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Lecture 31 Cash Management

The document discusses cash management techniques including cash planning, forecasting cash flows, determining optimal cash levels, and investing surplus cash. It covers short-term cash forecasting methods like receipts and disbursements and adjusted net income. The document also discusses motives for holding cash like transactions, precautionary, and speculative motives and long-term cash forecasting.

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Devyansh Gupta
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37 views22 pages

Lecture 31 Cash Management

The document discusses cash management techniques including cash planning, forecasting cash flows, determining optimal cash levels, and investing surplus cash. It covers short-term cash forecasting methods like receipts and disbursements and adjusted net income. The document also discusses motives for holding cash like transactions, precautionary, and speculative motives and long-term cash forecasting.

Uploaded by

Devyansh Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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UNIT VI

Cash Management
Outcome

• Analyze the concept of cash management with short term


and long term techniques.
News Analysis Dec 7
Cash Management
Cash management is concerned with the managing
of:
a)cash flows into and out of the firm,

b)cash flows within the firm, and

c)cash balances held by the firm at a point of time by


financing deficit or investing surplus cash
Cash Management Cycle
Motives for Holding Cash
• The transactions motive (requires a firm to hold cash to conduct
its business in the ordinary course)

• The precautionary motive (need to hold cash to meet


contingencies in the future. It provides a cushion or buffer to
withstand some unexpected emergency)

• The speculative motive (holding of cash for investing in profit-


making opportunities as and when they arise)
MCQ
Cash management is a broad term used for collecting and
managing cash. Speculative motive of holding cash refers to:

A.Holding cash to utilize it in internal projects

B.Holding cash for any future loss the company is expecting

C.Holding cash to avail any future investment opportunity

D.Holding cash to utilize it for international projects


Answer
C. Holding cash to avail any future investment
opportunity
Facets of Cash Management
1) Cash planning (Cash inflows and outflows should be planned to
project cash surplus or deficit for each period of the planning
period).
2) Managing the cash flows (The flow of cash should be properly
managed. The cash inflows should be accelerated while, as far as
possible, the cash outflows should be decelerated).
3) Optimum cash level (The cost of excess cash and danger of cash
deficiency should be matched to determine the optimum level of
cash balances).
4) Investing surplus cash (The cost of excess cash and danger of cash
deficiency should be matched to determine the optimum level of
cash balances).
Cash Planning

Cash planning is a technique to plan and control the use of cash.

Cash Forecasting and Budgeting

•Cash budget is the most significant device to plan for and control cash
receipts and payments.

•Cash forecasts are needed to prepare cash budgets.


MCQ
All of the following are reasons for holding cash except for
the

A.Precautionary motive.

B.Transactions motive.

C.Motive to make a profit.

D.Motive to meet future needs.


Answer
C. Motive to make a profit.
Short-term Cash Forecasts

The important functions of short-term cash forecasts


• To determine operating cash requirements

• To anticipate short-term financing

• To manage investment of surplus cash.

Short-term Forecasting Methods


• The receipt and disbursements method

• The adjusted net income method.


Receipt and Disbursements Method
Virtues of the receipt and payment methods:

•It gives a complete picture of all the items of expected cash flows.

•It is a sound tool of managing daily cash operations.

Limitations:

•Its reliability is reduced because of the uncertainty of cash forecasts. For


example, collections may be delayed, or unanticipated demands may cause
large disbursements.

•It fails to highlight the significant movements in the working capital items.
Adjusted Net Income Method
Benefits of the adjusted net income method:

•It highlights the movements in the working capital items, and thus
helps to keep a control on a firm’s working capital.

•It helps in anticipating a firm’s financial requirements.

Limitation

•It fails to trace cash flows, and therefore, its utility in controlling daily
cash operations is limited.
MCQ
The most direct way to prepare a cash budget for a
manufacturing firm is to include
A.Projected sales, credit terms, and net income.
B.Projected net income, depreciation, and goodwill impairment.
C.Projected purchases, percentages of purchases paid, and net income.
D.Projected sales and purchases, percentages of collections, and terms
of payments.
Answer
D. Projected sales and purchases, percentages of collections,
and terms of payments.
Long-term Cash Forecasting
Advantages of the long-term cash forecast:
•It indicates as company’s future financial needs, especially for its working
capital requirements.

•It helps to evaluate proposed capital projects. It pinpoints the cash required to
finance these projects as well as the cash to be generated by the company to
support them.

•It helps to improve corporate planning. Long-term cash forecasts compel each
division to plan for future and to formulate projects carefully.
Investing Surplus Cash in Marketable
Securities
Selecting Investment Opportunities:

•Safety

•Maturity

•marketability
Short-term Investment Opportunities
• Treasury bills

• Commercial papers

• Certificates of deposits

• Bank deposits

• Inter-corporate deposits

• Money market mutual funds


MCQ
A typical firm doing business nationally cannot expect to
accelerate its cash inflow by
A.Establishing multiple collection centers throughout the country.
B.Employing a lockbox arrangement.
C.Initiating controls to accelerate the deposit and collection of large
checks.
D.Maintaining compensating balances rather than paying cash for bank
services.
Answer
D. Maintaining compensating balances rather than paying
cash for bank services.

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