GROUP 5:

Table of contents

01 CASH AND
MARKETABLE
SECURITIES
Pasia, Kim Gerald S.
Leynes, Hannah Angela B.
Table of contents

02 CASH CONVERSION
CYCLE
Arellano, Mary Christine K .
Tumbaga, Princess Nicole B .
Table of contents

03 OPTIMAL CASH
BALANCE
Montenegro, Jade Ivy D
Table of contents

04 COLLECTION AND
DISBURSEMENT
FLOAT
Bustinera, Rose Anne B.
Table of contents

05 CASH MANAGEMENT
SYSTEM
Fajanilan, Allysa Mae M.
 CASH
MANAGEME
NT
CASH
 Money is the standard medium
of exchange.
 A. B.
RESTRICTED UNRESTRICTE
D
How do we measure cash?
CASH
ON
HAND
CASH IN
BANK
CASH
FUND
MANAGEMENT
 Management is the coordination
and administration of task to
achieve a goal.
 TREASURY MAXIMUM
MANAGEMEN HANDLING PROFITABILI
T TY
INVESTME CASH COLLECTI
NT MANAGEMEN ON
MAINTAININ MONITORIN
G T
G
INFLOWS
AND DISBURSEME MAXIMUM
OUTFLOW NT LIQUIDITY
Why do we always want
money?
MOTIVES
FOR
HOLDING
CASH
  Liquidity
Preference Theory

 John Maynard
Keynes
 The General Theory
of Employment,
Interest and Money
(1936)
 TRANSACTIONS
MOTIVE
 The need for holding money
arises because there is lack of
synchronization between
receipts and expenditures.
 PRECAUTIONARY
MOTIVE
 The amount of money demanded
under the precautionary motive
depends on the size of income,
prevailing economic as well as political
conditions and personal characteristics
of the individual such as optimism/
pessimism, farsightedness etc.
 PRECAUTIONARY
MOTIVE
 Increase in the price of raw materials

 Labor Strike

 Change in the demand

 SPECULATIVE
 According MOTIVE
to Keynes, people
demand to hold money balances
to take advantage of the future
changes in the rate of interest,
which is the same as future
changes in bond prices.
 SPECULATIVE
MOTIVE
 These opportunities could be in
the form of the low-interest rate
charged on the borrowed funds,
expected fall in the raw material
prices or favorable change in the
government policies.
 COMPENSATORY
MOTIVE
 Banks provide variety of services to
business firms like clearance of
checks, drafts, transfer of funds etc.
 Banks can utilise the balances to earn
a return to compensate their cost of
services to the customers.
 COMPENSATORY
MOTIVE
 Thus, in order to avail the convenience
of holding a current account, the
minimum cash balance must be
maintained by the firm and this provides
the compensation motive for holding
cash.
 FACTORS
DETERMINI
NG CASH
NEEDS
 SYNCHRONIZATION OF
CASH FLOWS
 However, the need for cash
balances enters the picture
when there is non-
synchronization of cash flows.
 SHORT COST

 Every shortage of cash whether

expected or unexpected involves a cost
depending upon the severity, duration
and frequency of the shortfall and how
the shortage is covered.
 EXCESS CASH
BALANCE COST
 If a firm is having large funds lying as
idle, it shows that the firm has missed
opportunities to invest those funds and
has thereby lost interest which it would
otherwise have earned. This loss of
interest is primarily the excess cost.
 PROCUREMENT AND
MANAGEMENT
 Procurement and management costs
are associated with establishing and
operating cash management staff and
activities. They are usually fixed and
are mainly accounted for by salary,
storage, handling of securities, etc.
 UNCERTAINTY

 Cash serves as the business

precautionary cushion to deal with
these kinds of circumstances.
OBJECTIVES
OF CASH
MANAGEME
NT
 Meeting Payment Schedule

 Minimizing the Funds

Committed to Cash Balances
 02
Marketable
Securities
Reporter: Hannah Angela Leynes
 What are Marketable Securities?
Marketable Securities are financial
instruments that can be sold or converted into
cash (at reasonable value) within one year.

• It is an unrestricted short-term
financial instruments that are issued
either for equity securities or for debt
securities of a publicly listed company.

