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    cash management at bank of India cash management at bank of India Document Transcript

    • A MINOR PROJECT REPORT ON “Title of the project” SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR IN BUSINESS ADMINISTRATION UNDER THE GUIDANCE OF: Ms./ Mr./ Dr./ Prof. ShaliniRathore__________ Assistant Professor/ Associate Professor/ Professor, RDIAS SUBMITTED BY: Name of the Student Enrollment No.02815901711____ BBA, Semester ___2___ Batch 2011__ - 2014__ RUKMINI DEVI INSTITUTE OF ADVANCED STUDIES An ISO 9001:2008 Certified Institute (Approved by AICTE, HRD Ministry, Govt. of India) Affiliated to GuruGobindSinghIndraprasthaUniversity, Delhi 2A & 2B, MadhubanChowk, Outer Ring Road, Phase-1, Delhi-110085
    • Table of Contents Student declaration i Certificate of the guide ii Acknowledgment iii Executive summary iv List of table of content v List of graphs vi List of charts vii List of Abbreviations viii Page no. Chapter I Plan of the Study 1.1 Introduction to topic ………………………………………………………………. 1.2 Objective of the study……………………………………………………………... 1.3 Literature review And/or Theoretical Background…………………… Chapter II Company Profile / Industry profile or details……………………………………………. Chapter III Research Methodology 3.1 Purpose of the study…………………………………………………..………...… 3.2 Research Objectives of the study………………………………………………….. 3.3 Research Methodology of the study…………………………………………. 3. 3.1 Research Design……………………………… …………………………...... 3.3.2 Data Collection Techniques …………………………………
    • 3.3.3 Sample design………………………………………………………………... 3.3.3.1 Population…………………………………………………………….. 3.3.3.2 Sample size…………………………………………………………… 3.3.3.3 Sampling method……………………………………………………... 3.3.4 Method of data collection…………………………………………………….. 3.3.4.1 Instrument for data collection………………………………………… 3.3.4.2Drafting of a questionnaire…………………………………. 3.3.5 Limitations…………………………………………………………………… Chapter IV Data Analysis and Interpretation (This chapter will cover the analysis on the basis of questionnaire or whatever is applicable. The analysis will be done and shown in a tabulated form and graphical representation with pie-charts, bar-diagrams, graphs, etc will also be done. Below the graphs, diagrams and charts, inferences have to be made. ) Chapter V Findings & Conclusions Chapter VI Suggestion/ Recommendation BIBLIOGRAPHY
    • STUDENT „s DECLARATION This is to certify that I have completed the Project titled “----------” under the guidance of “-----------” in the partial fulfillment of the requirement for the award of the degree of “Bachelor in Business Administration” from “Rukmini Devi Institute of Advanced Studies, New Delhi.” This is an original work and I have not submitted it earlier elsewhere. Name of the Student Enrollment No. Class & Section
    • CERTIFICATE OF GUIDE This is to certify that the project titled “---------------” is an academic work done by “-------------” submitted in the partial fulfillment of the requirement for the award of the degree of “Bachelors in Business Administration” from “Rukmini Devi Institute of Advanced Studies, New Delhi.” under my guidance and direction. To the best of my knowledge and belief the data and information presented by him / her in the project has not been submitted earlier elsewhere. Name of the Faculty Designation of the Faculty RDIAS
    • ACKNOWLEDGEMENT I offer my sincere thanks and humble regards to Rukmini Devi Institute Of Advanced Studies, GGSIP University, New Delhi for imparting us very valuable professional training in MBA. I pay my gratitude and sincere regards to “Faculty Name”, my project Guide for giving me the cream of his knowledge. I am thankful to him as he has been a constant source of advice, motivation and inspiration. I am also thankful to him for giving his suggestions and encouragement throughout the project work. I take the opportunity to express my gratitude and thanks to our computer Lab staff and library staff for providing me opportunity to utilize their resources for the completion of the project. I am also thankful to my family and friends for constantly motivating me to complete the project and providing me an environment which enhanced my knowledge. Name of the Student Enrollment No. Class & Section
    • Chapter1 Introduction
    • Cash is the important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor les s. Cash shortage will disrupt the firm‟s manufacturing operations while excessive cash will simply remain idle, without contributing anything towards the firm‟s profitability. Thus, a major function of the financial manager is to maintain a sound cash position. Cash is the money which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm, and balances in its bank accounts. Sometimes near-cash items, such as marketable securities or bank time‟s deposits, are also included in cash. The basic characteristic of near-cash assets is that they can readily be converted into cash. Generally, when a firm has excess cash, it invests it in marketable securities. This kind of investment contributes some profit to the firm MOTIVES FOR HOLDING CASH The firm‟s need to hold cash may be attributed to the following the motives:  The transactions motive  The precautionary motive  The speculative motive Transaction Motive The transaction motive requires a firm to hold cash to conducts its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends etc. The need to hold cash would not arise if there were perfect synchronization between cash receipts and cash payments, i.e., enough cash is received w h e n t h e p a y m e n t h a s t o b e m a d e . B u t c a s h r e c e i p t s a n d p a y m e n t s a r e n o t p e r f e c t l y synchronized. For those periods, when cash payments exceed cash receipts, the firm should maintain some cash balance to be able to make required payments. For transactions purpose, a firm may invest its cash in marketable
