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Cash Management

Facets of Cash Management

Cash planning planning inflow and outflow, preparing cash budget Managing the cash flows inflows to be accelerated and outflows to be decelerated Optimum cash level Investing surplus cash

Cash Management Cycle

Cash mgmt seeks to accomplish the below given cycle at a minimum cost. At the same time it also seeks to achieve liquidity and control.
Business Operations Information And Control Cash Collections

Deficit Surplus
Cash Payments

Borrow Invest

Motives for holding cash

Transaction motive Precautionary motive
Speculative motive

Cash planning
It is the technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash balance and cash deficit. Cash Budget -> it is the most significant device to plan for and control cash receipts and payments. Cash forecasts are needed to prepare cash budgets.

Short term cash forecasting methods

Receipts and disbursements method Adjusted net income method

Sensitivity Analysis
Optimistic, most probable and pessimistic

Long term cash forecasting

Gives an idea of the companys financial requirements in the distant future. They are not as detailed as the short term forecasting.

Accelerating cash collections

Managing Cash Collections & Disbursements

Amt of cheques sent by customer which are not yet collected is called collection or deposit float. Decentralised Collections
It is operating in USA and is known as concentration banking It reduces deposit float and consequently the financing requirements

Lock-box system
Lock-box system helps the firm to eliminate the time between the receipt of cheques and their deposit in the bank.

Controlling Disbursements
When a firms actual bank balance is greater than the balance shown in the firms books, the difference is called disbursement or payment float.

Determining optimum cash balance

Optimum Cash Balance under Certainty: Baumols Model
Firm is able to forecast the cash needs with certainty Firms cash payments occur uniformly over a period of time Opportunity cost of holding cash is known and it does not change over time Firm will incur the same transaction cost whenever it converts securities to cash

Holding Cost = k (C/2) Transaction Cost = c(T/C) Total Cost = k(C/2)+c(T/C)

2cT C k

Cost Total Cost Holding Cost


Transaction Cost Cash Balance

Optimum Cash Balance under uncertainty : Miller-Orr Model

It assumes that cash flows are normally distributed with a zero value of mean and standard deviation. It gives Upper limit, Lower limit and the return point.

Cash Balance Upper Limit

Purchase of Securities

Return Point
Sale of Securities

Low Limit


The firm sets the lower control limit as per its requirement of maintaining minimum cash balance. Distance between Upper and Lower limit (Z) =

Z (3 / 4xc / i)

1/ 3

Upper Limit = Lower Limit + 3Z Return point = Lower limit + Z

Three basic features of security

Safety Maturity Marketability

Investing surplus Cash in Marketable Securities

Types of Short-Term investment opportunities

Treasury bills Commercial Papers Certificate of Deposits Inter-corporate Deposits Money Market Mutual Funds