“CASH MANAGEMENT”

AT INDIAN OIL CORPORATION LTD.

Dissertation Submitted to the
padmashree dr. D.Y.Patil University
In partial fulfillment of the requirement for the award of
the Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by:-
URVISH PATEL
(Roll No.163)

Research Guide:
Ms.NITU SHARMA
Lecturer
Department of Business Management
Padmashree DR. D.Y. Patil University
CBD Belapur, Navi Mumbai
FEBRUARY 2010

“CASH MANAGEMENT”
INDIAN OIL CORPORATION LTD.

DECLARATION
I herby declare that the dessertation “CASH MANAGEMENT AT INDIAN OIL CORPORATION
LTD.” submitted for the MBA degree at Padmashree Dr. D.Y. Patil University Dep
artment Of Business Management is my original work and the dissertation has not
formed the basis for the award of any degree, associate ship, fellowship or any
other similar titles.

Place : mumbai
Date :

Signature of the student

CERTIFICATE
This is to certify that the dissertation entitled “ CASH MANAGEMENT” AT INDIAN O
IL CORPORATION LTD. is the bonafide research work carried out by Mr. URVISH PATE
L student of MBA, at Padmashree Dr. D.Y. Patil University Department Of Busines
s Management during the year 2008-2010, in partial fulfilment of the requireme
nts for the award of the degree of master in business management and that the d
issertation has not formed the basis for the award previously of any degree, dip
loma, associate ship, fellowship or any other similar title.

Signature of the Director signature of t

he guide
(DR. R. GOPAL )

Place: Mumbai
Date:
ACKNOWLEDGMENTS
In the first place, i thank Prof. Nitu sharma, lecturer, Padmashree DR. D.Y. Pat
il University Department of Business Management, Navi Mumbai for having me her v
aluable guidance for the project. Without her help it would have been impossible
for me to completed the project.
I would also like to thank the various people from the Manufacturing
Industry who have provided me lot of information and in fact even sharing some
of the confidential company documents and data-many of which i have used in this
report an without which this could not have been completed.
I would be failing in my duty if I do not acknowledge with a deep se
nse of gratitude the sacrifices made by my parents and thus have helped me in co
mpleting the project work successfully.

Place:
Date:

Signature of t
he student
TABLE OF CONTENTS
SR.NO. CHAPTER NO. TITLE
1. List of figures
2. List of tables
3. List of Abbreviation
1. Executive Summary
2. Objective of the study
3. Research Methodology
4. cash management
4.1) introduction of Cash Management
4.2)Importance of cash management
4.3)Cash planning and control
4.4)Strategies use for cash management
4.5)Short term investment opportunities
4.6)Managing cash outflow
5. Cash Management in Manufacturing sector
a) cash Shortage in India's Manufacturing Sector
 b) Issues involved in Cash Management
c)Impact of Cash Management in Manufacturing Sector
d) Ways to keep hold of cash
6. Data analysis
7. Recommendations
8. Conclusion
9. Appendix
a) Bibliography
b) Articles
c) Copy of questionnaire

CHAPTER:-1
EXICUTIVE SUMMERY

EXICUTIVE SUMMERY
Cash is your business's lifeblood. Managed well, your company remains healthy an
d strong. Managed poorly, your company goes into cardiac arrest.
If you haven't considered cash management an important issue, then you're probab
ly undermining your business's short-term stability and its long-term survival.
But how can you manage business cash better?
To make a profit, most businesses have to produce and deliver goods or services
to their customers before being paid. Unfortunately, no matter how profitable th
e contract, if a business don't have enough money to pay its staff and suppliers
before receiving payment, the business will not succeed.
To trade effectively and be able to grow sales and profits, a business needs to
build up cash reserves by ensuring that the timing of cash movements creates an
overall positive cashflow situation.
Bear in mind, however, that having a lot of cash in the bank does not necessaril
y make good business sense. Cash needs to be invested in the business in order t
o make the best return for the business owners.

CHAPTER:-2
OBJECTIVES OF THE STUDY
OBJECTIVES OF THE STUDY
1. To know the importance of the cash management.
2. To study the recent trends in cash management.
3. To understand, and study how cash management is important for the long-t
erm survival of the organization.
4. Reinforces a culture of continuous learning.
5. To understand the role of finance department in cash management.

CHAPTER:-3
RESEARCH METHODOLOGY

RESEARCH METHODOLOGY
Research is the systematic process of collecting and analyzing information (data
) in order to increase our understanding of the phenomenon about which we are co
ncerned or interested.
In simple words it is a purposeful investigation.
Methods of gathering data:-
• postal questionnaire survey
• e-mail questionnaire survey
• Internet polls
• face-to-face interviews
• telephone interviews
• Systematic observation
• Text analysis
• Statistical data (secondary analysis)
• Registered data
CHAPTER:-4
LIMITATIONS OF STUDY

LIMITATIONS OF STUDY
1. Time allotted for a project sometimes a big factor.
2. The company doesn’t disclose much information.
3. Out-of-date information may offer little value especially for companies
competing in fast changing markets.
4. Cost - Compared to secondary research, primary data may be very expensiv
e.

CHAPTER:-5
LITERARURE REVIEW

LITERARURE REVIEW
CASH MANAGEMENT
Meaning:-
Cash is money that is easily accessible either in the bank or in the business. I
t is not inventory, it is not accounts receivable, and it is not property. These
might be converted to cash at some point in time, but it takes cash on hand or
in the bank to pay suppliers, to pay the rent, and to meet the payroll. Profit g
rowth does not always mean more cash.
Profit is the amount of money you expect to make if all customers paid on time a
nd if your expenses were spread out evenly over the time period being measured.
However, it is not your day-to-day reality. Cash is what you must have to keep t
he doors of your business open. Over time, a company s profits are of little val
ue if they are not accompanied by positive net cash flow. You can t spend profit
; you can only spend cash.
Cash Flow refers to the flow of cash into and out of a business over a period of
time. The outflow of cash is measured by the money you pay every month to salar
ies, suppliers, and creditors. The inflows are the cash you receive from custome
rs, lenders, and investors.
Good cash management means:
• Knowing when, where, and how your cash needs will occur,
• Knowing what the best sources are for meeting additional cash needs; and
,
• Being prepared to meet these needs when they occur, by keeping good rela
tionships with bankers and other creditors.
The starting point for avoiding a cash crisis is to develop a cash flow projecti
on. Smart business owners know how to develop both short-term (weekly, monthly)
cash flow projections to help them manage daily cash, and long-term (annual, 3-5
year) cash flow projections to help them develop the necessary capital strategy
to meet their business needs. They also prepare and use historical cash flow st
atements to gain an understanding about where all the money went.
CASH MANAGEMENT CYCLE:-

CASH FLOW MANAGEMENT

Good cash management is simple. It involves:
1. Knowing when, where, and how your cash needs will occur
2. Knowing the best sources for meeting additional cash needs
3. Being prepared to meet these needs when they occur, by keeping good relations
hips with bankers and other creditors
The starting point for good cash flow management is developing a cash flow proje
ction. Smart business owners know how to develop both short-term (weekly, monthl
y) cash flow projections to help them manage daily cash, and long-term (annual,
3-5 year) cash flow projections to help them develop the necessary capital strat
egy to meet their business needs. They also prepare and use historical cash flow
statements to understand how they used money in the past.
TYPES OF CASH FLOWS:-
Positive Cash Flow
If the cash coming into the business is more than the cash going out of the busi
ness, the company has a positive cash flow. A positive cash flow is very good an
d the only concern here is managing the excess cash prudently.
Negative Cash Flow
If the cash going out of the business is more than the cash coming into the busi
ness, the company has a negative cash flow. A negative cash flow can be caused b
y a number of problems that result in a shortage of cash, such as too much or ob
solete inventory, or poor collections on accounts receivable. If the company doe
sn t have money in the bank or can t borrow additional cash at this point, it ma
y be in serious trouble.
A Cash Flow Statement is typically divided into three components so that you c
an see and understand both the internal and external sources and uses of cash.

1. Operating Cash Flow (Internal)

Operating cash flow, often referred to as working capital, is the cash flow gene
rated from internal operations. It is the cash generated from sales of the produ
ct or service of your business. Because it is generated internally, it is under
your control.
2. Investing Cash Flow (Internal)
Investing cash flow is generated internally from non-operating activities. This
component would include investments in plant and equipment or other fixed assets
, nonrecurring gains or losses, or other sources and uses of cash outside of nor
mal operations.
3. Financing Cash Flow (External)
Financing cash flow is the cash to and from external sources, such as lenders, i
nvestors and shareholders. A new loan, the repayment of a loan, the issuance of
stock and the payment of dividend are some of the activities that would be inclu
ded in this section of the cash flow statement.

THE IMPORTANCE OF CASH MANAGEMENT

Business analysts report that poor management is the main reason for business fa
ilure. Poor cash management is probably the most frequent stumbling block for en
trepreneurs. Understanding the basic concepts of cash flow will help you plan fo
r 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 n
ot accounts receivable (what you are owed), and it is not property. These can po
tentially be converted to cash, but can t be used to pay suppliers, rent, or emp
loyees.
Profit growth does not necessarily mean more cash on hand. Profit is the amount
of money you expect to make over a given period of time, while cash is what you
must have on hand to keep your business running. Over time, a company s profits
are of little value if they are not accompanied by positive net cash flow. You c
an t spend profit; you can only spend cash.
Cash flow refers to the movement of cash into and out of a business. Watching th
e 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 fr
om customers, lenders, and investors.
WHAT ARE THE COMPONENTS OF CASH FLOW?
A "Cash Flow Statement" shows the sources and uses of cash and is typically divi
ded into three components:
Operating Cash Flow Operating cash flow, often referred to as working capital, i
s the cash flow generated from internal operations. It comes from sales of the p
roduct or service of your business, and because it is generated internally, it i
s under your control.
Investing Cash Flow Investing cash flow is generated internally from non-operati
ng activities. This includes investments in plant and equipment or other fixed a
ssets, nonrecurring gains or losses, or other sources and uses of cash outside o
f normal operations.
Financing Cash Flow Financing cash flow is the cash to and from external sources
, such as lenders, investors and shareholders. A new loan, the repayment of a lo
an, the issuance of stock, and the payment of dividend are some of the activitie
s that would be included in this section of the cash flow statement.

Good Cash Flow Management?

Good cash management is simple. It involves:
1. Knowing when, where, and how your cash needs will occur
2. Knowing the best sources for meeting additional cash needs
3. Being prepared to meet these needs when they occur, by keeping good relations
hips with bankers and other creditors
The starting point for good cash flow management is developing a cash flow proje
ction. Smart business owners know how to develop both short-term (weekly, monthl
y) cash flow projections to help them manage daily cash, and long-term (annual,
3-5 year) cash flow projections to help them develop the necessary capital strat
egy to meet their business needs. They also prepare and use historical cash flow
statements to understand how they used money in the past.
Importance of Cash Management
Cash management consists of taking the necessary actions to maintain adequate le
vels of cash to meet operational and capital requirements and to obtain the maxi
mum yield on short-term investments of pooled, idle cash. A good cash managemen
t program is a very significant component of the overall financial management of
a municipality. Such a program benefits the city or town by increasing non-tax
revenues, improving the control and superintendence of cash, increasing contact
s with members of the financial community and lowering borrowing costs, while at
the same time maintaining the safety of the municipality’s funds.
THE GOALS OF CASH MANAGEMENT
The primary goals of a good cash management system are:
• To maintain adequate monies at hand to meet the daily cash requirements
of the municipality while maximizing the amount available for investment.
• To obtain the maximum earnings on invested funds while ensuring their sa
fety.
In order to reach these primary goals, a treasurer should strive to:
1. Develop strong, internal control of cash receipts and disbursements.
2. Establish improved procedures for collecting outstanding taxes.
3. Establish clear lines of communication between the treasurer and departm
ent heads.
4. Develop solid professional relationships with local bankers and other me
mbers of the investment community.

CASH MANAGEMENT SERVICES GENERALLY OFFERED

The following is a list of services generally offered by banks and utilised by l
arger businesses and corporations:
• Account Reconcilement Services:
Balancing a checkbook can be a difficult process for a very large business, sin
ce it issues so many checks it can take a lot of human monitoring to understand
which checks have not cleared and therefore what the company s true balance is.
To address this, banks have developed a system which allows companies to upload
a list of all the checks that they issue on a daily basis, so that at the end of
the month the bank statement will show not only which checks have cleared, but
also which have not. More recently, banks have used this system to prevent check
s from being fraudulently cashed if they are not on the list, a process known as
positive pay.
• Advanced Web Services:
Most banks have an Internet-based system which is more advanced than the one ava
ilable to consumers. This enables managers to create and authorize special inter
nal logon credentials, allowing employees to send wires and access other cash ma
nagement features normally not found on the consumer web site.
• Armored Car Services:
Large retailers who collect a great deal of cash may have the bank pick this ca
sh up via an armored car company, instead of asking its employees to deposit the
cash.
• Automated Clearing House:
services are usually offered by the cash management division of a bank. The Aut
omated Clearing House is an electronic system used to transfer funds between ban
ks. Companies use this to pay others, especially employees (this is how direct d
eposit works). Certain companies also use it to collect funds from customers (th
is is generally how automatic payment plans work). This system is criticized by
some consumer advocacy groups, because under this system banks assume that the c
ompany initiating the debit is correct until proven otherwise.
• Balance Reporting Services:
Corporate clients who actively manage their cash balances usually subscribe to
secure web-based reporting of their account and transaction information at their
lead bank. These sophisticated compilations of banking activity may include bal
ances in foreign currencies, as well as those at other banks. They include infor
mation on cash positions as well as float (e.g., checks in the process of coll
ection). Finally, they offer transaction-specific details on all forms of paymen
t activity, including deposits, checks, wire transfers in and out, ACH (automate
d clearinghouse debits and credits), investments, etc.
• Cash Concentration Services:
Large or national chain retailers often are in areas where their primary bank do
es not have branches. Therefore, they open bank accounts at various local banks
in the area. To prevent funds in these accounts from being idle and not earning
sufficient interest, many of these companies have an agreement set with their pr
imary bank, whereby their primary bank uses the Automated Clearing House to elec
tronically "pull" the money from these banks into a single interest-bearing bank
account.
• Lockbox - Retail: services:
Often companies (such as utilities) which receive a large number of payments via
checks in the mail have the bank set up a post office box for them, open their
mail, and deposit any checks found. This is referred to as a "lockbox" service.
• Lockbox - Wholesale:
services are for companies with small numbers of payments, sometimes with detail
ed requirements for processing. This might be a company like a dentist s office
or small manufacturing company.

