Unit 3

Management of Cash
 Cash
• Cash is one of the current assets of a business. It is required to keep
the business functioning smoothly with required levels of liquidity.
• It is the most unproductive of all other assets.
• In context of cash management, it is considered with high importance
Forms of Cash
• 1. Bank cash, including cash in the process of collection or
disbursement
• 2. Cash to which access has been arranged through a bank line of
credit, accessible whenever a shortfall of cash from operations is
forecast.
• 3. Cash invested in short-term investments in order to earn a return,
but which can be quickly turned into actual cash through the
liquidation (sale) of the asset.
Motives for Holding Cash
• Transaction Motive – Firm needs cash for making transactions in the
day to day operations. Cash is required to make purchases, pay
expenses, taxes, dividend etc.
• Precautionary Motive – Firm should maintain cash for meeting
various contingencies.
• Speculative Motive – Holding cash for investing in profitable
opportunities as & when they arise.
Aspects of Cash Management
• Business analysts report that poor management is the main reason
for business failure.
• Poor cash management is probably the most frequent stumbling
block for entrepreneurs.
• Understanding the basic aspects of cash management will help you
plan for the unforeseen eventualities that nearly every business faces.
Cash vs. Cash Flow
• Cash is ready money in the bank or in the business. It is not inventory,
it is not accounts receivable (what you are owed), and it is not
property. These can potentially be converted to cash, but can’t be
used to pay suppliers, rent, or employees.
• Cash flow refers to the movement of cash into and out of a business.
Watching the cash inflows and outflows is one of the most pressing
management tasks for any business. The outflow of cash includes
those checks you write each month to pay salaries, suppliers, and
creditors. The inflow includes the cash you receive from customers,
lenders, and investors.
Positive & Negative Cash Flows
• 1. Positive Cash Flow: If its cash inflow exceeds the outflow, a
company has a positive cash flow. A positive cash flow is a good sign
of financial health, but is by no means the only one.
• 2. Negative Cash Flow: If its cash outflow exceeds the inflow, a
company has a negative cash flow. Reasons for negative cash flow
include too much or obsolete inventory and poor collections on
accounts receivable (what your customers owe you). If the company
can’t borrow additional cash at this point, it may be in serious trouble.
Steps involved in cash planning process:
• Set Clear Objectives:
• Begin by defining your cash planning objectives. Are you planning for personal financial goals, such as saving for a
vacation or retirement, or are you managing cash for your business's day-to-day operations and growth? Setting clear
objectives helps you establish the purpose of your cash plan.
• Analyze Current Cash Position:
• Assess your current cash position by examining your bank statements, cash on hand, and other liquid assets.
Determine how much cash you have available to work with.
• Budgeting:
• Create a comprehensive budget that outlines your expected income and expenses. Categorize your expenses as fixed
(e.g., rent, mortgage, utilities) and variable (e.g., groceries, entertainment). Ensure that your budget reflects your
financial goals and priorities.
• Cash Flow Forecasting:
• Estimate your future cash flows by projecting your income and expenses over a specific period, such as monthly or
annually. Consider different scenarios and factors that might affect your cash flow, such as seasonal variations or
changes in income.
• Identify Cash Flow Surpluses and Shortages:
• Compare your projected cash flows with your budgeted expenses to identify periods of cash surplus or shortage. This
step helps you anticipate when you might have extra cash to save or invest or when you may need to tap into
reserves or secure financing.
• Establish a Cash Reserve:
• Create an emergency fund or cash reserve to cover unexpected expenses or income disruptions. A commonly recommended
amount is three to six months' worth of living expenses for individuals and an appropriate reserve for businesses.
• Prioritize Financial Goals:
• Determine your financial priorities and allocate surplus cash toward achieving those goals. Priorities may include paying off high-
interest debt, saving for retirement, funding education, or reinvesting in your business.
• Optimize Cash Management:
• Implement strategies to optimize your cash management, such as:
• Efficient accounts receivable and accounts payable management to ensure timely collections and payments.
• Inventory management to minimize excess inventory.
• Investment of surplus cash in interest-bearing accounts or other suitable investments.
• Debt Management:
• If you have debt obligations, create a strategy for managing them. Prioritize high-interest debt repayment and consider
refinancing or consolidating debt to lower interest costs.
• Regular Monitoring:
• Continuously monitor your cash flow against your projections and budget. Regularly review your financial statements, bank
balances, and other financial data to ensure you're staying on track.
• Adjust and Adapt:
• Be prepared to adjust your cash planning strategies based on changing circumstances, unexpected expenses, or new financial
goals. Flexibility is key to successful cash planning.
• Seek Professional Advice:
• If you're uncertain about cash planning or have complex financial needs, consider consulting a financial advisor or accountant for
guidance.
Cash Management