    • securities. Usually, the firm will purchase securities whose maturity corresponds with some anticipated payments, such as dividends, or taxes in the future. Notice that the transactions motive mainly refers to holding cash to meet anticipated payments whose timing is not perfectly matched with cash receipts. Precautionary Motive The precautionary motive is the need to hold cash to meet contingencies in the future. It provides a cushion or buffer to withstand some unexpected emergency. The precautionary amount of cash depends upon the predictability of cash flows. If cash flow can be predicted with accuracy, less cash will be maintained for an emergency. The amount of precautionary cash is also influenced by the firm‟s ability to borrow at short notice when the need arises. Stronger the ability of the firm to borrow at short notice, less the need for precautionary balance. The precautionary balance may be kept in cash and marketable securities. Marketable securities play an important role here. The amount of cash set aside for precautionary reasons is not expected to earn anything; therefore, the firm attempt to earn some profit on it. Such funds should be invested in high-liquid and low-risk marketable securities. Precautionary balance should, thus, held more in marketable securities and relatively less in cash. Speculative Motive The speculative motive r e l a t e s t o t h e h o l d i n g o f c a s h f o r i n v e s t i n g i n p r o f i t - m a k i n g opportunities as and when they arise. The opportunity to make profit may arise when the security prices change. The firm will hold cash, when it is expected that the interest rates will rise and security prices will fall. Securities can be purchased when the interest rate is expected to fall; the firm will benefit by the subsequent fall in interest rates and increase in security prices. The firm may also speculate on materials‟ prices. If it is expected that materials‟ prices will fall, the firm can postpone materials‟ purchasing and make purchases in future when price actually falls. Some firms may hold cash for speculative purposes. By and large, business firms do not engage in speculations. Thus, the primary motives to hold cash and marketable securities are: the transactions and the precautionary motives.
    • CASH PLANNING Cash flows are inseparable parts of the business operations of firms. A firm needs cash to invest in inventory, receivable and fixed assets and to make payment for operating expenses in order to maintain growth in sales and earnings. It is possible that firm may be taking adequate profits, but may suffer from the shortage of cash as its growing needs may be consuming cash very fast. The „cash poor‟ position of the firm can be corrected if its cash needs are planned in advance. At times, a firm can have excess cash with it if its cash inflows exceed cash outflows. Such excess cash may remain idle. Again, such excess cash flows can be anticipated and properly invested if cash planning is resorted to. Cash planning is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash balances (which lowers firm‟s profitability) and cash deficits (which can cause the firm‟s failure). Cash planning protects the financial condition of the firm by developing a projected cashstate ment from a forecast of expected cash inflows and outflows for a given period. The forecasts may be based on the present operations or the anticipated future operations. Cash plans are very crucial in developing the operating plans of the firm. Cash planning can be done on daily, weekly or monthly basis. The period and frequency of cash planning generally depends upon the size of the firm and philosophy of management. Large firms prepare daily and weekly forecasts. Medium-size firms usually prepare weekly and monthly forecasts. Small firms may not prepare formal cash forecasts because of the non-availability of information and small-scale operations. But, if the small firm prepares cash projections, it is done on monthly basis. As a firm grows and business operations become complex, cash planning becomes inevitable for its continuing success. Cash Forecasting and Budgeting Cash budget is the most significant device to plan for and control cash receipts and payments. A cash budget is a summary statement of the firm‟s expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. This information helps the financial manager to determine the future cash needs of the firm, plan for the financing of these needs and exercise control over the cash and liquidity of the firm. The time horizon of the cash budget may differ from firm to firm. A firm whose business is affected by seasonal variations
    • may prepare monthly cash budgets. Daily or weekly cash budgets should be prepared for determining cash requirements if cash flows show extreme fluctuations. Cash budgets for a longer intervals may be prepared if cash flows are relatively stable. Cash forecasts are needed to prepare cash budgets. There are two types of cash forecasting: 1 Short-term Cash Forecasting 2 Long-term Cash Forecasting Short-term Cash Forecasts Generally, forecasts covering periods of one year or less are considered short-term cash forecasting.It is comparatively easy to make short-term cash forecasts. The important functions of carefully developed short-term cash forecasts are: • To determine operating cash requirements • To anticipate short-term financing • To manage investment of surplus cash. Short-run cash forecasts serve many other purposes. For example, multi-divisional firms use them