Note:
 more than 90 days or within 1 year (short term
Investments)
 more than 1 year ( long term Investments)
Characteristics of Marketable Securities

 Maturity period of 1 year or less

 Ability to be bought or sold on a public stock exchange or public bond
exchange.
 Having a strong secondary market that makes for liquid buy and sell
transactions, as well as rendering an accurate price valuation for
investors.
 Have high liquidity, effectively lowering risk
 Not Cash and Cash Equivalents
Purposes for which Note:
they are bought: CURRENT ASSETS
 within 90 days or less (Cash Equivalents)
 Held for trading  More than 90 days or within 1
year (short-term investments)

 Held to Maturity NON CURRENT ASSETS

 More than 1 year (long-term investments)

 Available for Sale

Purposes for which Note:
they are bought: CURRENT ASSETS
 within 90 days or less (Cash Equivalents)
 Held for Trading  More than 90 days or within 1
year (short-term investments)
These are debt or equity investments
NON CURRENT ASSETS
purchased with the intention of short-term  More than 1 year (long-term investments)

gain.
Purposes for which Note:
they are bought: CURRENT ASSETS
 within 90 days or less (Cash Equivalents)
 Held to Maturity  More than 90 days or within 1
year (short-term investments)
These are securities purchased to be
NON CURRENT ASSETS
owned until maturity.  More than 1 year (long-term investments)
Purposes for which Note:
they are bought: CURRENT ASSETS
 within 90 days or less (Cash Equivalents)
 Available for Sale  More than 90 days or within 1
year (short-term investments)
These are debt or equity securities purchased
NON CURRENT ASSETS
with the intent of selling before it reaches  More than 1 year (long-term investments)

maturity or holding it for a long period should it

not have a maturity date.

 Classifications of
Marketable Securities

 Marketable Equity
Securities
 Marketable Debt
Securities
Classifications of Marketable Securities

1. Marketable Equity Securities

 Marketable equity securities are equity instruments that are traded on stock
exchanges.
 Equity securities are financial assets that represent shares of ownership.
Examples: Common Stocks and Preference shares
MARKETABLE EQUITY SECURITIES

Example:

 Company LMN is a successful car manufacturer that plans on

expanding into boat manufacturing. In order to raise capital for this
new venture, they issued 10,000 corporate stocks with corresponding
stock price of $100 per share.
 Company QRS has extra cash and believes that Company LMN’s
shares will increase in value in the coming months, so they invest
$100,000 intending to generate profit. After five months, the stock
price rises to $125, so QRS sells their shares for a $25,000 profit..
Since the past shares were held for less than one year, they are
considered as marketable securities
Classifications of Marketable Securities

2. Marketable Debt Securities

 Marketable debt securities are those debt securities that are traded in the bond
market.
 Debt securities are financial assets that define the terms of a loan between an issuer
(the borrower) and an investor (the lender).
Example: Bonds- government bonds and corporate bonds
MARKETABLE DEBT SECURITIES

Example:

 Company ABC is looking to raise money to expand into a new market.

Rather than using the limited cash it has on hand, it issues 10,000
corporate bonds for $1,000 each at 10% interest. The bonds mature in
one year, at which, at which point they will be worth $1,100 each
(110% of $1,000).
 Company XYZ has extra cash available, so they purchase 1,000 of the
bonds for a total price of $1,000,000. They plan on holding the bonds
until maturity, at which point they can be redeemed for a total of
$1,100,000.
Types of Marketable
Securities
1. Commercial Papers
2. Bank Deposits
3. Treasury Bills
4. Negotiable Certificate of
Deposits
5. Repurchase Agreements
Types of Marketable Securities

1. Commercial Papers
 Short-term agreement without collateral issued by big companies to
gain capital.

2. Banker’s Acceptance
 A bankers’ acceptance is an amount that a borrower borrows, with a
promise to pay in future, backed and guaranteed by the bank.
Types of Marketable Securities

3. Treasury bills (T-bills)

 Debt offered by federal government with maturity 3, 6 or 12 months.

4. Negotiable Certificates of Deposits

 A bank product offered to investors looking for a relatively safe
investment, but with higher interest rates than a regular savings
account or short-term time deposit.
Types of Marketable Securities

5. Repurchase Agreement (Repos)

 A short-term loan where both parties agree to the sale and future
repurchase of assets within a specified contract period.
Why do Corporates
purchase low yielding
Marketable Securities?

