Liquidity Planning And Manging Cash Assets

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Liquidity Planning And Manging Cash Assets

  1. 1. UNIT III Liquidity Planning and Managing Cash Assets
  2. 2. Motives for Holding Cash <ul><li>Transaction Motive </li></ul><ul><li>Precaution Motive </li></ul><ul><li>Speculative Motive </li></ul><ul><li>Image Building Motive </li></ul><ul><li>Statutory Compliance Motive </li></ul>
  3. 3. Reserves with Central Bank: Functions of Cash Reserve Ratio <ul><li>Liquidity </li></ul><ul><li>Monetary Control Tool in the Hands of the Central Bank </li></ul><ul><li>Transactions Between Banks and the Central Bank </li></ul><ul><li>Clearing House Transactions and Settlement </li></ul>
  4. 4. Float & its Management: Acceleration <ul><li>Organizing an Effective Cash Department </li></ul><ul><li>Electronic Clearance of Cheques </li></ul><ul><li>Quick Credit of Cheques </li></ul><ul><li>Instruments Payable at Par </li></ul><ul><li>Cheque Truncation </li></ul><ul><li>Using Lock Box System </li></ul><ul><li>Concentration Banking </li></ul>
  5. 5. Decelerating the Cash Flow <ul><li>Payment on the Last Date </li></ul><ul><li>Payment by Head Office </li></ul><ul><li>Cheque Kiting </li></ul><ul><li>Using Credit Cards for Payment </li></ul><ul><li>Selection of Banks </li></ul>
  6. 6. Traditional Liquidity Measures: Methods of Improving Liquidity <ul><li>Good Inventory Management </li></ul><ul><li>Rapid Stock Turnover </li></ul><ul><li>Negotiating with Suppliers </li></ul><ul><li>Better Accounts Receivable Management </li></ul><ul><li>Invoice Discounting </li></ul><ul><li>Disposal of Unnecessary Assets </li></ul><ul><li>Sale of Loss Making Divisions & Brands </li></ul><ul><li>Conversion of Debt into Shares </li></ul><ul><li>Becoming Growth Oriented Company </li></ul><ul><li>Dealer Deposits/Customer Deposit </li></ul>
  7. 7. Factors Determining the Size of Working Capital <ul><li>Nature of Business </li></ul><ul><li>Scale of Operation </li></ul><ul><li>Length of Operating Cycle: </li></ul><ul><li>Rapidity of Turnover </li></ul><ul><li>Nature of Demand </li></ul><ul><li>Level of Automation </li></ul><ul><li>Reliability of Supply </li></ul><ul><li>Credit Policy </li></ul><ul><li>Suppliers’ Credit </li></ul><ul><li>Level of Profits </li></ul><ul><li>Banking Norms </li></ul><ul><li>Taxes </li></ul><ul><li>Dividend Policy </li></ul><ul><li>Operative Efficiency </li></ul>
  8. 8. Concept of Operating Cycle <ul><li>Raw Material Conversion Period </li></ul><ul><li>Work-In-Progress Conversion Period </li></ul><ul><li>Finished Goods Conversion Period </li></ul><ul><li>Book Debt Conversion Period </li></ul>
  9. 9. Estimation of Working Capital Requirement <ul><li>Components of Working Capital Method </li></ul><ul><li>Percentage of Sales Method </li></ul><ul><li>Operating Cycle method. </li></ul>
  10. 10. Components of Working Capital Method <ul><li>A) Current Assets </li></ul><ul><li>1) Inventory </li></ul><ul><li>(+) (2) Debtors </li></ul><ul><li>(+) (3) Cash in hand & at bank </li></ul><ul><li>(+) (4) Prepaid Expenses & Accrued Income </li></ul><ul><li>Gross Working Capital--- </li></ul><ul><li>(B) Current Liabi lities </li></ul><ul><li>(–) Creditors/Bills Payable </li></ul><ul><li>(–) Expenses Outstanding </li></ul><ul><li>(Incl. lag in expenses) </li></ul><ul><li>Net Working capital </li></ul>
  11. 11. Percentage of Sales Method <ul><li>Determine the Working Capital As a Percentage of Sales from the Past Data </li></ul><ul><li>Forecast the Sales of the Immediate Future </li></ul><ul><li>Use the Percentage Benchmark to determine the Working Capital As a Percentage of Sales </li></ul>

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