• Positive Pay:
Positive pay is a service whereby the company electronically shares its check re
gister of all written checks with the bank. The bank therefore will only pay che
cks listed in that register, with exactly the same specifications as listed in t
he register (amount, payee, serial number, etc.). This system dramatically reduc
es check fraud.
• Reverse Positive Pay:
Reverse positive pay is similar to positive pay, but the process is reversed, wi
th the company, not the bank, maintaining the list of checks issued. When checks
are presented for payment and clear through the Federal Reserve System, the Fed
eral Reserve prepares a file of the checks account numbers, serial numbers, and
dollar amounts and sends the file to the bank. In reverse positive pay, the ban
k sends that file to the company, where the company compares the information to
its internal records. The company lets the bank know which checks match its inte
rnal information, and the bank pays those items. The bank then researches the ch
ecks that do not match, corrects any misreads or encoding errors, and determines
if any items are fraudulent. The bank pays only "true" exceptions, that is, tho
se that can be reconciled with the company s files.

• Sweep accounts:
Are typically offered by the cash management division of a bank. Under this syst
em, excess funds from a company s bank accounts are automatically moved into a m
oney market mutual fund overnight, and then moved back the next morning. This al
lows them to earn interest overnight. This is the primary use of money market mu
tual funds.
• Zero Balance Accounting:
Can be thought of as somewhat of a hack. Companies with large numbers of stores
or locations can very often be confused if all those stores are depositing into
a single bank account. Traditionally, it would be impossible to know which depos
its were from which stores without seeking to view images of those deposits. To
help correct this problem, banks developed a system where each store is given th
eir own bank account, but all the money deposited into the individual store acco
unts are automatically moved or swept into the company s main bank account. This
allows the company to look at individual statements for each store. U.S. banks
are almost all converting their systems so that companies can tell which store m
ade a particular deposit, even if these deposits are all deposited into a single
account. Therefore, zero balance accounting is being used less frequently.

• Wire Transfer:
A wire transfer is an electronic transfer of funds. Wire transfers can be done
by a simple bank account transfer, or by a transfer of cash at a cash office. Ba
nk wire transfers are often the most expedient method for transferring funds bet
ween bank accounts. A bank wire transfer is a message to the receiving bank requ
esting them to effect payment in accordance with the instructions given. The mes
sage also includes settlement instructions. The actual wire transfer itself is v
irtually instantaneous, requiring no longer for transmission than a telephone ca
ll.
• Controlled Disbursement:
This is another product offered by banks under Cash Management Services. The ban
k provides a daily report, typically early in the day, that provides the amount
of disbursements that will be charged to the customer s account. This early know
ledge of daily funds requirement allows the customer to invest any surplus in in
traday investment opportunities, typically money market investments. This is dif
ferent from delayed disbursements, where payments are issued through a remote br
anch of a bank and customer is able to delay the payment due to increased float
time.

ELEMENTS OF AN EFFECTIVE CASH MANAGEMENT PROGRAM

Bank Relations
The treasurer should strive to be constantly aware of the range of services avai
lable from area banks. Since banks’ service charges and investment rates vary,
the treasurer should regularly evaluate the charges and rates of the banks used
by the municipality to make certain that continuing to utilize these banks best
serves the interests of the municipality. When selling bonds or notes, the trea
s¬urer should endeavor to receive a sufficient number of bids to ensure competi¬
tive rates for the borrowed funds. Whether borrowing or investing monies, the t
reasurer should solicit bids from at least 3 area banks.
The treasurer should critically review bank statements for treasury checking acc
ounts and should funnel all activity into one account when possible. Also, the
treasurer should utilize a uniform system of forms and proce¬dures for all colle
ction, deposit, and disbursement activities. (See Chapter 12, “Procuring Bankin
g Services,” for more detailed information about banking relationships.)
Cash Flow Statements
As a component of implementing an effective cash management program, the treas¬u
rer must prepare a cash flow statement, also called a cash budget. Cash budgeti
ng involves the estimation of cash receipts and cash dis¬bursements to determine
cash availability. A treasurer can best identify the municipality’s major cash
items by examining an annual budget, payment and collection records and past ca
sh flow patterns.
Estimating Collection Receipts
Local taxes and state and federal grants constitute the primary sources of munic
ipal funds. By reviewing a municipality’s treasury and accounting rec¬ords, a t
reasurer can determine the pattern of receipts of that municipality. To assist
in determining this pattern, the treasurer should develop a table that displays:
(1) the type of each receipt, (2) the total amount of the receipt and (3) the m
onth when each portion of the receipt was received. If the treasurer traces the
cash flow back 2 or 3 years, a recog¬nizable pattern should become apparent.
The treasurer should assess the historical patterns of these cash flows in light
of current esti¬mates and events. Although making adjustments for changing tim
e environments is uncertain business, attempting to make such adjustments should
improve a collections forecast.
Forecasting Disbursements
Municipal payrolls account for approximately 70% of the expenditures of most cit
ies and towns. These expenditures tend to be relatively constant; accordingly,
they can be relia¬bly predicted. A treasurer should use prior payroll records,
together with the next fiscal year’s budget, to calculate the amount of the annu
al payroll.
The gross payroll, however, is not the amount disbursed. Rather, the amount dis
bursed is the gross payroll amount less deductions for federal and state income
taxes and for fringe benefits, such as workers com¬pensation and retirement. Th
e payroll disbursement forecast should also include adjustments for seasonal or
temporary workers and for seasonal payments, such as vacation advances in the su
mmer months. If a municipality offers a lump sum payment option for teachers, t
he payments are disbursed at the end of the school year.
Disbursement of monies previously withheld for income taxes and for employee ben
efits constitutes a signifi¬cant payment by a municipality. To forecast the amo
unt of this disbursement for some discrete period, such as from July 1 through J
anuary 1, the treasurer must add all of the deductions from a weekly or biweekly
pay¬roll and multiply the sum by the number of pay periods falling within the d
esignated time period.
As part of forecasting disbursements for personnel costs, the treasurer should a
ttempt to estimate the actual cash disbursement if that disbursement deviates fr
om the bud¬geted or authorized amount. Budgeted amounts can change only with su
pple¬mental appropriations, while authorized amounts can change with the increas
e or decrease of actual employees.
After completing the payroll disbursement forecast, the treasurer should develop
forecasts for other kinds of payments. The treasurer might begin by analyzing
each departmental budget for non-payroll items and then focusing on the more exp
ensive items first. For each item, the treasurer should converse with the depar
tmental officials familiar with expenditures to discover the pattern of past cas
h dis¬bursements with respect to that item and the anticipated pattern and amoun
t of expenditure for the item for the upcoming year.

Analyzing Cash Flow and Preparing a Budget

At a minimum, a treasurer should prepare cash flow data on a monthly basis for t
he current year. In larger communities, the treasurer should compile cash flow
information more frequently, on a daily, weekly, or biweekly basis, depending on
the size of the community.
The treasurer should prepare cash flow summaries using two basic categories of i
nflows and out¬flows of cash, recurring and extraordinary. Recurring payments a
nd receipts, such as payroll expenses and property taxes payments, can be antici
pated regularly, month after month; extraordinary payments and receipts, on the
other hand, result from nonrecurring programs or items, such as federal grants o
r capital expenditures.
The treasurer should use the history of major collections and dis¬bursements for
the previous 3 to 5 years to identify recurring expense and disbursement patter
ns. The treasurer should then extrapolate these past trends into the future, be
ing careful, at the same time, to make adjustments for anticipated changes in ti
ming and payment patterns and to recognize when particular historical data is no
t representative.
Analyzing the municipality’s current operating budget, looking particularly for
the percentage increase in payroll and in other expendi¬tures, for changes in se
asonal spending patterns and for adjustments caused by the addition or deletion
of programs, will provide crucial information for prepar¬ing a cash flow analysi
s. Also, examining the capital budget and communi¬cating with department heads
will assist in making projections concerning special cash flow items. (See pg. 1
1-26 for a sample projec¬tion of the flow of receipts and disbursements related
to special reve¬nues and expendi¬tures.) Of course, analyzing historical inform
ation is of little assistance in projecting special revenues and expenditures in
a cash flow analysis.
Because cash availability is the fundamental concern of cash management, some tr
easurers are very conservative in estimating receipts of funds and liberal in es
timating disbursements when they prepare a cash budget. For instance, they migh
t budget a receipt expected to be taken in at the end of a month as being receiv
ed the follow¬ing month. Certainly, it is better to err on the con¬servative si
de. Notwithstanding, accuracy is critical in estimating and managing a municipal
ity’s cash.
(See pg. 11-27 for a sample cash budget. In this sample, historical projections
and esti¬mates of special receipts and disbursements were adjusted, based on th
e treasurer’s knowledge of significant operational changes and unusual items.)
SUGGESTIONS FOR IMPROVING CASH FLOW
The treasurer can maximize the amount of a municipality’s available cash by acce
lerating cash re¬ceipts. A treasurer can increase the available cash amount by:
• Making daily deposits.
• Using a lock box.
• Receiving wire transfers of state aid.
• Applying promptly for reimbursement of state/federal grants.
• Utilizing, direct deposits, Automated Clearing House payments, and other
electronic means of transferring funds, whenever possible, making sure that the
appropriate safeguards are in effect.
The treasurer should induce municipal departments with large cash receipts to ma
ke deposits directly into an account specified by the treasurer, providing the t
reasurer with a written notice of each deposit, together with the deposit receip
t provided by the bank. This practice will result not only in an earlier deposi
t of the funds, but also in a more accurate deposit record since the bank will c
heck the accuracy of the deposit slip.
The treasurer should ensure that checks for large amounts are deposited immediat
ely. If, for example, a tax collector receives tax escrow payments from a mortg
agee bank at a time when the collector is too busy to process them, the treasure
r should instruct the collector to prepare a deposit slip and deposit the bank c
heck immediately, retaining a dupli¬cate copy of the deposit slip with the payme
nt breakdown. In this way, the money will be available for invest¬ment right aw
ay, and the collector can process the payment information whenever convenient.
The treasurer should urge the collector to make use of tax takings and other tax
payment enforcement remedies allowed by law to expedite the collection of unpai
d taxes. The treasurer should actively proceed with tax foreclosures and with l
and of low value sales in accordance with the best interests of the municipality
.
The treasurer can also improve cash flow by working with department heads to sch
edule certain cash dis¬bursements. For example, if a municipality has appropria
ted money to the public works department for the purchase of new trucks, the tre
asurer should encourage the department head to arrange for delivery of the truck
s no earlier than late April, close to the due date of the 2nd semiannual tax pa
yments or the 4th quarterly tax payments, when funds will be on hand to pay for
those trucks. Such planning minimizes the need for revenue anti¬cipation borrow
ing.
When possible, the treasurer should first pay bills that offer discounts, postpo
ning the payments of other bills until the due date. Also, when market con¬diti
ons permit, the treasurer should schedule the issuance of debt to make the payme
nt due dates coincide with times when the community’s cash revenues are at their
maximums. The treasurer should require all capital project managers to provide
regular reports of project payment schedules, permitting the treasurer to obtai
n maximum earnings on project funds.

Effectively Investing Available Cash

Obligates the treasurer to invest all monies not required for current operations
so as to receive the highest rate of return reasonably available taking into ac
count safety, liquidity and yield. To maximize interest income, the treasurer m
ust determine how much money is availa¬ble to invest by answering the following
questions:
• How much cash is on hand?
• How much money is needed to meet weekly or monthly warrants?
• How much money will be deposited weekly or monthly?
The treasurer should use the answers to these questions as a basis for planning
investments. By maintaining a chart of deposit accounts, such as the bank ledge
r discussed in Chapter 3, adding the daily deposits to these accounts, and sub¬t
racting amounts transferred or paid on warrants, the treasurer can determine exa
ctly how much cash is available to invest. Furthermore, the cash flow budget wi
ll permit the treasurer to determine the length of time for which particular fun
ds can remain in investments.
The Yield Curve
The cost of money varies according to the length of time for which it is borrowe
d or loaned. Generally, longer time periods are deemed to have a greater risk a
ssociated with them and thus command higher interest rates. This phenomenon, of
course, favors a municipality when making long-term investments and disfavors t
he community when making long-term borrowings. Accordingly, treasurers should u
se cash flow budgets to design investments for the longest reasonable periods in
order to obtain the highest yields on these investments.
Treasurers should attempt to be constantly aware of the various interest rates o
ffered by area banks. They should regularly communicate with these banks and as
k to be on their mailing lists for publications about bank services and about in
terest rates on differ¬ent types of investments over varying time periods. Trea
surers should also visit the websites of area banks to review information about
interest rates and bank products.

PROBLEMS OF CASH MANAGEMENT

A timing difference between cash in- and outflows poses challenges for the Depar
tment of the Treasury. Increased volatility of monthly cash flows may lead to un
expected short-term debt issuance and hence at the start of the month will dimin
ish gradually in coming years, start-of month payments to Medicare plan sponsors
for Medicare Advantage and Part D benefits are projected to grow. As requested,
this report (1) describes how Treasury, the Centers for Medicare & Medicaid Ser
vices (CMS), and plan sponsors operate under the current payment schedule; (2) i
dentifies timing options; and (3) describes potential implications for Treasury,
CMS, and Medicare. GAO analyzed Treasury cash flows, and interviewed Treasury,
CMS officials, and plan sponsor representatives.
Treasury s primary debt management goal is to finance the government s borrowing
needs at the lowest cost over time. Issuing debt through regularly scheduled au
ctions lowers borrowing costs because investors and dealers are willing to pay a
premium for liquidity and certainty of supply. In 2006 GAO reported that Treasu
ry faced misalignment of cash flows, with large payments due at the start of the
month and large cash receipts occurring midmonth. This misalignment results in
increasing cash flow volatility. The volatility leads Treasury to carry higher a
verage cash balances and issue short-term debt outside its regular schedule, whi
ch may raise overall interest costs. Payments to Medicare plan sponsors made at
the start of the month have increased the misalignment of cash flows. These paym
ents have more than doubled between 2005 and 2007, and they are projected to con
tinue to grow. GAO developed several options for changing the timing of Medicare
plan payments that would facilitate cash management, keep payments predictable,
and treat all plans equally. The options include keeping a single payment but m
aking it on a different date or making multiple payments each month. Treasury of
ficials said that moving some or all of the Medicare payments away from the star
t of the month would greatly facilitate cash management. CMS expressed concerns
about potentially increased administrative burden. Plan sponsors GAO interviewed
and CMS s Office of the Actuary indicated that sponsors would generally seek to
recoup any loss by raising their Medicare bids, thereby raising costs to the Me
dicare program and beneficiaries. The overall impact on the federal budget of ch
anging payment timing would depend on the relative size of interest cost reducti
ons and plans responses.