The reason is obvious since

cash does not give any return, it is
better to hold funds in the form of
such securities which offer return
with minimum risk.
Why Invest in Marketable
Securities?

1. Substitute for hard cash

2. Repayment of short term liabilities

3. Regulatory Requirement
CALCULATING
CASH
CONVERSION
CYCLE
PRINCESS NICOLE TUMBAGA
OPERATING CYCLE (OC)
● The Operating Cycle (OC) is the time
between ordering materials and collecting
cash from receivables.
CASH CONVERSION CYCLE
● The Cash Conversion Cycle (CCC) is the
time between when a firm pays its suppliers
(payables) for inventory and collecting cash
from the sale of the finished product.
OC and CCC may be computed as shown below.

● OC = AAI + ACP
● CCC = OC- APP
● CCC = AAI + ACP – APP

WHERE:
AAI - Average Age of Inventory
ACP - Average Collection Period
APP - Average Payment Period or Average Payable Period
 EXAMPLE:
MAX Company, a producer of paper dinnerware, has annual sales of $10 million,
cost of goods sold of 75% of sales, and purchases that are 65% of cost of goods
sold. MAX has an average age of inventory (AAI) of 60 days, an average collection
period (ACP) of 40 days, and an average payment period (APP) of 35 days.

Using the values for these variables, the cash conversion cycle for MAX is 65 days
(60+ 40-35) and is shown on a timeline in Figure 1.
Figure 1 – Timeline for Max
Company’s Cash Conversion Cycle
FUNDING REQUIREMENTS
PFN - If a firm's sales are constant, then its investment in
operating assets should also be constant, and the firm will have
only a permanent funding requirement.

SFN - If sales are cyclical, then investment in operating assets will

vary over time, leading to the need for seasonal funding
requirements in addition to the permanent funding requirements for
its minimum investment in operating assets
STRATEGIES
FOR MANAGING
THE CCC:
STRATEGIES FOR MANAGING THE
CCC:
1. Turn over inventory as quickly as possible without
stock outs that result in lost sales.
2. Collect accounts receivable as quickly as possible
without losing sales from high pressure collection
techniques.
3. Manage, mail, processing, and clearing time to
reduce them when collecting from customers and to
increase them when paying suppliers
4. Pay accounts payable as slowly as possible without
THREE STAGES
OF PRODUCTION
1. RAW MATERIALS
Raw materials are materials or
substances used in the primary
production or manufacturing of goods.
2. WORK-IN-PROGRESS OR
WORK-IN PROGRESS
The term work-in-progress (WIP) is a
production and supply-chain management term
describing partially finished goods awaiting
completion.
3. FINISHED GOODS
Finished goods are products that have
completed the manufacturing process but
have yet to be sold to customers.
TYPES OF MANAGERS
ACCORDING TO THE
THREE MAJOR
FUNCTIONAL AREAS OF
BUSINESS
1. FINANCIAL MANAGERS
They would like to keep inventory
levels low to ensure that funds
are wisely invested.
2. MARKETING MANAGERS
They would like to keep inventory
levels high to ensure orders
could be quickly filled.
3. MANUFACTURING MANAGERS
They would like to keep raw
materials levels high to avoid
production delays and to make
larger, more economical production
run.
INVENTORY
MANAGEMENT
TECHNIQUES
• ABC SYSTEM
• EOQ Model
• REORDER POINT
• JIT SYSTEM
• COMPUTERIZED
SYSTEMS
MARY CHRISTINE K. ARELLANO
ABC SYSTEM
The ABC System of inventory
management divides inventory into three
groups of descending order of
importance based on the amount
invested in each.
CATEGORIES OF ABC ANALYSIS
A – Products included in this category are one of the most important
stock items that have the highest value.

B – It is basically a mid-level category in which the products of

slightly higher value and less tightly controlled goods are recorded.

