WHAT IS CASH?

 Cash
 Cash is the ready currency to which all liquid assets can
be reduced.

 Near Cash
 Near cash implies marketable securities viewed the
same way as cash because of their high liquidity.

 Marketable Securities
 Marketable securities are short-term interest earning
money market instruments used by firms to obtain a
return on temporarily idle funds.
CASH MANAGEMENT

 Cash Management is concerned with the

managing of:
 Cash flows into and out of the firm,
 Cash flows within the firm, and
 Cash balances held by the firm at a point of time
by financing deficit or investing surplus cash
MOTIVES FOR HOLDING CASH

 Transaction motive
 Precautionary motive
 Speculative motive
 Compensation motive
TRANSACTION MOTIVE
 Holding of cash to meet routine cash requirements
to finance the transactions which a firm carries on
in the ordinary course of business.
PRECAUTIONARY MOTIVE
• The cash balances held in reserve for random and
unforeseen fluctuations in cash flows.
• A cushion to meet unexpected contingencies.
 Floods, strikes or failure of important customers
 Unexpected slowdown in collection of accounts receivable
 Sharp increase in cost of raw materials
 Cancellation of some order of goods
• Thus, precautionary cash balance serves to provide a
cushion to meet unexpected contingencies.
• Defensive approach
SPECULATIVE MOTIVE
 This motive of holding cash/near-cash to quickly
take advantage of opportunities typically outside
the normal course of business.
 It helps to take advantage of:
 Buying securities when interest rate is expected to
decline
 Aggressive approach
COMPENSATION MOTIVE
 This motive of holding cash/near-cash to
compensate banks for providing certain services or
loans.
 Clients are supposed to maintain a minimum
balance of cash at the bank which they cannot use
themselves.
OBJECTIVES OF CASH
MANAGEMENT
 The basic objectives of cash management are:

 To meet the cash disbursement needs (payment schedule)

 To minimize funds committed to cash balances

FACTORS DETERMINING CASH
NEEDS
 Synchronization of cash flows:
 The need for maintaining cash balances arises from the non-
synchronization of the inflows and outflows of cash: if the receipts
and payments of cash perfectly coincide or balance each other,
there would be no need for cash balances.

 Short cash balance Costs:

 Another general factor to be considered in determining cash needs
is the cost associated with a shortfall in the cash needs.
 For Example: Borrowing Cost, Penalty rates, etc.
 Excess Cash Balance Costs:
 The cost of having excessively large cash balances is known as the
excess cash balance cost. If large funds are idle, the implication is
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 cash balance cost.

 Procurement and Management:

 These are the costs associated with establishing and operating cash
management staff and activities. They are generally fixed and are
mainly accounted for by salary, handling of securities, and so on.

 Uncertainty and Cash Management:

 Finally, the impact of uncertainty on cash management strategy is
also relevant as cash flows cannot be predicted with complete
accuracy. The first requirement is a precautionary cushion to cope
with irregularities in cash flows, unexpected delays in collections and
disbursements, defaults and unexpected cash needs.
CASH BUDGET: CASH
MANAGEMENT TOOL
 Cash budget is a statement of the inflows and outflows
of cash that is used to estimate its short-term
requirements.

 A firm is well advised to hold adequate cash balances but

should avoid excessive balances. The firm has, therefore,
to assess its need for cash properly. The cash budget is
probably the most important tool in cash management.

 It is a device to help a firm to plan and control the use of

cash. It is a statement showing the estimated cash
inflows and cash outflows over the planning horizon.
 Q.1. Prepare a cash budget for months of May, June, and July, on the basis of
the following information:
 1) Income and Expenditure forecasts:
Months Credit Credit Wages Manufact Office Selling
Sales Purchases uring Expenses Expenses
Expenses
March 30,000 18,000 4,500 2,000 1,000 2,000
April 31,000 19,000 4,000 1,500 750 2,500
May 32,500 16,500 5,000 2,250 1,250 2,750
June 29,000 17,500 4,250 1,750 1,000 2,750
July 28,000 19,500 4,750 2,000 500 2,750
August 30,000 17,000 4,000 1,500 750 2,750
 2) Cash Balance on 1st May, Rs. 18,000
 3) Plant Costing Rs. 32,000 is due for delivery in July, payable 10% on delivery
and the balance after 3 months
 4) Advance Tax of Rs. 16,000 each is payable in March and June.
 5) Period of Credit allowed: i) By Suppliers- 2 Months ii) To Customers- 1
Month
 6) Lag in Payment of manufacturing expenses half month.
 7) Lag in Payment of office and selling expenses one month
 Q.2. Prepare a monthly cash budget for six months beginning from April 2018 on the basis of
the following information:
 Estimated Monthly Sales are as follows:
January 1,00,000 June 80,000

February 1,20,000 July 1,00,000

March 1,40,000 August 80,000
April 80,000 September 60,000
May 60,000 October 1,00,000

 Wages and Salaries are estimated to be payable as follows:

April 9,000 July 10,000
May 8,000 August 9,000
June 10,000 September 9,000
 Out of the total sales, 80% is on credit and 20% for cash. 75% of the credit sales are collected
within one month and balance in two months. There are no bad debt losses.
 Purchases amount to 80% of sales and are paid in the month preceding the sales.
 The firm has 10% debentures of Rs.1,20,000. Interest on this has to be paid quarterly in Jan.,
April and so on.
 The firm is to make an advance payment of tax of Rs. 5,000 in July.
 The firm had a cash balance of Rs. 20,000 on April 1st, 2018, which is the minimum desired
level of cash balance. Any surplus/deficit above/below this level is made up by temporary
investments/liquidation of temporary investments or temporary borrowings at the end of
each month (interest on these to be ignored).
 Q.3. A company is expecting to have Rs. 25000 cash in hand on
1st April 2022 and it requires you to prepare an estimate of cash
position during the three months, April to June 2022. The
following information is supplied to you.
Months Sales(Rs) Purchase(Rs) Wages(Rs) Expenses(Rs)
February 70,000 40,000 8,000 6,000
March 92,000 52,000 9,000 7,000
April 95,000 55,000 9,500 7,500
May 1,00,000 60,000 10,000 8,000
June 1,20,000 55,000 12,000 9,000
 Other information:
 1. Period of credit allowed by suppliers – two months
 2. 25% of the sale is for cash and the period of credit allowed to
customers for credit sale is one month.
 3. Delay in payment of wages and expenses – one month.
 4. Income tax of Rs. 25,000 is to be paid in June 2022.
 Q.4. A company expects to have Rs 37,500 cash in hand on 1st April 2016 and requires
you to prepare an estimate of cash position during three months, April to June 2022.
The following information is supplied to you.

Months Sales Purchases Wages Factory Office Selling

Expenses Expenses Expenses
February 75,000 45,000 9,000 7,500 6,000 4,500
March 84,000 48,000 9,750 8,250 6,000 4,500
April 90,000 52,500 10,500 9,000 6,000 5,250
May 1,20,000 60,000 13,500 11,250 6,000 6,570

June 1,35,000 60,000 14,250 14,000 7,000 7,000

 Other information:
 Period of credit allowed by suppliers is 2 months
 20% of sales are for cash and a period of credit allowed to customers for credit sales is
one month.
 Delay in payment of all expenses – 1 month
 Income tax of Rs 57,500 is due to be paid on June 15, 2022
 The company is to pay dividends to shareholders and bonus to workers of Rs 15,000 and
Rs 22,500 respectively in the month of April.
 The plant has been ordered to be received and paid in May. It will cost Rs 1,20,000.