TYPES OF INVESTMENTS
An investment is a placement or commitment of money or capital in a way intended
to gain profit or interest, as by purchasing property, securities or bonds. As
noted above, treasurers are compelled by Ch. 44 §55B to invest “all monies…not
required to be kept liquid for purposes of distribution…in such a manner as to r
equire the payment of interest on the money at the highest possible rate reasona
bly available, taking account of safety liquidity and yield.” Liquidity is the
quality of being readily convertible into cash with¬out substantial transaction
costs. Security is the quality of assurance that the investment expectation wil
l be fulfilled in a timely fashion. Yield is the measure of effective return on
an investment, usually expressed as a percent.
Many communities maintain written investment policies that serve as a guideline
in making investments of short-term funds. These policies delineate investment
procedures and considerations and define levels of acceptable risk. Frequently,
the policies identify the financial institutions that have satisfied the commun
ity’s criteria for secure deposits. In addition, the policies generally include
specific information about delegation of authority, internal controls, ethics a
nd conflict of interest.
Ultimately, the standard to which a treasurer is held in making investments is t
he “prudent person” standard. A treasurer should always remember to weigh the r
isk of financial loss when making municipal investments. When investing a munic
ipality’s money, the treasurer should carefully avoid high-risk or speculative i
nvestments, even if legally permitted.
Identify the various institutions into which municipal funds may be deposited.
A treasurer who deposits monies into these institutions will not be personally l
iable for any loss of money due to the failure of the institutions. Notwithstand
ing, a prudent treasurer must make certain that deposits and investments are suf
ficiently insured, adequately collateralized and invested in institutions that h
ave been researched for stability and safety.
The FDIC insures deposits in FDIC-insured institutions. All types of deposits r
eceived by insured institutions in their usual course of business are insured up
to $100,000 per deposit, including savings deposits, checking deposits, deposit
s in NOW accounts and time deposits, including CDs. In the case of a bank failu
re, the FDIC insurance protects deposits that are payable in the U.S. The treas
urer should communicate with the FDIC to determine whether separately named acco
unts are considered as separate deposits for the purposes of applying the $100,0
00 limit.
In the past, a number of governmental entities incurred significant losses due t
o inadequately secured investments. In order to remedy this situation, the Gove
rnmental Accounting Standards Board (GASB) issued Statement 3, which requires go
vernmental entities to disclose their policies regarding securitization and safe
keeping for deposits and investments, including repurchase agreements, better en
abling investors to assess the degree of risk more accurately. These disclosure
s must inform potential investors about situations in which a greater credit ris
k exists during the investment period than on the balance sheet date.
Cities and towns should disclose the amount of their total bank balances that ar
e:
• Insured or collateralized with securities held by the municipality or by
an agent in the municipality’s name.
• Collateralized with securities held by their financial institutions or b
y an agent in the municipality’s name.
• Uncollateralized.
The carrying amount and the market value of investments should also be disclosed
for each type of investment as of the balance sheet date. The disclosure shoul
d state the total amount of each type of investment and should categorize invest
ments that are:
• Insured or registered or held by the municipality or its agent in the mu
nicipality’s name.
• Uninsured or unregistered, with the securities held by the counterparty
in the municipality’s name.
• Uninsured or unregistered, with the securities held by the counterparty
but not in the municipality’s name.
Certificates of Deposit
A Certificates of Deposit, generally known as a CD, is a written acknowledgement
by a commercial bank, savings and loan institution or mutual savings bank conta
ining a promise to pay interest at a speci¬fied rate for a fixed period of time
for funds deposited in the institution. CDs provide a useful instrument for sho
rt-term investments, usu¬ally more than 7 days. They are available in almost an
y denomination, although most have a mini¬mum amount. The bank pays inter¬est o
n the certificate’s face value, and the interest accrues on a 360-day or 365-day
basis. Rates vary depend¬ing on the length of time for which the certificates
are issued, the amount of money deposited and the prevailing market rate. Rates
also vary among banks, making it important for treasurers to obtain quotes from
a number of banks before making a purchase.
Because monies are deposited in a CD for a fixed term, the instrument is not con
sidered a liquid investment. A bank can legally refuse to return the money befo
re the maturity date. If a bank allows redemption before the maturity date, the
municipality must pay a sub¬stantial, early withdrawal penalty. Accordingly, a
treasurer should only purchase a CD when it is very probable that the municipal
ity will not have to spend the money during the CD’s fixed term.
On the other hand, if a municipality can afford to tie up money for fixed period
, a CD provides an effective vehicle for obtaining fixed interest rates for that
period. Of course, timing the purchase of a CD is important since interest rate
s vary dramatically. The treasurer should strive to make the purchase when inte
rest rates are high. The municipality will then con¬tinue to earn the high rate
until the CD’s maturity. On the other hand, if the treasurer purchases a CD wh
en interest rates are low, the instrument will earn interest at the low rate.
U.S. Treasury Bills
Treasury bills are bearer obligations of the U.S. Government that are issued on
a discount basis; that is, a purchaser buys the instruments at less than the fac
e value and receives the face value upon redemption. The dif¬ference between th
e purchase price and the redemption price is the interest income. Treasury bill
s are backed by the full faith and credit of the U.S. Government and are con¬sid
ered the safest investment. Because of their relative safety and marketa¬bility
, T-Bills, as they are called, generally provide lower yields than do comparable
short-term investments.
Repurchase Agreement
A repurchase agreement, also known as a “repo” or a “buyback,” is a contract tha
t requires a seller of securities, most often treasury securities, to buy the in
vestment back in the future at a designated time and price. An advantage of thi
s investment vehicle is the flexibility of its maturity. A repo may be sold for
a fixed period of time, on demand, or renewable on a day-to-day basis.
The authority of a municipal treasurer to invest in repurchase agreements is set
out in Ch. 44 §55. This statute permits the treasurer to invest in “obligation
s issued or unconditionally guaranteed by the United States government or any ag
ency thereof and having a maturity from date of purchase of one year or less, or
in United States government securities or securities of United States governmen
t agencies purchased under an agreement with a trust company, national bank or b
anking company to repurchase at not less than the original purchase price of sai
d securities on a fixed date, not to exceed ninety days.”
However, while repos offer flexibility in maturity dates, they are not without r
isk. In the past, some banks have used the same security for several, simultane
ous repurchase agreements. Accordingly, when investing in a repo, the treasurer
should make certain to take possession of the underlying security or to receive
written notification of the transaction from a third-party trustee who holds th
e security on behalf of the municipality. In this way, the municipality will be
protected in the case of a bank default.
Money Market Deposit Accounts (MMDAs)
A money market account is a savings account that shares some of the characterist
ics of a money market fund, a mutual fund that invests solely in short-term secu
rities. These accounts, like other saving accounts, are insured by the Federal
government up to $100,000.
Banks generally place restrictions on money market accounts. The restrictions u
sually include:
• A minimum daily balance requirement, with an interest rate reduction if
the balance falls below this minimum.
• A limit on the number of withdrawals, such as 6 per month with a maximum
of 3 checks. Under such a limit, a depositor could, for example, write 3 check
s and make 3 withdrawal transfers in a month. Alternatively, the depositor migh
t write 2 checks and make 4 withdrawal transfers and two checks, etc.
MMDA accounts provide an ideal investment vehicle to obtain moderate yields whil
e keeping funds liquid. Every munici¬pality should have at least one money mark
et account. It is up to the treasurer to deter¬mine how much money should be ke
pt in these accounts.
Massachusetts Municipal Depository Trust
Authorizes the state treasurer to establish, with the advice of an investment ad
visory council, one or more combined investment funds and to sell participation
units to local governments. Under this authority, the state treasurer has estab
lished the Massachusetts Municipal Depository Trust (MMDT), a professionally man
aged investment pool. The trust manager invests in money market securities, suc
h as CDs, T-Bills, repos and commercial papers. Participants purchase shares in
the pool by depositing funds. Under the rules and regulations adopted by the s
tate treasurer, no minimums exist regarding either the amounts deposited or the
length of time monies may remain on deposit. Rates are subject to fluctuation a
nd are not guaranteed. Monies deposited in the MMDT are liquid, i.e., they may
be accessed at any time.
U.S. Government Agency Obligations
Agency obligations, also referred to as “agency securities” are debt instruments
issued by government agencies to fund loans to particular groups of borrowers,
such as students, farmers and homebuyers. Agency obligations include the Federa
l National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Cor
poration (Freddie Mac), the Federal Home Loan Bank System (FHLB), the Federal Fa
rm Credit Bank (FFCB), and the Student Loan Marketing Association (Sallie Mae.
Agency obligations generally yield high credit ratings because of their associat
ion with the federal government; however, they are not government obligations ba
cked by the full faith and credit of the U.S. Government. Accordingly, agency o
bligations are slightly riskier than Treasuries, but they also have the potentia
l for higher earnings.
Secondary Markets
Primary markets allow investors to bid directly for the purchase of securities w
ith issuers and, as a result, tend to provide more favora¬ble prices. Secondary
markets permit investors to purchase securities at other times than their issua
nce dates or to sell securities prior to their maturity dates.
General economic conditions affect interest rates, which in turn determine the m
arket behavior of securities in both primary and second¬ary markets. Confidence
in a particular security can also affect its behavior. Confidence is determine
d by an investor’s perception of the financial health of an institution or the c
ollateral behind a security. It tends to be most important in determining the s
trength and activity of a security in the secondary market. For instance, Treas
ury Bills are always very active in both primary and secondary markets because t
hey are backed by the U.S. Government. Under¬standing how markets behave under
a variety of conditions and gaining a feel for how various securi¬ties will be a
ffected is a skill acquired through day-to-day experience, as well as by a study
of the characteristics of securities.
Mutual Fund Money Market Accounts
Permits municipalities to invest in money market funds managed by mutual fund co
mpanies. The underlying securities of the funds must be within the guidelines a
pproved by the Commonwealth, similar to securities that would appear on the “leg
al list” of investments. The statute limits investment to those money market fu
nds that have received the highest possible rating from at least one nationally
recognized statistical rating organization.
Investment-Related Matters
Municipalities borrow for a variety of reasons, such as to fund temporary cash n
eeds and to finance the construction of pub¬lic works. The investment of borrow
ed funds is heavily regulated by federal arbitrage laws. Accordingly, the treasu
rer should work closely with bond counsel to determine the status of existing an
d proposed federal laws and regulations relating to arbitrage before the municip
ality effects a borrowing.
A useful resource for treasurers is a “Time Teller Calendar” that computes at a
glance interest, elapsed time and maturity dates on notes. Some banks will prov
ide this resource to treasurers. For each day of the year, the calendar exhibit
s the number of days from that day to any other day in the next nine months.
Every treasurer should keep records of all investments. While the treas¬urer ca
n design the forms to use for this process, these forms must make it pos¬sible t
o record all the necessary information to provide an accurate picture of each tr
ansaction. The Investment Register on pg. 11-31 displays an example form that c
an be used to record investment trans¬actions made in person, by mail, or over t
he telephone. Of course, a telephone transaction should be confirmed in writing
as soon as possible.
A treasurer must observe the limitations on deposits in any one bank, This stat
ute specifies that a municipality may not at any one time have on deposit in a b
ank or trust company an amount ex¬ceeding 60% of the capital and surplus of that
institution and that the total of all the municipality’s accounts may not excee
d 60% of the bank’s net equity If a treasurer wishes to exceed this limit, the b
ank must pledge addi¬tional securities to cover the extra amount deposited. Tre
asurers should retain these securities in their custody. Banks will make availa
ble copies of their most recent “Statement of Condi¬tion” from which a treasurer
can determine the banks’ capital and surplus amounts.
absolves treasurers of any personal liabili¬ty if they, in good faith and in the
exercise of due care, deposit public money in the MMDT or in a Massachusetts-or
ganized savings bank, trust company or FDIC banking company and a loss results f
rom the closing up of the depository or from the liquidation of its affairs. Th
is statute does not, however, absolve from lia¬bility a treasurer who invests pu
blic funds in a non-FDIC bank out¬side of Massachusetts.