C – this is known as the General category, this contains the largest

volume of inventory goods having the least volume in terms of
generating business revenue.
ABC ANALYSIS GRAPH
EOQ MODEL (ECONOMIC ORDER
QUANTITY)
● The economic order quantity (EOQ) is a
company's optimal order quantity for
minimizing its total costs related to ordering,
receiving, and holding inventory.
FORMULA:

2𝑥𝐷𝑋𝑆
Q=
𝐻
Q – EOQ units
D – Demand/Usage in units (typically on an annual
basis)
S – Order cost (per purchase order)
H – Holding/Carrying cost (per unit/year)
EXAMPLE
Assume, for example, a retail clothing shop carries a line of
men’s jeans, and the shop sells 1,000 pairs of jeans each
year. It costs the company $5 per year to hold a pair of jeans
in inventory, and the fixed cost to place an order is $2.

Given: Q = ?
D = 1,000 pairs
S = 2 dollars
H = 5 dollars
SOLUTION
2𝑥𝐷𝑋𝑆
Q=
2𝑥𝐷𝑋𝑆 Q=
𝐻
𝐻

2 𝑥 1,000 𝑋 2
Given: Q = ? Q=
5
D = 1,000
pairs
S = 2 dollars Q = 28.28 or 28 pairs of
H = 5 dollars jeans
ROP (REORDERPOINT)
● A reorder point (ROP) is a specific level at
which your stock needs to be replenished. In
other words, it tells you when to place an
order so you won’t run out of stock.

Formula: ROP with safety stock and ROP without

safety stock
 FORMULA: with safety stock
● ROP = (daily usage x lead time) + safety stock

Where:
Daily usage – the number of sales made in an average day of that
particular item

Lead time – time taken (in days) for your vendor to fulfill your order

Safety stock – the amount of extra stock, if any, that you keep in your
inventory.
EXAMPLE: Determining ROP with Safety
Stock
● Suppose you’re a perfume retailer who sells 200 bottles of
perfume every day. Your vendor takes one week to deliver
each batch of perfumes you order. You keep enough excess
stock for 5 days of sales, in case of unexpected delays. Now,
what should your reorder point be?
Given:
Lead Time = one week (7 days)
Safety stock = 5 days
Daily usage = 200 bottles
 SOLUTION
ROP = (daily usage x lead ROP = (daily usage x lead time)
time) + safety stock + safety stock

ROP = (200 X 7) + 1,000

Given:
Lead Time = one week (7 days) ROP = 1,400 + 1,000
Safety stock = 5 days x 200 = 1000
Daily usage = 200 bottles
ROP = 2,400 bottles
 FORMULA: without safety stock
● ROP = (daily usage x lead time)

Where:
Daily usage – the number of sales made in an average day of that
particular item

Lead time – time taken (in days) for your vendor to fulfill your order

Safety stock – the amount of extra stock, if any, that you keep in your
inventory.
EXAMPLE: Determining ROP without
Safety Stock
● Suppose you’re a perfume retailer who sells 200 bottles of
perfume every day. Your vendor takes one week to deliver
each batch of perfumes you order. Now, what should your
reorder point be?

Given:
Lead Time = one week (7 days)
Daily usage = 200 bottles
 SOLUTION
ROP = (daily usage x lead ROP = (daily usage x lead time)
time)

ROP = (200 X 7)

Given: ROP = 1,400 bottles

Lead Time = one week (7 days)
Daily usage = 200 bottles
JIT SYSTEM (JUST-IN-TIME)
● Just-in-time, or JIT, is an inventory
management method in which goods are
received from suppliers only as they are
needed. The main objective of this method is
to reduce inventory holding costs and
increase inventory turnover.
HOW JIT WORKS?
MRP SYSTEM (MATERIAL
REQUIREMENTS PLANNING)
● Material requirements planning (MRP) is a software-
based integrated inventory and supply management
system designed for businesses.
● Companies use MRP to estimate quantities of raw
materials, maintain inventory levels, and schedule
production and deliveries.
HOW MRP WORKS?
1. Identifying requirements to meet demand.
The first step of the MRP process is identifying customer demand and
the requirements needed to meet it, which starts with inputting
customer orders and sales forecasts.

