SESSION 25 CASH MANAGEMENT

Session 25

CASH MANAGEMENT
Objectives DIFFERENCE BETWEEN PROFITS AND CASH MOTIVES FOR HOLDING CASH OBJECTIVE OF CASH MANAGEMENT FACTORS INFLUENCING EFFICIENT CASH MANAGEMENT

Session 25

DIFFERENCE BETWEEN PROFITS AND CASH

Profits can be said to be the excess of income over the expenditure of the business entity.

They include both cash incomes, non-cash incomes and cash expenses in cash/cheque, non-cash expenses.
While profits reflect the earning capacity of a company, cash reflects its liquidity position.
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MOTIVES FOR HOLDING CASH

Transaction motive Precautionary motive Speculative motive Compensating Balances

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OBJECTIVES OF CASH MANAGEMENT

To forecast cash inflows and outflows

To identify profitable avenues to invest surplus cash To arrange for funds in case of cash deficit

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CASH FORECASTING AND BUDGETING

Cash Budgets: It help in forecasting and summarizing the cash inflows and outflows for a period of time in future.

It helps in planning the investment of surplus cash. It helps in adjusting the imbalances between forecasted cash receipts and payments.

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CASH REPORTS
Useful in situations where in cash flows donot fluctuate much. Types of Cash Reports: Daily Cash Report Daily Treasury Report Monthly Cash Report

1. 2. 3.

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Factors for efficient Cash Management

Prompt billing and Mailing Accelerating cash inflows Slowing cash outflows Playing the float Investment of surplus cash Determining the amount of surplus cash Determining the channels of investment
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 Determination of surplus cash Determined after deciding the minimum level known as safety level for cash. Safety level of cash Normal period
desired days of cash x average daily cash outflows

Peak period
desired days of cash x average of highest daily cash outflows

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 Determination of channels of investment Temporary cash surplus should be invested on short term basis Permanent cash surplus should be invested for a period ranging from 6 months to 1 year Criteria for investment 1. Security 2. Liquidity 3. Yield 4. Maturity
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 Forms of liquidity 1. Keeping reserve drawing power under cash credit /overdraft 2. Marketable securities 3. Investment in inter corporate deposits Choice of liquidity mix 1. Uncertainty surrounding cash flow projections 2. Attitude of the management towards risk 3. Ability to raise non bank funds or control its cash flows
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Summary
DIFFERENCE BETWEEN PROFITS AND CASH MOTIVES FOR HOLDING CASH OBJECTIVE OF CASH MANAGEMENT FACTORS INFLUENCING EFFICIENT CASH MANAGEMENT

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