CASH MANAGEMENT PLAN

Money is the most important tool in any successful business, and making sure you
have it when you need it should be a top priority. This requires creating and i
mplementing a cash management plan.
Many business owners in our industry, even some who are extremely knowledgeable
about decorating and efficient production management, have no idea what an incom
e statement is. They get by running their business with "checkbook accounting" ?
which can lead to disaster.
A cash management plan deals with five areas: receipts, expenses,
profits, getting paid and back in black.
1. Cash receipts
Cash receipts are the available dollars in your company checking account. This i
s not the same as what you bill your customers. It s important to distinguish be
tween cash flow and sales. Cash flow is the money you actually have in hand; it
does not include outstanding or uncollected sales dollars.
If your business has a history, your first step is to review your cash receipts
for a specific time period, e.g., a
day, week, month, quarter or year. (Looking at several periods provides micro an
d macro perspectives.)
Say, for example, a hypothetical business has cash receipts of $1.2 million a ye
ar. That averages out to $100,000 a month, $25,000 a week and $5,000 a day (usin
g the common reference frame of 4.33 weeks in a month and, allowing for holidays
, 20 workdays in a month). Of course, these are averages; actual cash flows in p
eaks and valleys.
Plug these averages into the profit cycle and that means sales has to generate $
5,000 per day. But we are not talking about just sales here; we re talking about
cash flow. Next we need to look at the profit on that $5,000 a day. A sale minu
s the cost of goods equals gross income. Gross income minus expenses equals net
income.
2. CALCULATING EXPENSES
Expenses are all the things that are necessary to keep your doors open. In addit
ion to production costs, they include rent, utilities and indirect labor, such a
s the person answering the phone. I also believe in factoring profit, or ROI (re
turn on investment), into a cash management plan as an expense. If you don t pla
n for profit the same way you do for your electric bill, it s not going to happe
n.
Expenses are expressed as a percentage of gross sales. For example, if you sell
a sweat shirt for $20, that is your gross sale. What you have left after subtrac
ting the cost of the shirt? let s say, $10?and all of your other expenses, and p
rofit? is your net income.
What we are talking about here is EBIDTA: Earnings Before Income Taxes, Deprecia
tion and Amortization. EBIDTA is a cash management tool to help ensure a busines
s makes progress. Most people don t understand how depreciation, amortization an
d interest affect profitability.
Looking at their businesses from a tax-planning standpoint, many owners want to
keep their income down by showing a net loss. Therefore, they write off as much
as possible ? they drive cars leased to their company or use a company-paid cell
phone, etc. Bear in mind that this strategy ? by reducing profitability ? also
makes the business significantly less appealing to prospective buyers when the t
ime comes to sell.
3. PLAN FOR PROFITS
Before you can plan for tax advantages, you ve got to plan for profitability. To
come up with a realistic profit percentage, begin by reviewing industry operati
ng ratios available from SGIA, the Specialty Graphic Imaging Association (www.sg
ia.org). Your banker, or business library, will have national operating ratio in
formation compiled by The Risk Management Association. (RMA, formerly The Robert
Morris Associates, is a national association of commercial bankers, and it sell
s its reports at www.rmahq.org). These ratios are based on statistics compiled f
rom large numbers of businesses and are expressed as a percentage of gross sales
.
I plan for an 18% profit. For our hypothetical $1.2 million business, that profi
t ratio would work out to $96,000 a year.
Part of creating your general business plan is determining which products you ar
e going to sell. Products and services differ in their profit margins. For insta
nce, the margin on custom decorating is typically higher than margins on contrac
t decorating or wholesaling. Cash flow management involves factoring in the prof
it margin of various types of products and services when
developing your product mix.
If we apply the example of a 50% cost of goods, 30% expenses and 20% profit to o
ur $100,000-a-month business, that means we re going to spend $50,000 a month on
products and $30,000 in expenses. And we should ? if we ve done everything righ
t ? have $20,000 in profit. Profit can be reinvested in the business by retiring
debt, expanding your facility and buying new equipment.
4. GETTING PAID
In order for a cash management plan to function, you ve got to get paid. One str
ategy I use is to require a 50% deposit from customers. Some people are uncomfor
table discussing money. However, if you don t ask, you won t get it. You must ha
ve a procedure in place that requires asking for and getting that deposit.
We will sometimes accept a purchase order in lieu of a deposit when we re certai
n the customer is authorized to place the order. We also offer some of our clien
ts incentives to pay at the time they place an order, offering free freight or a
n extra five shirts for every 50 paid.
All customers who have not paid in advance are presented with a balance due invo
ice when they pick up their goods. Credit-worthy accounts get net-10 day terms (
though we actually tolerate net-30 days for reliable customers who insist on tha
t); all others are expected to pay in full.
5. BACK IN BLACK
With a cash management plan in place, you will have the cash you need to pay you
r bills and keep your business in the black. Without a cash management plan, man
y businesses find themselves robbing Peter to pay Paul and before long, they are
out of business. If you do not already have a plan in place, the sooner you can
 accomplish this, the sooner you can be assured that your business is on solid g
round and will stay there.

CASH MANAGEMENT STRATEGY

1. Foreword
The PCT has a duty to remain within its Cash Limit, and cannot draw
down cash beyond that. Therefore, cash must be managed efficiently to
ensure that the PCT has adequate cash for its needs for the whole year.
In the future any loaned funds from the Department of Health (DOH) will
incur a charge. This will put additional pressure on the PCT resource limit and
a detailed plan for repayment of the loan will be required.
Ineffective draw down of cash throughout the year is uneconomical for the Treasu
ry, and where the DOH deem a PCT is at fault the DOH can impose a penalty on tha
t PCT. Cash management cannot be undertaken in isolation from resource managemen
t. Both need to be planned and managed throughout the year.
There are Treasury rules that apply to the total cash available to the DOH. The
DOH cannot draw more cash from Treasury than the financing requirement approved
by Parliament. The PCT should not draw down cash in advance of need for any mont
h. Any cash drawn down for contingencies results in a penalty charge from Treasu
ry (i.e. supplementary cash requests), these penalties could be
passed on to the PCT.
2. Calculation of total cash available to the PCT
1. Total cash available to the PCT equals
• Net resources as per approved resource allocation estimates for the curr
ent financial year
• Plus capital allocation for the current financial year
• Plus or minus any cash loans or repayments
• Less non cash items (new provisions, capital charges, depreciation, and
impairments) for the current financial year
• Forecast decrease in creditors or forecast increase in debtors for the c
urrent financial year
• Plus payment of provisions (when the provision crystallises) as a due pa
yment.
• Less actual cash balances at the 31st March from the previous financial
year
Parliament votes cash for one year only. Any cash in the PCT bank
accounts at year end is not available to support the next year’s cash
payments. Cash balances reported in Annual Accounts can be deducted
from the PCT in the next year. Therefore, it is essential that cash
balances are reduced to zero at year end.
3. HM Treasury cash flow controls
Treasury has to manage its cash requirements and borrowing in each
month. To do this cost effectively requires all parts of the Exchequer to
forecast cash needs for each month in advance of the start of the month.
Poor cash forecasts for the month as a whole result in higher borrowing
costs. Treasury measures performance and passes on higher costs
through penalties.
The PCT must forecast its cash requirements for the following month and notify t
he DOH by deadline agreed (usually 22nd of the month).
Drawing too much cash which results in high month end balances can also result i
n penalties. Drawing too little cash will may mean that the PCT is unable to mee
t its payment policy target.

Currently, Treasury cash penalties are managed centrally by the DOH;

however, they have always maintained that these penalties will be passed on if N
HS organisations do not become more efficient and economical in their use of cas
h.
.
4. Cash requisitioning
• Cash requirements should be linked to annual planned cash flow
• The PCT should make as accurate as possible its forecast of net cash
• requirements for the following month. This requirement is needed for bot
h discretionary and non discretionary services.
• Contingencies should not be built into forecasts as this will increase
• Treasury borrowing costs and could incur penalties.
• In month supplementary requisitions should only be used for unplanned ev
ents (currently under review by the DoH).
• Requisitions for discretionary and non discretionary accounts should be
separate
• Cash for non discretionary accounts should not be used for discretionary
payments
• The PCT should not requisition contingency sums to non discretionary acc
ounts.
5.Bank accounts
• All settlements between NHS bodies or other OPG users should be made via
RFT transfers.
• Separate OPG accounts will be held for discretionary and non discretiona
ry cash.
• The same level of management is required for non discretionary accounts
as for discretionary
• Where discretionary payments are made from non discretionary accounts th
ey should be funded by transfer from discretionary accounts on the same day.
• Cash in non discretionary accounts should not be loaned to the discretio
nary account.
• The PCT also holds separate OPG accounts for Charitable Funds and Patien
ts Monies. There must not be any cash loans between accounts.
• Transfers will occur between the Discretionary OPG account and the Chari
table Funds OPG account for any services or goods purchased via the PCT main ord
ering and payment system. Likewise cash paid into the wrong OPG account inadvert
ently will need to be transferred to the correct account. Monthly reconciliation
s by the Shared Services Agency will ensure any transfers are made on a timely b
asis.
• Transfers will also occur between the Discretionary OPG account and the
Patients Monies Account. This will be in respect of monies held in safekeeping f
or long term clients as it is an interest bearing account.
6. Clearing House Automated Payments System (CHAPS)
• CHAPS involve high value same day transactions which are costly to Treas
ury in managing cash flows. Special penalties apply. It should notbe necessary f
or the PCT to have to action CHAPs when BACS can be operated through OPG account
s direct and all payments to NHS trusts and other government departments can be
made via OPG RFT1 transfers
• Transfers via CHAPS should be the exception and will carry a charge. Qua
rterly FIMS returns monitor the use of CHAPs payments.
7.Cash Management Standards
1. Billing and payment within the NHS
a) Commissioned services (including education, training and R&D)
• All service agreements (SLAs) above £250k in annual value should be subj
ect to monthly billing by the first of the month to which the bill relates, and
payment on the 15th of the month (or the previous working day) with the exceptio
n of JPH which is paid on the 1st of the month.
• These bills should exclude variations in value arising from risk share a
rrangements within SLAs, which should be billed no less frequently than quarterl
y, within 30 days of the quarter end, and paid on the 15th of the month followin
g receipt of the bill.
• Any disputed amounts should be credited by the trust on the next quarter
ly account, and re-invoiced when agreement is reached. In the event of failure t
o reach agreement on a dispute within three months of issue of an original bill
over £50,000, the billing trust should seek conciliation from the SHA. Lower amo
unts should be resolved between Directors of Finance within four months.
• In the event of conciliation failing to secure resolution within two mon
ths of commencement of the conciliation process, the SHA will make a ruling, whi
ch will be binding on both parties. As a consequence the PCT should not be holdi
ng an NHS debtor or creditor which is over six months old.
• For SLAs under £250k in annual value, quarterly billing and payment will
operate. Bills will be issued at the beginning of the quarter and paid on the 1
5th of the second month in the quarter.
• If the deminimus limit of £250k too high, and if a more frequent payment
arrangement for low value SLAs is required, this can be built into SLAs.
b) Provider services
The same billing and payment rules will apply to service level agreements for pr
ovider services as for commissioned services.
c) Failure to reach agreement on service agreement values
Where agreement has not been reached on service agreement values by 1st April, b
ills for April will be based on the preceding March bill (excluding risk share c
harges). Conciliation should be sought by the PCT from the SHA, and a two month
limit on a conciliation outcome set, following which a ruling will be made by th
e SHA which is binding on both parties.Billing will continue as for April until
either conciliation is concluded or the SHA ruling is issued. Any adjusting bill
s will be issued within 30 days of the ruling and paid on the 15th of the month
following the month of issue. In all matters of conciliation it is the SHA of th
e lead PCT commissioners that leads and determines any final ruling, following c
onsultation with the providing trust’s SHA Contracts with foundation trusts (FT)
must be explicit about payment arrangements and it is proposed that these contr
acts follow the best practice described above. FT contracts are legally binding
and interest on late payment should apply as for commercial businesses.
d) Advance payments of bills
Advance payments of non NHS accounts are governed by Treasury guidance and such
payments may only be made if it can be demonstrated that the cost to the public
purse as a whole is lower than if paid on the usual due date.
e) Lead commissioner arrangements
Where there are lead commissioning arrangements, and it has been locally decid
ed that the lead PCT pays the provider trust on behalf of other PCTs, the lead P
CT must bill the other PCTs before the 15th of the month for payments made on th
eir behalf. The other PCTs must settle these accounts by the 25th of the same mo
nth (or nearest working day), subject to invoice being received in time to enabl
e payment.
8. Monitoring of performance on billing and payments.
The PCT is required to conform to the “Better Payments Practice Code”
and as such should pay at least 95% of its invoices within 30 days of
receipt of valid invoice or receipt of goods. Historically the predecessor
PCTs have not achieved this. Prompt payment will assist the PCT in
managing its cashflow. The quarterly FIMS return monitors the
percentage of payments to both NHS and Non NHS creditors.
Performance data on the “Better Payments Practice Code” will also be
reported in the monthly Finance Report to the Board.
It is also important to ensure billing is done on a timely and accurate bas
is.The management accounts team is responsible for ensuring that invoices are ra
ised on a timely basis for regular income. Prompt invoicing will assist in the m
anagement of cashflow.
Regular monitoring of NHS debtors and creditors should also be
established. This will ensure any potential disputes are highlighted at an
early stage for resolution. All debtors/creditors over six months old and over £
5,000 should be reported routinely to the Audit Committee or Finance & Performan
ce Committee with explanations/action plans.
9. Monitoring of cash management
The quarterly FIMS return monitors the cash management plans of the
PCT and includes
1. Details of the PCT Cash Limit
2. Reconciliation of Cash Drawings to Net Parliamentary Funding
3. YTD cash flow against plan
4. Details of cash drawings, net payments and opening and closing
5. OPG balances
6. Cash top slices by the DOH for PPA and Dental Contracts
7. Balance sheet movements
The PCT Cash flow forecast is included as part of the Finance Report that goes
to the Board and Finance & Performance Committee.
The PCT mechanism of monitoring cash flow will include Monthly reconciliation
between Income & Expenditure movements, Balance Sheet movements and Cash utilis
ation.
• Monthly review of outstanding creditors and debtors
• Daily updating of cash flow spreadsheet
• Daily monitoring of Periodic Payments Register
• Identifying capital cash flow

DEVELOPING A TOTAL CASH MANAGEMENT STRATEGY

Good cash management practices drive performance through all stages of the busin
ess cycle. Nevertheless, in the good times these practices can become lax, leavi
ng businesses vulnerable when conditions deteriorate.
Arguably, the current Global Financial Crisis is proving the most serious busine
ss setback since the Great Depression of the 1930s. It threatens to cut deeper a
nd last longer than any other post World War II downturn. Certainly the implosio
n of banking systems around the world and the near paralysis of international an
d domestic debt markets have no real parallel in modern times.
No one knows how recent economic and financial events will play out, just as the
optimal government policy responses remain unclear. Official forecasts on the e
nd of the downturn are often conflicting and provide little clarity.
Unlike governments and central bankers, which have to rely on financial aggregat
es and economic indicators that are to some extent always out of date, business
enterprises can base their decisions on close to real-time data. Obviously, comp
anies must ensure that their information and reporting systems are producing dat
a that is relevant, accurate and up to date. They must then use this information
to make prompt decisions.
Some of the most important of these decisions are likely to concern cash managem
ent and liquidity matters, particularly the role that well developed cash flow f
orecasting and reporting practice can have in building and maintaining trust wit
h key stakeholders and financiers. A failure to deliver this key information is
a significant risk in the current environment.
Cash is the lifeblood of every business. A business can generate an accounting p
rofit, but without sufficient cash flow it cannot survive. In a period of extrem
e uncertainty, cash management has to be a management priority - one that stretc
hes all the way to the CEO s desk. Yet in practice, cash shortages often creep u
p on businesses, even large, apparently well-managed ones. Cash flow and working
capital problems often reflect broader decision-making and management issues:
• cash forecasting and budgeting that is poorly executed, or non-existent
• outgoings that have not been brought into line with reduced revenues
• credit lines that have not been locked in
• actions taken that crystallise unplanned-for cash outgoings (e.g. employ
ee terminaion payments or tax obligations)
• stocks that are excessive and debtor balances that are out of control
• financing structures that are inefficient and weak
• excessively complex business structures and processes that absorb cash u
nnecessarily
• capital spending programs that have not been reviewed and revised to ref
lect current conditions.