2. Checking inventory and allocating resources.

Utilizing the MRP to check demand against inventory and allocating
resources accordingly, you can see both what items you have in stock
and where they are—this is especially important if you have inventory
across several locations.
HOW MRP WORKS?
3. Scheduling production.
Using the master production schedule, the system determines
how much time and labor are required to complete each step

4. Identifying issues and making recommendations.

Finally, because the MRP links raw materials to work orders
and customer orders, it can automatically alert your team when
items are delayed and make recommendations for existing
orders
5Cs of Credit
5C’s of Credit
● The 5 Cs of Credit is a framework used by financial institutions
and other non-bank lenders to evaluate the creditworthiness of
a borrower, as well as the strength of an overall borrowing
request.

• Character
• Capacity
• Capital
• Collateral
• Conditions
CHARACTER
● The borrower’s historical track record of managing
credit and making payments should serve as a
proxy for future creditworthiness
CAPACITY
● Capacity really speaks to a borrower’s ability
to service debt obligations into the future.
CAPITAL
● Capital can be thought of as a
borrower’s overall financial strength
COLLATERAL
● Collateral provides assurance to the
bank in case you're unable to pay for
the loan.
CONDITIONS
● This refers to the current economic
health of the market and the industry
you work in.
 00
Optimal Cash
Balance
Reporter: Montenegro, Jade Ivy D.
Optimal Cash Balance

Optimal cash balance means a

position when the cash balance
amount is on the most ideal
proportion so that the company
has the ability to invest the
excess cash for a return [profit]
and at the same time have
sufficient liquidity for future needs.
How to determine
 Determining OCB

There are two techniques for deciding how much cash to

maintain at any given point, considering that both holding
cash and investing it have both advantages and
disadvantages. The purpose of cash models is to satisfy
cash requirements at the least cost.
Cash Management Models

Optimum Cash Optimum Cash

Balance under Balance under
Certainty: Baumol’s Uncertainty: The
Model Miller–Orr Model
William J. Baumol (1952) developed a cash model to
determine the optimum amount of transaction of cash under
conditions of certainty.

The assumptions:
 The firm is able to forecast its cash needs with certainty.
 The firm’s cash payments occur uniformly over a period of
time. The opportunity cost of holding cash is known and it
does not change over time.
 The firm will incur the same transaction cost whenever it
converts securities to cash.
 The optimum cash balance, C*, is obtained when
the total cost is minimum. The formula for the
optimum cash balance is as follows:
2𝐹𝑇
C* =
𝑖
Where:
C* = Optimum Balance
T = Total Cash Needed During The Year
F = Fixed cost of transaction
i = Interest rate on marketable securities
For ABC Co., the optimal cash level that it can invest SAMPLE PROBLEM
in each transaction can be calculated by using the
Baumol Model as below. A company, ABC Co., has
2𝐹𝑇 monthly excess cash inflows of
C* =
𝑖 $20,000. ABC Co. intends to
2(100𝑥12)(20,000) invest excess cash in short-term
=
5% securities. The company expects
48,000,000 to earn an interest rate of 5% per
=
0.05 annum on the investment. Every
= P30,983.87 time the company invests in
securities, the company must
bear transaction costs of $100.
 It is also known as Stochastic Model

 The Miller–Orr Model provides for two control limits–the upper control limit (H)
and the lower control limit (L) as well as a return point.

 If the firm’s cash flows fluctuate randomly and hit the upper limit, then it buys
sufficient marketable securities to come back to a normal level of cash balance
(the return point).

 Similarly, when the firm’s cash flows wander and hit the lower limit, it sells
sufficient marketable securities to bring the cash balance back to the normal
level (the return point).
Miller–Orr Model requires the following step:

 Specifying Lower Control Limit

 Estimating the Variability in Cash Flows
 Computing the Spread or the Distance (called Z) between Lower and Upper
Limit
 This spread is added to the lower cash limit for determining the Upper Cash
Limit
1
 Return Point = L + 𝑍
3
 The spread (called Z) can be computed using Miller-Orr Model below:
1
3 3
3 3𝑇𝑉 𝑥 𝑇𝑥𝑉
4
Z =3 4𝑖
𝑜𝑟 3 𝑖
Where:
T = Transaction Cost of Conversion
V = Variance of Daily Cash Flows
i = Daily % interest rate on marketable securities
First, we need to compute for variance
Variance = (𝑆𝐷)2
=(4,000)2
=P16,000,000
Second, compute for the daily interest rate
11%
= 0.03% SAMPLE PROBLEM
365
Next, compute for the z
3 3𝑇𝑉
Z=3 The company, XYZ Co., has
4𝑖
established a lower cash limit of
3 3(100)(16,000,000)
= 3 P50,000. The transactions costs
4(0.0003)
of transferring cash amount to
= P47,622
P100 per transaction. The
After computing the z, we can now get the return point
1 standard deviation in cash flows
Return point = L + 𝑍 is P4,000 per day. The annual
3
1
= 50,000 + 47,622 interest rate is 11%.
3
= P65,874
Finally, we can compute the upper limit
Upper Limit = L + Z
= 50,000 + 47,622
= 97,622
FLOA
• refers to funds that have been
T
dispatched by a payer but are not
yet in form that can be spent by the
payee.

