Cash

Management
 Introduction
Cash is one of the current assets of a business. It is
needed at all times to keep the business going. A
business concern should always keep sufficient cash for
meeting its obligations. Any shortage of cash will
hamper the operations of a concern and any excess of it
will be unproductive. Cash is the most unproductive of
all the assets. While fixed assets like machinery, plant,
etc. and current assets such as inventory will help the
business in increasing its earning capacity, cash in hand
will not add anything to the concern.
 Nature of cash
For some persons, cash means only money in the form of currency (cash in hand). For other persons,
cash means both cash in hand and cash at bank. Some even include near cash assets in it. They take
marketable securities too as part of cash. These are the securities which can easily be converted into
cash.

Cash itself does not produce goods or services. It is used as a medium to acquire other assets.
It is the other assets which are used in manufacturing goods or providing services. The idle cash can
be deposited in bank to earn interest. A business has to keep required cash for meeting various
needs.

There remains a gap between cash inflows and cash outflows. Sometimes cash receipts are more
than the payments or it may be vice-versa at another time. A financial manager tries to synchronise
the cash inflows and cash outflows. But this situation is seldom found in the real world. Perfect
synchronisation of receipts and payments of cash is only an ideal situation.
Motives for holding cash
• Transaction Motive: Cash is held to facilitate day-to-
day transactions. This ensures that individuals and
businesses have enough liquid funds to cover
expenses without needing to sell assets or borrow
money.
• Precautionary Motive: Cash is held as a precautionary
measure to meet unexpected expenses,
emergencies, or economic uncertainties. Having a
cash buffer provides a sense of financial security.
• Speculative Motive: Cash can be held as a short-term
investment strategy, particularly when individuals or
businesses anticipate a future opportunity to invest in
assets at favorable prices.
• Flexibility Motive: Holding cash provides
flexibility to take advantage of investment
or business opportunities that may arise
suddenly. It allows for quick deployment
of funds without the need to liquidate
other assets.
• Psychological Motive: Some individuals or
businesses may feel more comfortable
holding a certain amount of cash for
psychological reasons, such as a sense
of security or peace of mind.
 Cash Management
Cash management refers to the process of
collecting, managing, and investing cash in a way
that maximizes its value and ensures there is
enough liquidity to meet short-term obligations. It
involves monitoring cash flows, forecasting cash
needs, and implementing strategies to optimize the
use of cash resources.

Cash management deals with the following;

• Cash inflows and outflows
• Cash flows within the firm
• Cash balances held by the firm at a point of time
 • Cash planning
Cash planning, also known as cash flow planning, is the process
of forecasting and managing the cash inflows and outflows of a
business or individual over a specific period, typically a month,
quarter, or year. The goal of cash planning is to ensure that there
is enough cash on hand to meet financial obligations as they come
due, such as paying bills, employees, and suppliers, while also
minimizing the amount of idle cash that is not being used
productively.

• Cash forecasting and Budgeting

Cash forecasting is the process of estimating the future cash
inflows and outflows of a business or individual over a specific
period. It helps in predicting when cash surpluses or shortages
might occur, allowing for better management of cash flow. While
Budgeting is the process of creating a plan for how money will be
allocated and spent over a specific period, typically a month,
quarter, or year. It involves estimating income and expenses and
setting financial goals.
 Managing Cash Flow
I. Methods of accelerating cash inflows
i) Prompt payment by customers
 Prompt Billing
 Cash Discount

ii) Quick conversion of payment into cash

 Postal float
 Lethargy
 Bank float
 Deposit float
I. Methods of accelerating cash inflows

iii) Decentralised collection

 Opening collecting centres at different areas.
 Helps to reduce the mailing and collection time.

iv) Lock Box System

 Introduced in USA in 1947
 A firm will hire a post box in a post office at different places.
II. Methods of slowing cash
outflows

i) Paying on the last date

 Payment is only made on the last due date.

ii) Payment through draft

 Choosing drafts over cheques for payment.

iii) Adjusting payroll funds

 Reducing the frequency of payment.
II. Methods of slowing cash outflows

iv) Centralisation of payments

 All the payments will be made by the central office.

v) Inter-bank transfer
 Transfer of amount from one account to another till reaching the desired
account.

vi) Making use of float

 Float- Difference between the balance in company’s cash book and the
balance in passbook of the bank.
INVESTMENT OF SURPLUS FUND

Investment of surplus funds refers to the practice of

investing excess cash that is not immediately needed for
day-to-day operations or other financial obligations. This
can apply to both individuals and businesses. The primary
goal of investing surplus funds is to earn a return on idle
cash and maximize the value of the funds over time.
The selection of securities or method of investment is
very important. Some of these methods are discussed
herewith;

1. Treasury Bills. The treasury bills are issued by RBI on

behalf of the Central Government. Earlier they were
issued on the basis of tenders floated regularly but now
are available on tap system, on rates announced by RBI
every week. Since there is a backing of the Central
 Responsible saving and consumption strategies

• Negotiable Certificates of Deposit (CD's). The money is deposited in a bank for a fixed period of
time and marketable receipt is issued. The receipt may be registered or bearer, the latter
facilitates transactions in the secondary market. The denominations and maturity periods are
decided as per the needs of the investor. The CD's are different from the treasury bills which
are issued on discount. The short-term surplus funds can be used to earn interest in this
method. The investment is secure unless the bank fails, the chances of which are remote.