The importance of cash management in business survival and stability was underli
ned a year ago when KPMG surveyed 152 executives from mid-sized organisations ar
ound the Asia Pacific region about their cash management practices. We wanted to
understand the importance these companies placed on cash, how they were executi
ng their cash management practices and how they were reacting to the changing fi
nancial climate.
The study found that nearly three quarters of respondents regarded cash manageme
nt as of “great” or “vital importance” to their respective organizations. Sixty-
one percent reported they had introduced a working capital improvement program i
n the previous 12 months. A large majority of these said they had achieved an im
provement in working capital of 10 percent or more. Cash released by these progr
ams had been used to expand operations (72 percent), repay debt (39 percent), or
increase shareholder dividends (38 percent). Apart from reducing their working
capital requirements, 31 percent of respondents planned to unlock cash from fixe
d assets.
Obviously this survey took place before the worst of the global credit crunch an
d the associated economic downturn had been felt, although credit had already be
gun to tighten. It is certain that most of these companies would have become eve
n more cash conscious over the following 12 months.
A similar study conducted by KPMG in the United States and Europe during 2008 in
dicated that companies in these regions had become somewhat more nervous about d
eteriorating financial conditions than their Asian counterparts. This concern wa
s reflected in their cash management practices. Particular issues reported by US
and European companies included:
• suppliers demanding earlier payment
• customers delaying payments
• stakeholders seeking improved cash generation
• credit reducing in availability and increasing in cost.
What both these surveys suggest is that there appears to be a positive link betw
een the efficacy of cash management policies and practices and the profitability
of companies and their overall business performance. Interestingly, companies w
ith very accurate cash flow forecasts appear to be significantly more profitable
than those with poor cash forecasting records. Perhaps accurate cash flow forec
asting is symptomatic of accurate and realistic business forecasting generally.
KPMG s Restructuring practice recommends to its clients that they embrace a tot
al cash management philosophy. It means putting cash management at the centre o
f both business strategy development and operational decision making. There are
several elements in this process.
1. Put cash at the heart of strategy development
Companies often perceive cash management as a relatively narrow, back-office res
ponsibility concerned with stretching payment terms and chasing debtors. That is
a mistake. Instead, it should be about obtaining greater visibility and control
of cash flows across the business. It is critical that management understands h
ow cash flows through the enterprise, where it gets stuck and why, and what can
be done about it. This includes recognising that some arrangements can be tax ef
fective, but not cash flow effective.
2. Build a cash culture
Instilling a cash-conscious culture is integral to maintaining a steady focus
on cash. Employing a cash focus at the top and communicating it throughout the o
rganisation is fundamental. By linking KPIs and incentive regimes to cash, execu
tives can be measured not only on sales and margin but on ensuring that credit r
isks are assessed and debtors are collected on a timely basis.
3. Improve forecasting
Cash flow forecasting needs to be accurate as well as realistic in its assumptio
ns. Accurate forecasting should be based on a range of scenarios and risks so th
e organisation has an understanding of the key drivers on the cash position. Cle
ar reporting lines are critical, and underlying assumptions should be regularly
reviewed and challenged. Poor forecasting typically results from inadequate tech
nical skills and a lack of commitment to the task by managers. Many executives w
rongly combine cash flow issues with profitability and balance sheet concerns.
4. Consider sensitivities and vulnerabilities
Difficult economic times may reduce customer demand and impact the viability of
key suppliers and the pricing of inputs. The first step in managing these risks
is an assessment of key cash flow sensitivities. Scenario planning will help ide
ntify business vulnerabilities and core cash needs, both short and long term. It
will also clarify any need for urgent change.
5. Reconsider capital expenditures
Changing business conditions should prompt a rigorous review of capital investme
nt plans, especially those that will require ongoing funding from cash flows. Pr
ojects that are already seriously over budget and behind time should receive spe
cial scrutiny — history suggests they often become cash black holes and fail t
o deliver some (or all) of their promised benefits.
6. Pick the low-hanging fruit
Few reasonably large and complex organisations have exhausted their opportunitie
s to generate extra cash, conserve it and reduce working capital requirements. O
ffering appropriate incentives is one way to uncover these opportunities. There
are many of them. Here are a few examples.
7. Improve the management of trade debtors —
Poor debtor management typically results from weak credit and collection policie
s. Debtor collections can be improved by the timeliness and accuracy of invoices
. (It is surprising how many companies persist in sending out invoices that are
vague, ambiguous or obscure in describing the goods and services for which payme
nt is being sought.) Now is the time to focus on overall effectiveness of the cr
edit team rather than merely associated costs.

8. Dispose of obsolete stock —

This process may result in an accounting loss, but can generate real dollars and
possibly crystallise a tax benefit.
9. Review trade credit arrangements —
It is sensible to consider whether trade credit terms are being appropriately ut
ilised and take full advantage of availability of trade credit. Where an opportu
nity exists to renegotiate terms to overcome a shortage in short-term cash flow,
the early engagement of key creditors is vital.
10. Identify non-essential purchases —
Even businesses facing a liquidity crisis are often found to be buying things t
hey do not really need. There is no substitute for a meticulous, line-by-line ex
amination of input costs and overheads. Always ask what would really happen if t
his expenditure were reduced or eliminated altogether? Sometimes the answer is n
othing at all.
11. Undertake a similar review of the balance sheet —
Many well-established businesses possess surplus assets. Keep an eye open for a
sset hoarders .
• Remember to review the cash position of any partly-owned subsidiaries, a
ssociated companies, or joint ventures.
Although the great recession may not feel like a blessing for companies, it ca
n be an opportunity to push through changes in how the company manages its cash
flows.
A short-term cash focus can yield a rapid payback (and potentially pay for longe
r term initiatives). However achieving sustainable, long-term improvements in ca
sh management requires that it become ingrained and a natural part of everyday l
ife for everyone in the business. Just as most people are used to considering th
e profit and sales implications of their business decisions, so too they should
take account of the cash flow implications. Targets, reporting and incentives wi
ll all have their cash flow and working capital dimensions. However this require
s visible commitment and strong enduring leadership from the top.
Winning companies should release cash from their businesses to give them financi
al flexibility and use the opportunity to embed effective cash management into t
he corporate culture and maintain a healthy balance between cash and earnings wh
en prosperity returns.
SHORT TERM INVESTMENTS
Which Are Best?
If you need to make money quickly, consider short term investments. Short term i
nvestments allow you to invest an amount of money at a high yield interest rate,
and gain access to the return sooner rather than later.
There are several short term investment options out there, and the key to making
money successfully is finding the best short term investments. And that starts
with learning the answer to the question you probably have: what are short term
investments?
Defining Short Term Investments
A short tern investment fund is a fund that earns you a return on your money in
a short period of time, such as one to ten years. This is different than retirem
ent investing, and it can be a challenge to find short team, high yield investme
nts. Good short term investments will have a high interest rate, allowing you to
earn substantial money immediately.
The Need for Short Term Investments
You might need short term investments if you have a pressing need coming up in t
he near future. If, for example, you might need to have a down payment for a hou
se or car in a year or two, you could make use out of short term investment opti
ons. Also, you might use this type of fund in replacement of a traditional savin
gs account, because you will earn a higher rate of return. Some even choose to u
se short term investment funds to supplement their retirement income.
How to Use Short Term Investments
If you are interested in short term investments, talk to your financial advisor.
He or she can tell you what the best short term investment opportunity you can
use will be. Then, invest your money, and leave it alone. Allow it to gain inter
est for the course of the investment period. When the fund comes to term, you wi
ll have earned interest on the money you invested.
Decide what amount of your total income you are willing to invest in your fund.
Most people are comfortable with investing around ten percent of their total inc
ome. Then, choose the investment to use. It is best to take the amount and inves
t it into one particular investment. Your long term investments are where divers
ification is helpful.
short-term investment plans!
The stock market is pretty volatile right now, financial analysts don t really r
ecommend real estate and gold prices are on a high. In such a situation where sh
ould the retail investor park his money.
Let us consider the following examples:
P F Mani is a 50-year-old executive working in a multinational firm. He has rece
ntly received a bonus of Rs 500,000 which he plans to use for his daughter s wed
ding next year. So where should Mani invest his money?
Typically, for risk-averse investors like Mani, most financial planners recommen
d safe investment options such as PPF, NSC, Kisan Vikas Patras, etc.
However, all these instruments have long lock-in periods in excess of one year a
nd, therefore, cannot be considered in the short run.
"Since he is a low-risk investor we will advice him to invest at least 70 per ce
nt of his portfolio in liquid funds," says Abhilash Maheshwari of SureFin Invest
ments, a Gurgaon-based portfolio management service company.
Liquid funds are currently giving annualised returns of 4.5 per cent to 4.75 per
cent. They are better than bank fixed deposits as there is more liquidity. In c
ase of a bank FD, you lose some interest if you break it before maturity. Also,
liquid funds are more tax-efficient.
"We recommend the dividend option to taxpayers in the 20 per cent-plus tax categ
ory as here they would only lose 12.5 per cent as dividend tax," says Sanjiv Baj
aj [ Images ] of Bajaj Capital.
Agrees Rohit Sarin of Client Associates, "If the money is definitely required af
ter one year then we would advise all investors to invest in debt only as 12 mon
ths is too short a period for equity investing even for a high risk investor."
SureFin s Maheshwari feels Mani should put the remaining 30 per cent in Fixed Ma
turity Plans of mutual funds. These are close-ended debt funds where the maturit
y of the underlying securities coincides with the maturity of the plan.
Hence the yield of the security becomes the return to the investor at the end of
the plan period. A one-year FMP is currently giving annualised returns of betwe
en 5.5 per cent to 6 per cent.
However, there is limited liquidity in case of FMPs as withdrawal before maturit
y results in a 2 per cent to 3 per cent penalty. Bajaj recommends the dividend o
ption of FMPs as the first choice in short-term investments for individuals in t
he high tax category.
But should Mani put his money in these instruments and then forget about it for
the next one year?
"We would like to move the funds from liquid to arbitrage opportunities in both
equity and commodity derivatives markets to increase the effective return to the
client from 4.5 per cent (being earned in liquid funds) to say 8 per cent," say
s Surefin s Maheshwari.
"These arbitrage opportunities are few and infrequent but when the opportunity a
rises we would definitely like to take advantage of the same," says Maheshwari.
Arbitrage is the simultaneous purchase and selling of a security or commodity in
order to profit from a differential in the price. This usually takes place on d
ifferent exchanges or marketplaces and is also known as a riskless profit.
Bajaj also recommends the post office savings bank one-year time deposit scheme
that offers a return of 6.25 per cent.
"Although the returns are taxable they are still pretty high and 100 per cent sa
fe," says Bajaj. He feels one can also look at bank fixed deposits in the short
run.
"Near the end of the quarter, to make up their deposit targets, banks start offe
ring better returns. You may get a good deal," says Bajaj.
In the second example, let s suppose that Mani decides to use the bonus for a wo
rld cruise next year. Where should he park his money in the short run?
"Mani is now an average-risk investor and, therefore, we would recommend his put
ting only 30 per cent to 40 per cent in liquid funds, which will subsequently be
used to capture arbitrage opportunities in the derivatives market and the remai
ning in direct stock holding in such stocks which we consider value buys," says
SureFin s Maheshwari.
SureFin constantly researches stocks that are value rich but their true value is
not reflected in their stock prices as they are not current market favourites.
These they consider value stocks.
"These stocks realise their true value in a time span of not less than six month
s, i.e. whenever an unlocking event takes place. It includes investing in specia
l situations like mergers, restructuring, and other value unleashing events," sa
ys SureFin s Maheshwari.

MANAGING CASH OUTFLOW

Cash Flow Planning
One of the objectives of cash flow management is to hold the right amount of cas
h. If we hold too much cash, we lose the opportunity to earn a return on idle ca
sh. If we hold too little cash, we run the risk of not making timely payments to
suppliers, banks, and other parties. We want to have an optimal cash balance th
at is neither excessive nor deficient. The optimal cash balance is determined by
looking at the four reasons for holding cash:
1. Transaction Amounts:
We have to hold enough cash to cover our outstanding payments or transactions. I
n addition to transaction amounts, we should add any compensating balances requi
red under loan agreements. Therefore, the amount of cash on hand must be transac
tion amounts + compensating balances.
2. Precautionary Amounts:
We need to maintain cash for unexpected disbursements. This is the precautionary
amount of cash.
3. Speculative Amounts:
If we are anticipating making an investment, we will hold a speculative amount
to take advantage of opportunities in the marketplace.

4. Financial Amounts:
In order to acquire assets, retire debt, or meet some major event, we will accum
ulate and hold a financial amount of cash.
Key Point The minimal cash balance is usually equal to the total transaction a
mount (includes compensating balances) + total precautionary amount.
Cash Flow Forecasting
One of the best ways to determine the optimal cash balance is to fully understan
d cash flow patterns. This requires that we plot cash flows and prepare a foreca
st. A cash flow forecast gives us a detail projection of future cash inflows and
outflows. This will help us avoid cash deficiencies as well as excessive cash b
alances. A cash flow forecast also answers several questions, such as how long c
an we invest idle cash, when will it be necessary to borrow cash, and when can w
e purchase new capital assets? A typical cash flow forecast will include: Cash o
n Hand, Expected Receipts, and Expected Disbursements. Each major receipt and di
sbursement should be listed as a separate line item. Example 7 illustrates a bas
ic cash flow forecast.

Short-Term Financing
Part of managing cash flows is to understand how to finance operating cash flows
. We previously discussed how to predict cash deficits with forecasting. We now
have to understand how to finance our cash flow deficits. Whenever we use short-
term financing to cover cash deficits, we must consider costs, risks, restrictio
ns imposed upon the organization, financing flexibility, our current financial s
ituation, and other factors. Some of the questions we need to ask include:
How long will we need financing?
How much cash do we need?
How will we use the borrowed funds?
When and how will we repay the borrowed funds?
The first and most practical source of financing is spontaneous financing or tra
de credit. By lengthening the disbursement cycle, we obtain additional cash. Onc
e we have exhausted spontaneous sources of financing, we than use conventional s
ources of financing, such as bank loans, lines of credit, and asset based borrow
ing.