• defined as "the difference between

book cash and bank cash,
representing the net effect of checks
in the process of clearing."
Components of Float

Mail Float Processing Clearing Float

the delay between the Float
the delay between the the delay between the
time when a payer receipt of a check by the deposit of a check by the
mails a payment and payee and its deposit in the payee and the actual
the time when the firm’s account. availability of the funds.
payee receives it.
FLOAT TIMELINE
3 TYPES OF FLOAT
 Collection Float

 Disbursement
Float

 Net Float
Collection Float
The delay between the
time when a payer or
customer deducts a
payment from its
checking account ledger
and the time when the
payee or vendor actually
receives the funds in a
spendable form.
COLLECTION FLOAT TIMELINE
Disbursement Float
The lapse between the
time when a firm deducts a
payment from its checking
account ledger (disburses
it) and the time when
funds are actually
withdrawn from its
account.
DISBURSEMENT FLOAT TIMELINE
 NET
•
FLOAT
The net float at a point of
time is simply the overall
difference between the
firm’s available bank
balance and the balance
shown by the ledger
account of the firm.
Example:
The accountant for a catering business is reviewing its finances
and determining its net float. The accountant recently made
several payments, which were 1,200 to the supply vendor for new
platters and hot plates, 2,100 to the company they rent their truck
from and 500 to the provider of the international food. This means
the total disbursement float for the catering business is 3,800.
The accountant also considers their collection float from the four
checks they received from customers, two deposit checks for 500
each, another from a big event for 5,600 and one from a smaller
event for 900. From these payments, the accountant can
determine that their total collection float is 7,500.
Ways of Managing Float
 Concentration Banking
 Accelerating Collections
 Lock Box System
 Electronic Banking System
 Delaying Payments
Concentration Banking
a collection procedure in which
payments are made to regionally
dispersed collection centers, then
deposited in local banks for quick
clearing. Reduces collection float by
shortening the mail and clearing float
components.
Accelerating
Collections
The objective in this method of
cash collections is to minimize lag
between the mailing time from
customers to the firm and time
when the firm can make use of the
funds.
Lock Box System

customers are advised to mail their

payments to special post office boxes
called ‘lockboxes’, which are attended
to by local collecting banks, instead of
sending them to corporate
headquarters.
Electronic Banking
System
offers access to information such
as exchange rates, which helps
customers transfer funds directly
to the central account of the
business.
Delaying Payments

The delay in transit of cheque

and delay in collection of the
cheque, will be used to increase
the float.
Other Techniques to
Accelerate Collections
 Pre-authorized check
 Depository Transfer Check
(DTC)
 Wire Transfers
 Automated Clearing House
Debits
Ways on how to slow
down the disbursement
 Controlled Disbursing
 Playing the Float
 Staggered Funding
 Payable-through Draft
 Automated Clearing House
Debits
 Cash
Management System
Objectives
• To keep the investment in cash as low as possible
while keeping the firm operating efficiently and
effectively.
• To maintain optimum cash balance.
• To keep the optimum cash balance requirements at
minimum level by prompt collection and late
disbursement.
• To minimize funds committed to cash balances.
 Cash Management
Cash management is one of the key areas of working capital
management. Apart from the fact that it is the most liquid asset, cash is
the common denominator to which all currents assets can be reduced
because the other major liquid assets, that is receivables and inventory
get eventually converted into cash.