• Unit 1964 Scheme. The Unit Trust of India's unit 1964 scheme is very popular for making short-
term investments. It is an open ended scheme which allows investors to withdraw their funds
on a continuing basis. The purchase and sale value of units is not based on net assets value
but it is determined administratively in such a manner that they rise gradually over time.
 Responsible saving and consumption strategies

• Ready Forwards. A commercial bank or some other organisation may enter into a ready forward
deal with a company willing to invest funds for a short period of time. Under this system the
bank sells and repurchases the same security (that means that company purchases and sells
securities in tum) at pre-determined prices.

• This kind of arrangement provides the company with a short-term investment option while
allowing the bank to manage its liquidity needs efficiently. Ready forwards also give companies
the opportunity to earn a return on their idle funds without tying them up for extended periods.
By engaging in these transactions, both parties can benefit from a mutually beneficial
arrangement that fulfills their respective financial goals.
• Badla Financing; Badla financing is used in stock exchange transactions when a
broker wants to carry forward his transactions from one settlement period to another.
Badla financing is done through operators in stock exchange. It is the financing of
transactions of a broker who wants to carry forward this deal to the other settlement
period. Badla transaction is financed on the security of shares purchased whose
settlement is to be carried forward.

• Inter-Corporate Deposits. These are short term deposits with other companies which
attract a good rate of return. Inter-corporate deposits are of three types :

• Call Deposits. It is a deposit which a lender can withdraw on one day's notice. In
practice it takes three days to get this money. The rate of interest at present is 14%
on these deposits.
• Three Months Deposits. These deposits are popular and are used by borrowers to tide
over short-term inadequacy of funds. The interest rate on such deposits is influenced
by bank overdraft interest rate and at present the borrowing rate is 22% per annum.
 • Bill Discounting. A bill arises out of credit sales. The buyer will accept permit such a by the seller.
In order to raise funds the seller may get the bill discounted with his bank a bill drawn on him

A company may also discount the bills as a bank does thus using its surplus funds. The bill
discounting is considered superior to inter corporate deposits. The company should ensure that the
discounted bills are (a) trade bills (resulting from should ensure that the a trade transaction) and not
accommodation bills (helping each other). (b) the bills backed by the letter of credit of a bank will be
most secure as these are guaranteed by the drawee's bank.

Investment in Marketable Securities. A firm has to maintain a reasonable balance of cash.

This is necessary because there is no perfect balancing of inflows and outflows of cash. Sometimes
more cash is received than required for quick payments. Instead of keeping the surplus cash as idle,
the firm tries to invest it in marketable securities. It will bring some income to the business. The
investment of this cash in securities needs a prudent up again and cautious approach.

While choosing among alternative securities, the firm should examine three basic features of a
security: safety, maturity and marketability. The security element deals with the absence of any type of
risk. The securities with risk may give higher returns but these should be avoided.

The maturity periods will give higher returns. The short-period securities will carry lower rates of
 • Money Market Mutual Funds (MMMF) 'Money market mutual fund' means a scheme of a
mutual fund which has been set up with the objective of investing exclusively in money
market instruments. These instruments include treasury bills, dated Government
securities with an expired maturity of upto one year, call and notice money, commercial
paper, commercial bills accepted by banks and certificates of deposits.

• Only commercial banks and public financial institutions were allowed to set up MMMFs
MMMEs are wholesale markets for low risk, high liquidity and short-term securities. The main
feature of this fund is the access to persons of small savings.
 Management of Marketable Structure Profitability measurements

The marketable securities are the short-term highly liquid investments in money market instruments that ca
easily be converted into cash. A firm has to maintain a reasonable balance of cash to keep the business
going. This is necessary because there is no balancing of inflows and outflows of cash. Sometimes more
cash is received than required for immediate payments. Instead of keeping the surplus cash as idle, the firm
should invest it in marketable securities so as to earn some income to the business. The management of
investments in marketable securities is an important function of financial management. As cash and
marketable securities are closely related, cash management should take care of the investment in
New version and
marketable securities also. However, management of marketable securities should include:
latest features
(a) Determining the amount of marketable securities to be kept.
(b) Choosing among alternative securities.
The basic objective of investment in marketable securities is to earn some return for the business Thus, the
return available is an important criterion while choosing among the alternative securities, yet investment of
surplus cash in marketable securities needs a prudent and cautious approach. The selection of securities
should be carefully made so that cash can be raised quickly on demand by sale of these securities.
The following are some of the important factors that should be considered while choosing
among alternative securities to be purchased :

• Safety; Since a firm invests cash in marketable securities to earn some return on surplus
cash but with the primary motive of converting them back into cash easily through sale of
securities as and when required, the firm will tend to invest in very safe marketable
securities. The risk level associated with a loss in value of principal amount invested is,
thus, the most important factor while choosing among the alternative securities.
• Maturity. The maturity of the marketable securities should be matched with the length of
time or which the surplus cash is expected to be available. Usually, a firm invests cash for
a period shorter than the surplus cash availability period. Although the longer maturity
period s give higher returns, the short period securities should be preferred.
• Liquidity and Marketability. Liquidity refers to the ability to convert a security into cash
immediately without any significant loss of value. Although, marketable by nature are all
marketable, yet care must be taken that the selected investment can be easily,
conveniently and speedily converted into cash.
Thank you