1. Bank Financing
One of your key partners in business should be your bank. Therefore, it is essen
tial that you establish a good working relationship with a bank officer. This re
lationship is the basis for how you will obtain bank financing. For example, a l
ine of credit is one way to address recurring cash deficits. You can also arrang
e a revolving loan. Under these arrangements, you borrow as deficits occur up to
a maximum amount. Unless you have excellent credit, you will be required to put
up collateral (such as receivables, inventory, etc.). The bank may also require
a commitment fee or compensating balance (percentage of loan). Some key points
about bank financing are:
Make arrangements to borrow when you least need it. This is the best way
to obtain favorable terms and conditions for short-term financing.
Borrow more than you think you will need. Many organizations under-estim
ate the amount of borrowing required for short-term financing.
The moment you think you will need short term financing, begin preparing
immediately. Bank financing takes time to arrange and execute.
Borrow to meet your strategic plans, not to avoid possible bankruptcy. B
anks are much more receptive to financing when it fits with some type of long-te
rm plan.
Make sure you maintain the best possible relationship with the bank. Sen
d regular reports and information to the bank officer.
2. Receivable Financing
In addition to bank financing, you can borrow against your assets from a financi
ng company. Accounts Receivable is a liquid asset that provides a form of financ
ing. In order to borrow against your accounts receivable, you must meet the foll
owing criteria:
1. Receivables are related to the sale of merchandise and not services.
2. Receivable customers are financially sound and there is a high probabili
ty of payment.
3. Receivable customers obtain title to merchandise when it is shipped.
4. Your overall receivable balance is at least $ 50,000 with sales that are
substantially higher than your receivable balance.
There are two forms of receivable financing, factoring and assignments.
3. Factoring:
Under this form of financing, you sell your receivables to the financing company
. You receive the face value of the receivable less a commission charge. The fin
ancing company assumes responsibility for collecting the receivable. Factoring g
ives you immediate cash and freedom from collecting from customers. However, it
is costly and it sometimes confuses customers since they now make payment to a f
inancing company.

4. Assignment:
Under this arrangement, you transfer or assign your receivables over to the fina
ncing company. However, you still retain ownership of the receivables. The finan
cing company advances 60% to 80% of the receivable balance. You continue to coll
ect the receivables and the financing company charges you interest and service f
ees on the borrowed funds.
5. Inventory Financing
Inventory financing is similar to receivable financing. Inventory financing has
the following requirements:
1. Inventory must be highly marketable.
2. Inventory is non-perishable and not subject to obsolescence.
3. Inventory prices are relatively stable.
There are three forms of inventory financing:
1. Floating or Blanket Liens:
The financing company will place a lien on your inventory; i.e. they obtain a s
ecurity interest in your inventory in exchange for lending you cash. You continu
e to manage and control the inventory.
2. Warehouse Receipts:
The financing company obtains an interest in a certain segment or part of your
inventory. You will have to separate the inventory that you use for financing fr
om the inventory not used for financing. This may require physical separation as
well as separate accounting.
3. Trust Receipts:
The financing company lends you money for a specific item in your inventory unti
l you are able to sell it. When you receive cash for the inventory sale, you pay
the financing company. For example, car dealerships often buy automobiles by fi
nancing the purchase. When the car is sold, they payoff the financing company.
6. Unsecured Financing
For large corporations with financially sound operations, cash can be obtained o
n the credit worthiness of the corporation; i.e. unsecured financing. Smaller or
ganizations can sometimes obtain unsecured financing, but costs are often much h
igher than secured financing. For large corporations in the United States, comme
rcial paper is perhaps the most popular form of unsecured financing. Commercial
paper is sold at a discount in the form of a promissory note. The promissory not
es are short-term, usually less than 270 days. Example 12 illustrates the costs
of commercial paper.

HOW TO MANAGE CASH FLOW IN A NEW BUSINESS

Too often, entrepreneurs think of cash-flow management as an activity required o
nly for established companies. Perhaps this is because startup companies don t h
ave a financial track record and usually have had no income at all to set a benc
hmark, making a systematic analysis of cash inflow and outflow difficult.
However, cash-flow management can be even more important for a new company becau
se the startup phase is often a sensitive and volatile financial period.
Your business plan (or general operating strategy), which ideally would be compl
eted before your business opens its doors, should clearly delineate procedures f
or billing, handling ongoing accounts receivable, overdue notification and colle
ction processes. This will allow you to handle incoming funds systematically.
Even before the first sale, design methods to speed collection of monies owed (s
ending out invoices quickly, notifying overdue accounts in a timely way, etc.),
how deposits will be made, and all other aspects involved with the intake and im
mediate depositing of funds into savings and checking accounts.
Try to arrange "same-day availability of funds" with your bank, so that your dep
osits will available on the same day they are made. At most, your funds should b
e available two days after deposits are made.
Cash Outflows
On the other side of the financial coin, cash outflow needs to be monitored care
fully -- without sacrificing the flexibility required while a new company settle
s into its niche with offerings to customers.
To explain this further, a business plan may specifically outline expenditures f
or purchasing/leasing of equipment, purchasing of inventory, and any number of o
ther expenses that can be quite significant during startup. But in a matter of a
month or so after startup, it may become apparent that some expenses allocated
in the business plan may be too much or too little in some areas.
Because there may be no record of sales in a new company, it can be difficult to
figure out just how much can be spent when variations from purchases set up in
the business plan need to be made.
The ideal scenario in such situations is to make purchases in a way that allows
you to be as flexible and economical as possible in the case that equipment or i
nventory needs to be returned. Never lock yourself into outright cash purchases
during the startup phase, no matter how attractive the discounts.
Make sure that leases of equipment provide the opportunity for return or exchang
e.
If individual products or lines of inventory cannot be returned in the event the
y sit on the shelf, think twice before taking them on.
Because inventory is often the major initial expense of a retail startup, it s c
ritical to determine what s moving and what isn t. As a general guideline, 20% o
f your inventory will produce 80% of your sales. Don t let a month go by without
knowing what that 20% is -- and making adjustments to take advantage of what cu
stomers are buying.
When possible, set up "just in time" purchasing for your inventory. This means t
hat you would be able to order inventory as needed, with delivery in a day or tw
o. This eliminates the financial dead weight of inventory that sits for months.
Don t pay off debt faster than you need to. Your business plan probably outlines
schedules for debt repayment. Bankers usually don t expect payments to be made
quicker than scheduled. If you re in the fortunate position of being able to pay
quicker projected, make sure that the funds would not be of better use elsewher
e.

HOW TO/WAY TO HOLDING CASH

The financial gurus will be debating for years how we got into the mess we re in
—and how we ll get out of it. But while the talking heads are talking, you d lik
e to know how to shore up your resources so you won t have to worry about every
little hiccup in the stock market. Here are time-tested strategies you can maste
r—how to spend less, reduce your debt, make the most of your tax breaks, and fin
ance your retirement. The idea, says William Speciale, a Boston-based adviser wi
th the financial planning firm Calibre, is to focus on what you can control: "Li
ttle steps can really make a huge difference."
1. Taxes
Forget the short form. Most taxpayers-65 percent of us, to be specific—just take
the standard deduction. But you may save money by itemizing your deductible exp
enses. It doesn t matter if you use an online program), a current tax guide, or
a storefront preparer. Out-of-pocket health care charges, business expenses (inc
luding some for job searches), and charitable donations are just a few of the it
ems you may be able to deduct. Fill out the long form, known as the 1040, and co
mpare numbers. If your total deductions are greater than $5,450 (the standard de
duction for 2008 for a single person) or $10,900 (for a married couple filing jo
intly), you ll save money by itemizing when you file.
Your kids should file a tax return. The Internal Revenue Service (IRS) doesn t c
are how old they are. If they earn more than $5,450 in a given year (in wages an
d/or interest income), they have to file-even if you claim them as dependents. A
nd if they make less than that, they should still file because they ll get back
all the money their employer withheld. Help them fill out the paperwork. It s a
great learning experience that may earn them some extra cash.
Avoid a tax refund. You may feel giddy knowing you ll get a check from the IRS t
his spring, but you shouldn t. Getting money back means you re essentially lendi
ng money, interest free, to the government for the year. Better to have that cas
h in your account than lend it to Uncle Sam. So if you ve been getting big refun
ds or have had a big life change (a marriage, a baby, a divorce, a radical incre
ase or decrease in income), adjust the withholding allowances on your W-4 form.
You can do that for your 2009 taxes now at irs.gov. Use the withholding calculat
or to determine the correct figure for you. Then print a new W-4, fill it out, a
nd give it to your payroll department.
Avoid "rapid refund" programs. Sure, they sound great. After all, what can be be
tter than getting your money fast? A tax-prep chain might try to get you to agre
e to one of these "instant" or "anticipation" options. Don t take the bait. This
is not your refund. It s a loan—and a very high-interest loan at that. The aver
age for 2008 was 123 percent. If you file electronically, even if it s through a
tax chain, the IRS will deposit your refund directly into your bank account wit
hin a week or two.
2. Checking and Savings
Make sure your free checking is really free. A lot of banks advertise it, but re
ad the fine print. If the minimum balance is steep-thousands of dollars, in some
cases—look for a bank with no minimum requirement. This could save $100 a year
or more. Bankrate.com is a good site for comparing accounts. (And don t waste $2
on ATM withdrawals at another bank s machines.)
Bank online. You ll be surprised how easy it is to pay bills, transfer funds, sa
ve automatically, and keep track of it all. In fact, gathering records at tax ti
me will be a cinch. And by setting up the automatic bill-payment option, you ll
help protect your credit score. Banking online is actually safer than banking at
a brick-and-mortar institution. Banks have spent a fortune to make sure their s
ites are among the most secure on the Internet. Besides, most cases of identity
theft happen the old-fashioned way—by crooks who raid your mailbox.
Keep your money in supersafe places. Aim to amass at least six months of emergen
cy expenses, in case you lose your job or become disabled. Where s the best plac
e to keep it? FDIC-insured bank savings, CD, and money market accounts are still
three of the most secure places. (The government recently increased the limit i
t will insure to $250,000 per account until December 31, 2009.) Money market fun
ds that invest in Treasury bills are supersafe, too, but low yielding. Internet
banks and credit unions tend to pay higher interest rates, but go to fdic.gov an
d check to make sure they offer the same government-insured guarantee. Look into
Series I bonds, or I bonds, which are just as safe and are guaranteed to keep u
p with inflation. They re also free from state and local taxes (and possibly fed
eral tax, if you use them for college costs). The downside? You can t redeem the
m for at least a year. And if you cash them in beforefive years, there s a small
penalty.
3. Debt
Cut up your extra credit cards. But don t close the accounts. Yes, it s smart to
reduce your temptation to splurge by destroying your cards. But if you actually
cancel them, it could hurt your credit rating. Here s why: Lenders worry about
how close you are to using all the credit available to you. If you close an acco
unt, you lose its credit line. As a result, you are using a greater portion of t
he reduced amount you can now borrow. How many cards do you need? While the aver
age American household has nine, two or three active cards should be plenty.
Pay your bills on time. A single late payment means that you could pay a much hi
gher interest rate on any future loans and on your existing credit card accounts
. That s because even one missed payment can lower your credit score by as much
as 100 points. That plunge means that lenders view you as a risky customer. If y
ou re shopping around for a mortgage, you could end up paying as much as a full
percentage point more. That s an increase that could ultimately cost you tens of
thousands of dollars in interest. Set up automatic payments to make sure you re
never late on your major bills. The sooner you can show lenders you re back on
track, the better.
Pay $10 more each month. Most American households keep their credit balances at
around $2,000, but about 10 to 15 percent carry balances that are $9,000 or high
er. If you paid the minimum $224 required on that $9,000 balance each month, it
would take you 31 years and over $13,000 in interest to pay it off. Increasing y
our payment by just $10 a month, to $234, until you ve paid off the balance woul
d save you $8,900. And you d get rid of the debt in five years.
Put your savings to work. Many people who are deep in debt usually have some sav
ings stashed in a bank account. They argue that they don t want to use their har
d-earned savings to pay off debt. But do the math: It would make sense to keep t
he money in savings only if the bank is paying you an interest rate higher than
the one your credit cards charge. Paying off a card with an interest rate of 13
percent is the equivalent of earning 13 percent interest on your money after tax
es. There are no savings or investment options with that kind of guarantee. Expe
rts caution that you still want to keep emergency cash on hand. A good rule is t
o take 5 percent of your paycheck to pay off debt and put an additional 5 percen
t into savings.
Pay more on your mortgage. You may have heard that because the interest is tax d
eductible, a mortgage is a good debt. But even if you re getting a tax break, yo
u re still paying interest—and the longer you ve had the mortgage, the smaller t
he tax break (because you pay less interest each year). As with all debt, paying
it off sooner is better. So once you ve paid off your credit cards and other hi
gh-rate debt, go ahead and add an extra payment each year (or spread it out over
12 months). If you do that over the life of a 30-year fixed loan with a rate of
6 percent, you ll shave roughly 20 percent off the total interest you pay. On a
$150,000 mortgage, that means saving about $26,000.
Reduce your credit card interest rate. It may be time to get nervy with the cred
it card companies. If you pay your bill on time and your credit card company sti
ll raises your rates or lowers your limits, call the company s toll-free number
(ask for the retention department) and explain that you re thinking of taking yo
ur business elsewhere. You may reap a rate reduction. No matter what you ve hear
d about the current credit crunch, banks are still motivated to keep good custom
ers. And check your accounts often. These days, banks are increasing rates even
on good customers.
Get your credit report for free. You re entitled to one free report from each of
the three credit bureaus (Experian, TransUnion, and Equifax) every year. Beware
, though. Many sites advertising "free credit reports" are actually fronts for c
ompanies trying to sell you services—credit monitoring, debt consolidation, cred
it repair-most of which you don t need. The reports are free, but you ll be auto
matically signed up and billed for these products. Get your reports from annualc
reditreport.com, which is sponsored by the three bureaus and the Federal Trade C
ommission. You can purchase extras on this site, too, but just stick with the fr
ee reports. If you want to see your credit scores (a numerical representation of
how good a credit risk you are).
4. Insurance
Shop around for car insurance. An online search and a few phone calls can turn u
p vastly different rates in the same area. You ll also want to ask about lesser-
known breaks. For example, even if your kids are grown and out of the house, the
y might be able to get a substantial discount if they insure their cars through
the company you use. Once you ve found the best rate, ask your insurance agent i
f he or she can match it.
Sign up for an FSA. Many employers offer flexible spending accounts as a way to
set aside part of your salary for health care and child-care costs. You can pay
for everything from Band-Aids to orthodontic work with pretax money, which trans
lates into a discount of about 30 percent or more, depending on your tax bracket
. But plan carefully. If you don t use all the money in your account within the
year (at many companies, you have until March 15 of the following year to submit
receipts), you lose whatever s left.
Keep grown kids on your health insurance policy. If you re going to end up lendi
ng (or giving) your children money for coverage, it s much cheaper to keep them
on your policy as long as possible. In some states, you can do this until they a
re 26, whether they re still in school or not. (New Jersey will give you until t
hey turn 30.) Some states require proof that they are single, without children,
and that they live in the same state as you. For the rules where you live, go to
statecoverage.net. Even if your state doesn t mandate extended coverage, your p
lan might, so call your human resources department for details.
Hold off on that long-term-care insurance. The soaring cost of extended nursing
care has prompted many people in their 40s and 50s to sign up for long-term-care
insurance in order to lock in a rate. It s true that the premiums go up as you
get older, but not by the huge amount you might expect. According to data collec
ted by America s Health Insurance Plans, a 65-year-old may end up paying just $1
26 more a year than someone who bought a policy at age 55. During those ten year
s, that person would spend close to $19,000 on coverage, even though he or she p
robably won t need it until age 83 or so (if at all). Depending on your health,
the best time to buy is between 60 and 65. Until then, make retirement savings t
he priority, not long-term-care insurance.
Sign up for disability insurance. It helps protect your income in the event you
become unable to work for a long period. Ideally, you should have enough to repl
ace 60 to 70 percent of your salary. If your company plan doesn t provide this m
uch coverage, consider buying more on your own. It can be costly, but it s worth
it if you can afford it.
Think twice about life insurance. If you don t have dependents, you may not need
it. If you do have kids or other dependents, you re probably better off with te
rm life insurance until, say, your children are grown and can take care of thems
elves. It s generally less expensive than whole-life or other types of policies
that build up value until you die or cash them in. Agents will tell you that who
le-life insurance is a good investment because your money builds up tax-free, bu
t these policies often have very high fees. You re better off putting that money
toward your 401(k) and IRA instead. To comparison shop for term life policies
Write your will. Although no one likes to think about dying, you need to. A will
 doesn t have to be a fancy contract that teams of lawyers slave over. It s just
a written record of whom you want to entrust your kids and assets to when you d
ie. You can write one using a simple boilerplate form and then sign it in the pr
esence of witnesses (usually two people who aren t named in the will). The legal
publishing company Nolo has a good template and instructions you can download f
or less than $25. (These templates are valid in all states except Louisiana. Of
course, if your situation is complicated or you d like a professional to look it
over, consult an attorney. You can search for lawyers by state at actec.org.) Y
ou ll also want to make sure all the beneficiaries on your life insurance polici
es and bank and retirement accounts are up-to-date.
5. Retirement
Contribute to your company s 401(k). If your company matches funds, sign up. Thi
s will be the best investment you can possibly make. Typically, a company will k
ick in 50 cents for every dollar you save, up to 6 percent of your salary. That
s the equivalent of earning an immediate 50 percent return—a rate you can t get
anywhere. Yet incredibly, one in three American workers who are eligible isn t t
aking full advantage of it. With the matching funds, you can more than double th
e size of your 401(k) in 20 years, even if the stock market remains flat. For a
family making $44,000, your contribution may cost you as little as $30 a week, m
oney you won t even miss after a while.
Put retirement savings ahead of college savings. This sounds crazy to parents wh
o need to come up with tuition money well before it s time to retire. But becaus
e of the tax breaks and the flexibility of retirement accounts, you re much bett
er off contributing to a 401(k) or an IRA and taking out loans for college. Many
people don t realize that the contributions you put in Roth IRAs can be withdra
wn free of penalties at any time. That s very different from the college savings
plans, called 529s, that smack you with a significant penalty if the money is n
ot used for college. Another plus: Most schools don t count money in your retire
ment accounts when assessing how much financial aid they ll offer you. (For more
detailed advice, check out Kalman Chany s book, Paying for College Without Goin
g Broke.) Once you ve saved the maximum amount that the government allows in you
r retirement accounts.
Say no to company stock. Think of Lehman Brothers, Bear Stearns, and Enron. All
were once on top, but when they went under, many employees were left without job
s and with retirement accounts that were overloaded with worthless company stock
. You already have a huge stake in the company because you depend on it for your
paycheck. Don t risk your retirement money as well. If your employer offers com
pany stock as a 401(k) option, don t take it. If you get company stock as part o
f your matching-funds plan, sell it as soon as you re allowed to and switch that
money into some other type of investment. Ask your HR representative for detail
s.
Don t worry about Social Security. You ve probably heard the dire predictions th
at anyone younger than 35 can t expect to collect Social Security. Even in bleak
economic scenarios, though, Social Security will probably pay you 65 to 80 perc
ent of your currently promised benefits. And with some fairly modest changes—lik
e raising the retirement age or increasing payroll taxes for anyone earning more
than $250,000 annually-the system can be shored up for decades to come. Make su
re you re saving enough so you don t have to count on the program for your entir
e retirement income.
Stay away from individual stocks. In spite of what you may hear from your cousin
the broker, buying the stock of a single company is generally not wise. It s es
sentially putting all your eggs in one basket-and paying broker fees that could
eat up your earnings. In fact, you don t really need a broker. Instead of buying
individual stocks, invest directly in mutual funds, which spread your dollars a
mong a group of stocks. It s usually safer, cheaper, and simpler. But remember,
you should do this only with money you can invest long term and can afford to lo
se in the short term.
Stick with index funds. You ll want to go with a special type of mutual fund cal
led an index fund, which buys a little piece of each of the companies that make
up established market benchmarks like the S&P 500. One of the best-kept secrets
of investing is that in the long run, index funds perform at least as well as th
e funds that charge high fees and have a professional stock picker making the ch
oices. And how are index funds doing these days? As of early December, they had
actually lost less than the average stock fund run by the so-called experts. For
a list of low-cost index funds, go to vanguard.com or fidelity.com.
Don t buy investment products from your bank. Banks sell a wide range of mutual
funds, annuities, and individual stocks and bonds. These aren t FDIC-insured, an
d they tend to be more expensive than what you could get elsewhere because banks
usually charge high sales commissions. Buy directly from mutual fund companies
instead. Go with companies like Vanguard or Fidelity, which charge low fees and
no commissions.
Build a portfolio. The rule of thumb is to put 50 percent of your long-term savi
ngs in stocks and 30 percent in bonds and keep 20 percent available in cash (tha
t means in a savings or money market account where you can withdraw it at a mome
nt s notice). In tough times especially, getting the right mix will depend on th
e risk you re willing to take and how soon you ll need your money. Stocks are ge
nerally more risky than bonds, but there are exceptions. For example, bonds issu
ed by companies that are in questionable financial health-called junk bonds or,
more euphemistically, high-yield bonds are a lot riskier than, say, stock in uti
lity companies. Financialengines.com, which charges about $40 for a three-month
subscription, is a great site for calculating the right mix.
6. Bonus Tip
Take care of your health. Eat right, exercise, and get plenty of sleep. Says Rut
gers finance professor Barbara O Neill, "The last thing you want in a financial
crisis is huge medical bills."
CASH MANAGEMENT TRENDS IN INDIA

