. Adjustment earning Method
3. Balance Sheet Method
1. Receipts and Payments Method

This is the most widely used and popular method of
preparing cash budget.
The estimates under this method may be divided into

weekly fortnightly or monthly basis.
The method is of particular importance in business

where sale is unstable or seasonal or which suffers from
shortage of liquid resources.
1. Estimating cash receipts 2.Estimating cash payments
2.Adjusted Profit and Loss Method :
This is also known as adjusted Earning Method.

This method is based on estimating closing cash
balance by converting profit figure into cash.
The net profit shown by profit and loss account does

not indicate the actual cash flow onto the business .
3.Balance sheet method
This method resembles the adjusted profit and loss

method except that in this method a balance sheet is
projected while in the second the profit or loss is
adjusted.
Here the Budgeted balance sheet is prepared as at the

end of the budget period in which estimated amounts
of all assets and liabilities are put down except cash.
Controlling of cash inflows
Lock-Box Systems :
Lock box system is a further step in speeding up
collection of cash.
In this system the firm hires a post office box asks its
customers to send the cheques to the box.
The firms local bank is given the authority to open
the box and credit the payments in the firms bank
account.
The bank picks up the mail several times a day.
Standing instructions are given to the local banks to
transfer funds to head office bank when they exceed a
particular limit.
Cont
The lock box system has the following

advantages :
1 All remittances are handled by the banks a very
low cost.
2. The cheques are deposited immediately upon
receipt of remittances and the process of collection
does not have to wait till the firm completes its
processing for internal accounting purpose.

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Cash management

Cash is the medium of exchange which allows

A firm should hold sufficient cash neither more nor

If the firm holds surplus cash, this excessive cash

Cash management involves the

Ascertainment of the minimum cash balance

Controlling cash outflows.

Advantage of cash budget

Planned use of cash :-

If the management has a clear idea about cash

2. Provision for capital expenditure :

It is useful in two ways.

It shows whether capital expenditure projects can be

Secondly it gives an idea about the timings when sufficient

3. Investment of surplus fund:

It reveals the availability of excess cash.

It may be considered even for long term investment

The cash budget may guide the management in

If the cash budget shows that the liquid position will

5. Profitable use of cash.

It guided the management when to get the benefit

6. Timely payment of Debts

Cash budget enables the finance manager to

Thus provision is made for enough cash for

7. Arrangement For Obtaining Funds :

It guides the management in making decisions about

8. Useful for control

If the estimates for cash receipts and payments are

Thus the management can control the use of cash

In fact , Cash budget serves as coordinator of all

For example the revenue shown by sales budget

10. Easy to obtain funds

A concern preparing cash budget is able to meet its

This creates good will for the concern in the money

Difficulties or Limitation of cash budget

Cash budget If properly framed and implemented is

The actual cash receipts and payments would not conform to

Methods of preparing Cash budget

The method to be used for preparing cash forecast

1. Receipts and Payments Method

preparing cash budget.

The estimates under this method may be divided into

The method is of particular importance in business

1. Estimating cash receipts 2.Estimating cash payments

2.Adjusted Profit and Loss Method :

This is also known as adjusted Earning Method.

The net profit shown by profit and loss account does

3.Balance sheet method

This method resembles the adjusted profit and loss

Here the Budgeted balance sheet is prepared as at the

Controlling of cash inflows

The lock box system has the following

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