• Cash management refers to a broad area of finance involving the

collection, handling, and usage of cash. It involves assessing market
liquidity, cash flow, and investments.
• It deals with the following:
• Cash Inflows & outflows
• Cash flows within the firm
• Cash balances held by the firm at a point of time
Methods of Accelerating Cash Inflows
• Prompt payment by customers
• Quick conversion of payments into cash
• Decentralised collections
• Lock Box system (Collection centers)
Methods of Slowing Cash Outflows
• Paying on Last date
• Payments through cheques
• Adjusting payroll funds
• Centralisation of payments
• Inter-bank transfers
Determining Optimum Cash Balance
• A firm has to maintain a minimum amount of cash for settling the
dues in time.
• It refers to the cash balance that should be maintained by a firm
which helps the firm to meet its obligations on time & maintaining
excess cash for contingencies.
• This cash balance can be determined by the preparation of cash
budget or by other cash management models.
Factors Determining the Optimum Cash
Balance
• 1. Synchronization of cash flows
• 2. Short costs
• 3. Excess cash balance
• 4. Procurement and management
• 5. Uncertainty
1. Synchronization of cash flows
• The need for maintaining cash balances arises from the non synchronization
of the inflows and outflows of cash: if the receipts and payment of cash
perfectly coincide with each other, there would be no need for cash balances.
The first consideration in determining the cash balances is hence the extent
of synchronization of cash receipts and disbursements.
• For this purpose, the inflows and outflows have to be forecast over a period
of time depending upon the planning horizon which is typically a one year
period with each of 12 months being a sub-period. The technique adopted is
a cash period.
• A properly prepared budget will pinpoint the month/periods when the firm
will have an excess or a shortage of cash.
2. Short Costs
The other most important factor in determining the optimum cash is
the shortfall in cash needs. The cash forecast as presented in the cash
budget would reveal cash shortage periods. Despite this, there may be
some additional shortfall.
Every shortage of cash whether expected or unexpected involves a cost
depending upon the severity, duration and frequency of the shortfall
and how the shortage is covered. Expenses incurred as a result of
shortfall are called short costs.
3. Excess cash balance
• If a affirm is having large funds lying as idle, it shows that the firm has
missed opportunities to invest those funds and has thereby lost
interest which it would otherwise have earned. This loss of interest is
primarily the excess cost.
4. Procurement and management
• Procurement and management costs are associated with establishing
and operating cash management staff and activities. They are usually
fixed and are mainly accounted for by salary, storage, handling of
securities, etc.
5. Uncertainty:
• Finally, the impact of uncertainty on cash management strategy is also
relevant as cash flows cannot be predicted with complete accuracy.
• The first requirement is a precautionary cushion to cope with
irregularities in cash flows, unexpected delays in collection and
disbursements, defaults and unexpected cash needs
Cash Budget
• It is an estimate of cash receipts and disbursements of cash during a
future period of time.
• It is a forecast of expected cash intake & outlay
Cash Budget Format
Particulars Amount
Opening Balance of Cash XXX
Add: Incomes:
Cash Sales XX
Collection from Debtors XX
Interest Income XX
Commission XX
Total Income (A) XXX
Less: Expenditure:
Payment to Creditors XX
All other expenses XX
Total Expenditure (B) XXX
Closing balance of Cash (A-B) XXX
1. ABC Ltd., provides the following information. Prepare a cash budget for
the 3 months – April, May & June
Month Credit Sales Credit Purchases Wages Other
Expenses
Feb 185,000 92,000 37,000 21,000
Mar 210,000 100,000 42,000 23,500
Apr 245,000 120,000 49,000 27,000
May 178,000 90,000 35,000 19,400
Jun 182,000 98,000 36,000 20,000

Other Information:
i. Period of credit allowed to debtors 2 months
ii. Period of credit allowed by creditors 1 month
iii. Delay in payment of wages & other expenses 1 month
iv. Expected cash sales Rs.15000 per month
v. Expenditure on Machinery payable in April Rs.50,000
vi. Expected cash balance on 1st April Rs.10,500
Solution: Cash Budget
Particulars April May June
Opening Balance of Cash 10500 -5000 24000
Add: Incomes:
Collection from Debtors 185000 210000 245000
Cash Sales 15000 15000 15000
Total Income (A) 210500 220000 284000

Less: Expenditure
Payment to Creditors 100000 120000 90000
Payment of wages 42000 49000 35000
Payment of other expn 23500 27000 19400
Expn on Machinery 50000 0 0
Total Expenditure (B) 215500 196000 144400

Closing Cash Balance (A-B) -5000 24000 139600

2. Prepare a cash budget the following information for the period Sep to Dec

Month Credit Purchases Credit Sales Wages Selling Expn overheads

Jul 85,000 160,000 32,000 8,000 10,000
Aug 92,000 185,000 37,000 9,500 11,500
Sep 182,000 300,000 45,000 12,000 15,000
Oct 200,000 250,000 65,000 15,000 12,000
Nov 180,000 178,000 40,000 10,000 9,000
Dec 220,000 370,000 25,000 9,600 10,000

Other Information:
i. Period of credit allowed to debtors 2 months
ii. Period of credit allowed by creditors 1 month
iii. Delay in payment of all expenses 1 month
iv. Expected cash sales Rs.75000 per month
v. Repairs to Machinery Rs.10,000 to be paid in December & bonus to be paid to employees in the month of Oct is
Rs.10,000
vi. Expected cash balance on 1st Sep Rs.65,000
vii. Income on investment receivable in the month of Sep Rs.50,000
Thank You