Traditionally having a paper-based clearing system involving not only high proce
ssing cost but security risk, cash management in India has certainly undergone a
paradigm change. From a product-centric approach, the focus for almost all bank
s today has shifted emphatically to the customer. And success is all about bring
ing the maximum possible delivery channels to the prospect s doorstep.
In the rapidly transforming world of business, banking faces its biggest challen
ge yet - constant change. With every bank seeming to offer service possible, eff
iciency coupled with innovative value added solutions have emerged as the key bu
siness differentiators that affect a bank s bottom line. Confronted with shrinki
ng deposits/margins, rising customer expectations and intensifying competition,
banks must at all times strive to be a step ahead of industry standards. At the
same time, they cannot lose sight of credit risk, a natural byproduct of the inc
reasingly complex relationships in today s dynamic markets.
For some time now, technology has been the key driving force behind every succes
sful bank. In such an environment, the ability to recognise and capture market s
hare depends entirely on the bank s competence to evolve technically and offer t
he customer a seamless process flow. The objective of a cash management system i
s to improve revenue, maximise profits, minimise costs and establish efficient m
anagement systems to assist and accelerate growth.
Today a corporate treasurer s dilemma is multifaceted. With more movement toward
s the regional/central liquidity management in the complex structure of rules an
d regulations, further complication is caused by taxation issues.
I describe what a corporate treasurer needs as VOC - Visibility of funds, Optimi
sed returns on funds, and Control over receivables and payables. Treasury can fa
ce a number of issues related to the slow movement of funds, locked working capi
tal, loss of float income, high cost of funds, time consuming reconciliation and
manual processes. In India the cash management business primarily involves coll
ections and payments services.

CASH MANAGEMENT IN INDIA

1. Products offered by banks under collections (paper and electronic):
o Local cheque collections.
o High value (0 Day clearing).
o Magnetic ink character recognition (MICR) (three day clearing of cheques
).
o Outstation cheque collections.
o Cheques drawn on branch locations.
o Cheques drawn on correspondent bank locations.
o Cheques drawn on coordinator locations.
o House cheque collections.
o Outside network cheque collections.
o Cash collections.
o ECS-Debit.
o Post dated cheque collections.
o Invoice collections.
o Capital market collections.
2. Products offered by banks under payments (paper and electronic):
o Demand drafts/bankers cheques.
o Customer cheques.
o Locally payable.
o Payable at par.
o RTGS/NEFT/ECS.
o Cash disbursement.
o Payments within bank.
o Capital market payments.

The Reserve Bank of India (RBI) has placed an emphasis on upgrading technologica
l infrastructure. Electronic banking, cheque imaging, enterprise resource planni
ng (ERP), real time gross settlement (RTGS) are just few of the new initiatives.
The evolution of payment systems such as RTGS has posed some tough challenges fo
r cash management providers. It is important that banks now look towards a shift
to fees from float although all those cash management providers who have factor
ed in float money in their product pricing might take a hit. But of course there
are opportunities also attached like collection and disbursal of payments on-li
ne across the banks.
There are a number of regulatory and policy changes that have facilitated an eff
icient cash management system (CMS). Fox example, the Enactment of Information T
echnology Act gives legal recognition to electronic records and digital signatur
es. The establishment of the Clearing Corporation of India in order to establish
a safe institutional structure for the clearing and settlement of trades in for
eign exchange (FX), money and debt markets has indeed helped the development of
financial infrastructure in terms of clearing and settlement. Other innovations
that have supported in streamlining the process are:
• Introduction of the Centralised Funds Management Service to facilitate b
etter management of fund flows.
• Structured Financial Messaging Solution, a communication protocol for in
tra-bank and interbank messages.
Evolution of Services
One of the emerging cash management services in India is payment outsourcing. Th
ough cheques and drafts are a popular mode of payment in India, it is obviously
a time consuming procedure because of the manual processing required. This is an
area where payment outsourcing can help. It allows corporates to reduce their o
verheads and focus on their core competencies and, as a result, benefit from spe
ed and accuracy. The enhanced security it offers also allows for tighter fraud c
ontrol. For the Indian payment system to become completely seamless there are ma
ny variables that need to be tackled, such as regulatory and legal issues, custo
mer behaviour and infrastructure. As more corporates and banks have added techno
logy to their processes, the issues surrounding connectivity security have becom
e much important.
Today, treasurers need to ensure that they are equipped to make the best decisio
ns. For this, it is imperative that the information they require to monitor risk
 and exposure is accurate, reliable and fast. A strong cash management solution
can give corporates a business advantage and it is very important in executing t
he financial strategy of a company. The requirement of an efficient cash managem
ent solution in India is to execute payments, collect receivables and managing l
iquidity. Traditional or e-business objectives, in India there are different cas
h management solutions.

CASH MANAGEMENT SOLUTIONS OFFERED IN INDIA

1. Account reconciliation services

Balancing a chequebook for a very large business can be quite a difficult proces
s. Banks have developed a system to overcome this issue. They allow companies to
upload a list of all the cheques whereby at the end of the month, the bank stat
ement will show not only the cleared cheques but also uncleared ones.
2. Positive pay
An effective anti-fraud measure for cheque disbursements. Using the cheque issua
nce data, updated regularly with cheque issuance and payment, the bank balances
all cheques offered for payment. In the case of any discrepancies, the cheque is
reported as an exception and is returned
.
3. Balance reporting services
Balance reporting provides help in procuring a company s current banking informa
tion from its accounts. With this service the banks can offer almost all types o
f transaction-specific details on activities related to payment like deposits, c
heques, wire transfers etc. It also helps in an effective and efficient manageme
nt of regular cash flow.
4. Lockbox
Facilitates the cash improvement where, instead of being delivered to business a
ddress, customer payments are delivered to a special post office (PO) box. It is
only the customers payments that are delivered in the PO box and the company s
own bank collects the amount and delivers them to the banks of the customers. T
he bank of the customers opens and processes the payments for direct deposit to
the bank account. Lockbox contents regularly removed and processed.
--

INDIAN OIL CORPORATION LTD.

INTRODUCTION TO GUJARAT REFINERY

IndianOil began operation in 1959 as Indian Oil Company Ltd. The Indian Oil Corp
oration was formed in 1964, with the merger of Indian Refineries Ltd.
Indian Oil Corporation is the largest commercial enterprise in India and the onl
y Indian Company in Fortune ‘Global 500’ listing of the world’s largest corporat
ion with a ranking of 278 for fiscal 1998.Among the petroleum refining companies
covered in the listing it is ranked at 16th place .It was incorporated in 1959
as Indian Oil Company Ltd. It became An corporation in 1964 when Indian Refineri
es was merged with the company.
Indian Oil Corporation or Indian oil, is an Indian public-sector petroleum
company. It is India’s largest commercial enterprise, ranking 105th on the Fortu
ne Global 500 list in 2009. IndianOil and its subsidiaries account for a 47% sha
re in the petroleum products market, 40% share in refining capacity and 67% down
stream sector pipelines capacity in India. The Indian Oil Group of Companies own
s and operates 10 of India s 19 refineries with a combined refining capacity of
60.2 million metric tons per year.
Indian Oil operates the largest and the widest network of fuel stations in the c
ountry, numbering about 17606 (15557 regular ROs & 2049 Kissan Sewa Kendra). It
has also started Auto LPG Dispensing Stations (ALDS). It supplies Indane cooking
gas to over 47.5 million households through a network of 4,990 Indian distribut
ors. In addition, IndianOil s Research and Development Center (R&D) at Faridabad
supports, develops and provides the necessary technology solutions to the opera
ting divisions of the corporation and its customers within the country and abroa
d. Subsequently, Indian Oil Technologies Limited - a wholly owned subsidiary, wa
s set up in 2003, with a vision to market the technologies developed at Indian O
il s Research and Development Center. It has been modeled on the R&D marketing a
rms of Royal Dutch Shell and British Petroleum.

