Cash

Course Objectives

Cash in business

Cash Flow cycle

Cash budgets Genesis of Forecasting

Cash budgets Formatting

Cash budgets Short term

Cash budgets Long term

Cash Management Techniques

Liquidity and Efficient Use of Cash

Management of Receivables

Management of Inventory

Investment of Short Term Surplus

Introduction

Glen Louis is a
first generation
entrepreneur. He
has recently
started a textile
showroom.
Although the
market is very
competitive, Glen
is confident of
achieving good

Introduction

Glen has invested

nearly $1 million
in inventory and
furniture. Further,
he has obtained a
credit period of 25
days from his
suppliers.

Introduction

To attract
customers, Glen
offered
considerable
discounts. He also
started offering 35
days credit to his
customers.

Introduction

Both the discounts

and the credit
drew in a large
number of
customers. The
first month sales
was much higher
than Glen
anticipated.

Introduction

In spite of this
booming sales,
Glen had a
problem
shortage of
cash.

Introduction

Glen had
borrowed
money from a
bank to
decorate the
showroom and
to buy a few
mannequins.

Introduction

With these
commitments, Glen
had no money to
buy stocks for the
oncoming festival
season. Customers
also failed to pay
up within the
specified credit
period. Many of
these sundry
debtors soon

Introduction

As Glen was
unable to pay his
suppliers on time,
they declined to
offer him goods on
credit. Moreover,
he had to pay
heavy interest for
the loan taken
from the bank.

Introduction

Due to depleting
stocks to offer
customers, Glen
had very low
sales during the
festive days. The
business sank
into deep
losses.

Introduction
The mistakes done by Glen are:-

The credit time given was 35 days but availed

by him from supplier was only 25 days time.
The cyclical flow of cash will be affected
by this.
Glen did not forecast the requirement of
cash during the festival season. If he had
forecasted well, he could have invested the
money borrowed from bank for getting stock
instead of decorating the shop or purchasing
mannequins.
Glens business did not have cash liquidity
to meet the immediate needs.

Let us now
learn Cash
Management

Origin of cash

All business transactions involve give and take.

Earlier this give and take was settled through

commodities.

One commodity was exchanged with another.

Barter system had two difficulties presence of

two persons who could satisfy each others
needs; determination of the rate of exchange

Present day cash

With the growth in

business and trade it
became increasingly
difficult to use
commodities as the
medium of exchange.
Search started to
develop a new medium,
devoid of the
experienced pitfalls.
Thus started the era of
paper money.

Management of cash

In a business virtually all activities have an

impact on finance and cash. Cash to business
is like blood to a living body. A business cannot
operate without its life-blood cash, and without
cash management, there may remain no cash

Features of long term cash flow cycle

The basic features of long term cash flow are:-

The quantum
of cash flow
involved is
much bigger
than that of
short term
cash flow
The cycle
orbital
time is much
longer than
that of short
term cash
flow

It covers
normally fixed
assets and long
term liabilities

It is less volatile

Characteristics of cash budget

The following are the characteristics of cash
budget:Statement contains forecasted figures

Forecasts are made for a predetermined

period known as budget period

It is designed and presented in an

orderly format

Scope of cash management

techniques

These cash management techniques cover both payables

and receivables and have significant impact on the cash
flow cycle.

Let us now look at a diagram in the next slide to

understand the cash flow movement and the steps
involved in cash management techniques.

Phases in cash management

The first phase
techniques

relates to
payables and
have four steps
A1 to A4. The
activity starts
with the placing
of order for the
materials which
are received after
10 days
(A1 - A2).
Credit
period
of
10 days has been
allowed by the
supplier (A2
A3), after the
expiry of which
cheque is
despatched.

Parties to cash management

techniques

Bank, the second party, plays a

commanding role in contemporary cash
management strategies. Many steps
involved in these techniques are under
the control of the banks.

Types of Float

1
Collection
float

Collection float
When the customer deposits a
cheque, he credits his books of
accounts, but the bank credit his
account only on realization. These
cause differences in the balances
shown in the books of the business
and the bank accounts. These
differences of balances are known as
Collection float.

Concentration banking
The important cash collection techniques are as
follows:-

1
2
3
4
5
6
7

Let us now look at each in detail.

Credit policy and cash flow

It increases sales and profit but requires

relatively more cash to be tied up with the
customers for a longer period.
A liberal or loose credit policy is
expansionary in nature.
The credit policy followed by a business is
crucial to its cash flow.

Credit investigation

Extension of credit is an important and

sensitive issue. Credit cannot be accorded in
a blanket manner. It has to be selective.
Whom to give and how much to give credit, is
based on effective investigation prior to
extending the term.

Real Life Example

A study made by the

business shows that in
case it extends the
credit period to 45
days, it is likely to have
a increase 20% in the
sales. It is also
presumed that the
fixed costs remain
unchanged.

Stock and cash

1
2
3

Stock like cash, too, move in a circular

fashion. The iterative process of stock is
akin to circular track of cash flow.

The motive of holding stock is similar to

those of holding cash. Stock is held for
transactions motive to cater to the
demands of day-to-day production
schedule.

Management of stock aims at counter

balancing two conflicting objectives. It
tries to keep the minimum balance of
inventory so as to reduce the investment
costs and it attends to ensure that
production does not suffer due to lack of

Economic Order Quantity (EOQ)

Various inventory management techniques are:1

ABC analysis

Order
22 Economic
Economic
Order
Quantity
Quantity

Reorder point

Safety stock

Just-In-Time

Let us look at each in detail.

EOQ determines the

optimum order
quantity where the
total cost - both the
ordering costs and
carrying costs are
minimal.
There are two
approaches, they are
trial and error
approach and

Cash movement statement

Cash budgets are

formulated on a monthly
basis. This places a
limitation on this budgets
capability to tackle intramonth fluctuations. Cash
Movement Statement helps
to overcome this and
facilitate the ways for
profitable short-term
investment. Data here is
reflected in a detailed
manner. Daily cash
movement can also be
projected if heavy
transaction are occurring

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