Cash management is the process of collecting and managing cash

flows. Cash management can be important for both individuals and
companies. In business, it is a key component of a company's financial
stability. For individuals, cash is also essential for financial stability while
also usually considered as part of a total wealth portfolio.
Cash
management
efficiency
 It collects accounts receivable as soon as
possible but pay accounts payable as late as
is consistent with maintaining the firm’s credit
standing with suppliers
Types of Cash Management

Cash Flow Free Cash

from Operating Flow to the
Activities Firm

Free Cash The Net

Flow to Equity Change in
Cash
Roles and Function of Cash
Management
Inventory Management

Inventory management is concerned

with keeping enough product on hand
to avoid running out while at the
same time maintaining a small
enough inventory balance to allow for
a reasonable return on investment.
Excessive level of inventory results in
large inventory carrying cost.
Receivables Management

A company focuses on raising its invoices

so that sales can be boosted. This means
that the organization has recorded all its
sales, but the cash with respect to these
transactions has not yet been received
Payables Management

Accounts payable management is a system that

deals with a business's debts to third-party
vendors or suppliers that it made on credit and
hasn't paid back yet. These debts might include
expenses that have accumulated, purchases of
inventory or supplies and short-term operations
costs
 Basic Principle
● Keeping a larger inventory level can often lead to a scenario
where cash gets unnecessarily stuck. Even the warehouse
space gets occupied unnecessarily. Companies must come up
with appropriate techniques and strategies to be able to
maintain lower levels of inventory successfully.

● The companies must encourage their clients and customers

to pay their dues quicker, and they must offer them lucrative
discounts and other schemes that motivate them to pay as
early as possible.
Example of Cash Management

Following is the Ry & Co

weekly average cash
balances
 Week Average Cash Balance
1 ₱ 10,000
2 ₱ 17,000
3 ₱ 7,000
4 ₱ 12,000
TOTAL ₱ 46,000
Annual Interest Rate = 12%
Monthly Average Cash Balnce is calculated as

Monthly Average Cash Balnce = ₱ 46,000/4

Month average Cash Balance = ₱ 11,500
 Monthly Return on Average
Cash Balance is calculated as

Monthly Return on Average

Cash Blance = ₱ 46,000*0.1

Monthly Return on Average

Cash Balance = ₱115

Using this, the company will

manage cash of its business
Cash Management Strategies

• One must always ask for a milestone or deposit payment

• The customers must be encouraged to clear their bills faster
• One must always make sure that the expenses are always bare
minimum or even delayed.
• One must request the vendors to modify their payment terms
• Finance and fulfill purchase orders
• Idle equipment must be put for sale or on lease
• Boost profit margins
• Invoice factoring/ invoice discounting/ invoice financing/ sale invoices
Different Types of Cash Management
Tools

Short-term Savings
Instrument Account

Checking Certificates of
Account Deposit
Limitations of
Cash management ignores the accrual
concept of accounting.

It is historical in nature; that is; it

rearranges the current information which
is provided in the profit and loss
statement and the balance sheet.
It is not a substitute for a profit and loss
statement.

It ignores non cash transactions

Advantages
• Cash management allows estimating
the cash profits and not just profits from
outstanding incomes and credit sales.
• It helps in detecting cash
embezzlement.
• It allows in speeding up the working
capital cycle.
• It helps in rewarding such debtors
that make quicker payments.
• It speeds up the operations of an
organization.
Disadvantages
• Management of the cash requires
the specified skills of the person
managing it.

• It is a time-consuming process
 03

Components
of a CMS
These devices are designed to streamline activities.
A cash counter, for example, automates cash
counting.
The coin and banknote recycler is a more robust solution.
It counts cash, but it will also sort notes. It then records
amounts and makes the cash available to use again.

The other component of a cash management system is

software. The right software can allow you to run the
machines, as well as collect information and create
reports. It can also allow you to reconcile cash with ease.
04 Benefits of a
CMS
Automation frees up your employees’ time and
speeds up the process of counting and reconciling
cash. It also reduces errors and improves security.
By freeing up your employees’ time, cash
automation can also help you improve customer
service, and productivity within your business.
This also reduces the costs of handling cash
within the business.
Causes of problems with Cash
Management
Poor Understanding of Lack of
the Cash Flow Cycle Management Skills

Lack of Understanding Bad Capital

of Profit versus Cash Investments
Thank you
for
listening