PRODUCTS
Indian Oil s product range covers petrol, diesel, LPG, auto LPG, aviation turbin
e fuel, lubricants, naphtha, bitumen, paraffin, kerosene etc. Xtra Premium petro
l, Xtra Mile diesel, Servo lubricants, Indane LPG, Autogas LPG, Indian Oil Aviat
ion are some of its prominent brands.
Recently Indian Oil has also introduced a new business line of supplying LNG (li
quefied natural gas) by cryogenic transportation. This is called "LNG at Doorste
p". LNG headquarters are located at the Scope Complex, Lodhi Road, Delhi.
REFINARIES
• Digboi Refinery, in Upper Assam, is India s oldest refinery and was comm
issioned in 1901. Originally a part of Assam Oil Company, it became part of Indi
anOil in 1981. Its original refining capacity had been 0.5 MMTPA since 1901. Mod
ernisation project of this refinery has been completed and the refinery now has
an increased capacity of 0.65 MMTPA.
• Guwahati Refinery, the first public sector refinery of the country, was
built with Romanian collaboration and was inaugurated by Late Pt. Jawaharlal Neh
ru, the first Prime Minister of India, on 1 January 1962.
• Barauni Refinery, in Bihar, was built in collaboration with Russia and R
omania. It was commissioned in 1964 with a capacity of 1 MMTPA. Its capacity tod
ay is 6 MMTPA.
• Gujarat Refinery, at Koyali in Gujarat in Western India, is IndianOil’s
largest refinery. The refinery was commissioned in 1965. It also houses the firs
t hydrocracking unit of the country. Its present capacity is 13.70 MMTPA.
• Haldia Refinery is the only coastal refinery of the Corporation, situate
d 136 km downstream of Kolkata in the Purba Medinipur (East Midnapore) district.
It was commissioned in 1975 with a capacity of 2.5 MMTPA, which has since been
increased to 5.8 MMTPA
• Mathura Refinery was commissioned in 1982 as the sixth refinery in the f
old of IndianOil and with an original capacity of 6.0 MMTPA. Located strategical
ly between the historic cities of Delhi and Agra, the capacity of Mathura refine
ry was increased to 7.5 MMTPA.
• Panipat Refinery is the seventh refinery of IndianOil. The original refi
nery with 6 MMTPA capacity was built and commissioned in 1998. Panipat Refinery
has doubled its refining capacity from 6 MMT/yr to 12 MMTPA with the commissioni
ng of its Expansion Project.
GROUP COMPANIES AND JOINT VENTURES
• Indian Oil Technologies Ltd : Indian Oil Technologies Ltd. is the market
ing arm of IOCL which markets the entire range of technologies developed at the
Indian Oil R&D Centre, Faridabad. Indian Oil Technologies Ltd. headquarters is l
ocated at the Indian Oil R&D Centre.
• Indian Oil (Mauritius) Ltd.
• Lanka IOC PLC - Group company for retail and storage operations in Sri L
anka. It is listed in the Colombo Stock Exchange. It was locked into a bitter su
bsidy payment dispute with Sri Lanka s Government which has since been resolved.
• IOC Middle East FZE
• Chennai Petroleum Corporation Limited
• Bongaigoan Refinery and Petrochemicals Ltd.
• Green Gas Ltd. - a joint venture with Gas Authority of India Ltd. for ci
ty-wide gas distribution networks.
• Indo Cat Pvt. Ltd., with Interact, USA, for manufacturing 15,000 tones p
er annum of FCC (fluidized catalytic cracking) catalysts & additives in India.
• Numerous exploration and production ventures with Oil India Ltd., Oil an
d Natural Gas Corporation.
INTERNATIONAL RANKINGS
Indian Oil is the highest ranked Indian company in the Fortune Global 500 listin
g, the 116th position(in 2008) based on fiscal 2007 performance. It is also the
18th largest petroleum company in the world and the number one petroleum trading
company among the National Oil Companies in the Asia-Pacific region. IOCL was f
eatured on the 2008 Forbes Global 2000 at position 303.
LOYALTIES PROGRAMES
XTRAPOWER Fleet Card Program is aimed at Large Fleet Operators. Currently it has
1 million customer base. XTRAREWARDS is a recently launched loyalty program for
retail customers where customers can earn reward points on their purchases in t
he org.
COMPETITORS
Indian Oil Corporation has two major domestic competitors, Bharat Petroleum and
Hindustan Petroleum. Both are state-controlled, like Indian Oil Corporation. The
re are two private competitors, Reliance Petroleum and Essar Oil.
CONCERNS
Indian Oil Corporation earned concerns about the state of affairs in its marketi
ng business when Manjunath, Shanmugam, a marketing manager and an MBA from the p
restigious Indian Institute of Management Lucknow, was murdered in 2005 for seal
ing a corrupt petrol station in the state of Uttar Pradesh (U.P.).
The corporation s Mathura Refinery unit has also remained constantly in news due
to the threat of air pollution created by it.
OIL INDUSTRY DEVELOPMENT BOARD
India has begun the development of a strategic crude oil reserve sized at 37.4 m
illion barrels, enough for two weeks of consumption. Petroleum stocks have been
transferred from the Indian Oil Corporation (Indian Oil) to the Oil Industry Dev
elopment Board (OIDB).The OIDB then created the Indian Strategic Petroleum Reser
ves Ltd (ISPRL) to serve as the controlling government agency for the strategic
reserve.

VISION
A major diversified.
Trans-national.
Integrated Energy Company.
With National leadership and a strong environment conscience.
Playing a National role in oil security & public distribution.

MISSIONS
To achieve international standards of excellence in all aspects of energ
y and diversified business with focus on customer delight through value or produ
ct and services, and cost reduction.
To maximize creation of wealth, value and satisfaction for the stakehold
ers.
To attain leadership in developing, adopting and assimilating state of t
he art technology for competitive advantage.
To provide technology and services through sustained research and develo
pment.
To foster a culture of participation and innovation for employee growth
and Contribution.
 To cultivate high standards of business ethics and total quality m
anagement for a strong corporate identity and brand equity.
To help enrich the quality of life of the community and preserve ecologi
cal balance and heritage through a strong environment conscience.

VALUES
CARE
▪ Concern
▪ Empathy
▪ Understanding
▪ Cooperation
▪ Empowerment

INNOVATION
▪ Creativity
▪ Ability to learn
▪ Flexibility
▪ Change

PASSION
▪ Commitment
▪ Dedication
▪ Pride
▪ Inspiration
▪ Ownership
▪ Zeal & zest

TRUST
▪ Delivered promises
▪ Reliability
▪ Dependability
▪ Integrity
▪ Truthfulness
OBJECTIVES
To serve the nation interests in oil and related sectors in accordance a
nd consistent with Government policies.
To ensure maintenance of continuous and smooth supplies of petroleum pro
ducts by way of crude oil refining. Transportation and marketing activities and
to provide appropriate assistance to consumers to conserve and use petroleum pro
ducts efficiently.
To enhance the country’s self-sufficiency in crude oil refining and buil
d expertise in laying of crude oil and petroleum product pipelines.
To further enhance marketing infrastructure and reseller network for pro
viding assured service to customer throughout the country.
 To create a strong research & development base in refinery processes, pr
oduct formulations, pipeline transportation and alternative fuels with a view to
minimizing /eliminating imports and to have next generation products.
To optimize utilization of refining capacity and maximize distillate yie
ld and gross refining margin.
To maximize utilization of the existing facilities for improving efficie
ncy and increasing productivity.
To minimize fuel consumption and hydrocarbon loss in refineries and stoc
k loss in marketing operations to effect energy conservation.
To earn a reasonable rate of return on investment.
To avail of all viable opportunities, both national and global, arising
out of the government of India’s policy of liberalization and reforms.
To achieve higher growth through mergers, acquisitions, integration and
diversification by harnessing new business opportunities in oil exploration & pr
oduction, petrochemicals, natural gas and downstream opportunities overseas.
To inculcate strong ‘core values’ among the employees and continuously u
pdate skill sets for full exploitation of the new business opportunities.

OBLIGATIONS
Towards customers and dealers:-
To provide prompt, courteous and efficient service and quality products at compe
titive prices.
Towards suppliers:-
To ensure prompt dealings with integrity, impartiality and courtesy And
help promote ancillary industries.
Towards employees:-
To develop their capabilities and facilitate their advancement Through a
ppropriate training and career planning. To have fair dealings with recognized R
epresentatives of employees in pursuance of health industrial relations practi
ces and Sound personnel policies.
Towards community:-
To develop techno-economically viable and environment-friendly Products.
To maintain the highest standards in respect of safety, environment protection
And occupational health at all production units.

BALANCE SHEET OF IOCL

PARTICULER Mar 09 Mar 08 Mar 07 Mar 06
Mar 05
Sources of funds
Owner s fund
Equity share capital 1,192.37 1,192.37 1,168.01 1,168.01
1,168.01
Share application money 21.60 - 24.36 - -
Preference share capital - - - - -
Reserves & surplus 42,789.29 39,893.88 33,664.92 28,134.6
6 24,816.35
Loan funds
Secured loans 17,565.13 6,415.78 5,671.42 7,793.54
2,491.23
Unsecured loans 27,406.93 29,107.39 21,411.27 18,610.77
14,829.01
Total 88,975.32 76,609.42 61,939.98 55,706.98 43,304.6
0
Uses of funds
Fixed assets
Gross block 62,104.64 56,731.50 54,770.29 43,662.84
39,869.26
Less : revaluation reserve - - - - -
Less : accumulated depreciation 27,326.19 23,959.68 21,400.07
18,639.42 16,488.47
Net block 34,778.45 32,771.82 33,370.22 25,023.42
23,380.79
Capital work-in-progress 18,186.05 9,170.22 4,394.30
9,620.03 8,719.47
Investments 32,232.13 21,535.78 19,990.86 14,521.39
5,554.93
Net current assets
Current assets, loans & advances 45,234.47 53,506.07 43,966.2
6 42,451.37 37,432.64
Less : current liabilities & provisions 41,493.74 40,499.06 39,938.9
3 35,966.74 31,816.32
Total net current assets 3,740.73 13,007.01 4,027.33
6,484.63 5,616.32
Miscellaneous expenses not written 37.96 124.59 157.27 57.51 33.09
Total 88,975.32 76,609.42 61,939.98 55,706.98 43,304.6
0

P&L A/C OF IOCL

PARTI. Mar 09 Mar 08 Mar 07 Mar 06 Mar 05
Income
Operating income 3,07,123.99 2,47,359.24 2,16,498.85 1,74,895
.12 1,39,214.32
Expenses
Material consumed 2,75,383.54 2,21,256.55 1,93,471.53 1,56,413
.53 1,21,580.37
Manufacturing expenses 1,500.51 1,558.14 1,112.87 961.22
1,252.79
Personnel expenses 5,686.96 2,894.86 2,586.80 1,799.23
1,829.10
Selling expenses 9,684.04 8,753.07 7,733.07 6,721.97
5,868.43
Administrative expenses 1,888.60 2,004.30 1,375.23 1,596.65
1,270.69
Expenses capitalised -544.01 -403.58 -542.83 -406.74 -
Cost of sales 2,93,599.64 2,36,063.34 2,05,736.67 1,67,085.86
1,31,801.38
Operating profit 13,524.35 11,295.90 10,762.18 7,809.26
7,412.94
Other recurring income 2,709.59 2,422.73 1,836.69 1,426.92
1,121.31
Adjusted PBDIT 16,233.94 13,718.63 12,598.87 9,236.18
8,534.25
Financial expenses 4,020.98 1,589.73 1,496.25 995.44
604.17
Depreciation 2,881.71 2,709.70 2,590.31 2,201.46
2,072.80
Other write offs 317.64 236.53 113.43 10.47 -
Adjusted PBT 9,013.61 9,182.67 8,398.88 6,028.81
5,857.28
Tax charges 1,364.71 3,104.54 2,949.46 1,790.38
1,063.80
Adjusted PAT 7,648.90 6,078.13 5,449.42 4,238.43
4,793.48
Non recurring items -5,615.51 705.81 1,973.32 178.24 76.45
Other non cash adjustments 915.26 178.64 76.73 498.45 21.45
Reported net profit 2,948.65 6,962.58 7,499.47 4,915.12
4,891.38
Earnings before appropriation 8,254.63 6,962.58 7,499.47
4,915.12 4,891.38
Equity dividend 910.48 655.81 2,250.89 1,460.02 1,693.62
Preference dividend - - - - -
Dividend tax 154.74 76.48 361.72 204.77 237.29
Retained earnings 7,189.41 6,230.29 4,886.86 3,250.33
2,960.4
CASH FLOW OF IOCL
PARTI. Mar 09 Mar 08 Mar 07 Mar 06 Mar 05
Profit before tax 4,328.59 10,080.40 10,485.00 6,705.99
5,955.18
Net cash flow-operating activity -23,156.96 -9,382.79 -3,141.7
1 -962.04 4,380.29
Net cash used in investing activity 19,177.91 4,376.55 6,960.16
-5,437.09 -6,360.29
Net cash used in fin. activity 3,950.40 4,904.70 -3,713.54
6,696.33 1,728.25
Net inc/dec in cash and equivalent 28.65 -101.54 104.91 297.20 -251.75
Cash and equivalent begin of year 798.02 925.97 821.06 446.97 698.07
Cash and equivalent end of year 826.67 824.43 925.97 744.17 446.32

CONCLUSION
All municipal monies, except those required to be kept liquid for purposes of di
stribution, be pro¬ductively invested at the “highest possible rate reasonably a
vailable, taking account of safety, liquidity, and yield.” Accordingly, each mun
icipal treasurer possesses a legal obligation to invest wisely, prudently, and e
ffectively. This goal can be achieved through the implementation of an effectiv
e cash management program.

WIBLIOGRAPHY
Websites:-
en.wikipedia.org/wiki/Cash_management
www.hcltech.com/financial-services/.../cash-management.asp
www.smallbusinessnotes.com/.../cashmanagement.html
www.hsbc.co.in/1/2/business/cash-management
www.cashworkbooks.com/ -
www.investorwords.com/774/cash_management.html -
www.allbusiness.com/.../cash-management/4950369-1.html -
sbinfocanada.about.com/cs/management/g/cashflowmgt.htm
wiki.answers.com/.../Definition_of_a_cash_cash_management_definition_and_objecti
ves_objectives_of_managing_cash_flows
www.reuters.com/article/.../idUSTRE5313U120090402
www.visa.com/cashmgmtsurvey/ -
www.essays.se/.../Importance+of+cash+management+in+decision+making/ -
www.ey.com/US/en/Issues/.../Cash-management-and-treasury

BIBLIOGRAPHY
1. Cash Management:-S.S.MODI
2. Financial Management and Policies:-R.M.SRIVASTAVA
3. Financial Management and Policies:-JAMEDSC. VAN HORNE
4. Advance Accounts:-M.C.SHUKLA
:-S.C.GUPTA
5. Financial Statement Analysis:-JOHN J. WILD
:-Robert F.HALSEY