as a tool to coordinate the flow of funds between their various divisions as well as to make financing arrangements for these operations. These forecasts may also be useful in determining the margins or minimum balances to be maintained with banks. Still other uses of these forecasts are: • Planning reductions of short and long-term debt • Scheduling payments in connection with capital expenditures programmes • Planning forward purchases of inventories • Checking accuracy of long-range cash forecasts • Taking advantage of cash discounts offered by suppliers • Guiding credit policies. Methods of Short-term Cash Forecasting: Two most commonly used methods of short-term cash forecasting are: • The receipt and disbursements method • The adjusted net income method. The receipts and disbursements method is generally employed to forecast for limited periods, such as a week or a month. The adjusted net income method, on the other hand, is preferred for longer durations ranging between few months to a year. Both methods have their pros and
    • cons. The cash flows can be compared with budgeted income and expenses items if the receipts anddisbursements approach is followed. On the other hand, the adjusted income approach is appropriate in showing a company‟s working capital and future financing needs. Long-term Cash Forecasting Long-term cash forecasts are prepared to give an idea of the company‟s financial requirements in the distant future. They are not as detailed as the short-term forecasts are. Once a company has developed long-term cash forecast, it can be used to evaluate the impact of, say, new product developments or plant acquisitions on the firm‟s financial condition three, five, or more years in the future. The major uses of the long-term cash forecasts are: •It indicates as company‟s future financial needs, especially for its working capitalrequireme nts. • 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. Long-term cash forecasts may be made for two, three or five years. As with the short-term forecasts, company‟s practices may differ on the duration of long-term forecasts to suit their particular needs. The short-term forecasting methods, i.e., the receipts and disbursements method and the adjusted net income method, can also be used in long-term cash forecasting. Long-term cash forecasting reflects the impact of growth, expansion or acquisitions; it also indicates financing problems arising from these developments. CASH MANAGEMENT Cash management is a broad term that refers to the collection, concentration, and disbursement of cash. It encompasses a company‟s level of liquidity, its management of cash balance, and its short-term investment strategies. In some ways, managing cash flow is the most important job of business managers.For some time now, technology has been the key driving force behind every successful bank. In such an environment, the ability to recognize and capture market share depends entirely on the bank‟s competence to evolve technically and offer the customer a seamless process flow. The objective of a cash management system
    • is to improve revenue, maximize profits, minimize costs and establish efficient management systems to assist and accelerate growth. Cash Management in India The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological infrastructure. Electronic banking, cheque imaging, enterprise resource planning (ERP), real time gross settlement (RTGS) is just few of the new initiatives. The evolution of payment systems such as RTGS has posed some tough challenges for cash management providers. It is important that banks now look towards a shift to fees from float although all those cash management providers who have factored in float money in their product pricing might take a hit. But of course there are opportunities also attached like collection and disbursal of payments on-line across the banks. There are a number of regulatory and policy changes that have facilitated an efficient cash management system (CMS). Fox example, the Enactment of Information Technology Act gives legal recognition to electronic records and digital signatures. The establishment of the Clearing Corporation of India in order to establish a safe institutional structure for the clearing and settlement of trades in foreign exchange (FX), money and debt markets has indeed helped the development of financial infrastructure in terms of clearing and settlement. Other innovations that have supported in streamlining the process are: 1. Introduction of the Centralized Funds Management Service to facilitate better management of fund flows. 2. Structured Financial Messaging Solution, a communication protocol for intra-bank and interbank messages. Today, treasurers need to ensure that they are equipped to make the best decisions. For this, it is imperative that the information they require to monitor risk and exposure is accurate, reliable and fast. A strong cash management solution can give corporates a business advantage and it is very important in executing the financial strategy of a company. The
    • requirement of an efficient cash management solution in India is to execute payments, collect receivables and managing liquidity. FACTSOFCASHMANAGEMENT Cashmanagement is concerned with the managing of: (i) cash flows into and out of the firm,(ii) cash flows within the firm, and (iii) cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control. Cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a firm holds. It is significant because it issued to pay the firm‟s obligations. However, cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore, the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way. Cash management is also important becau se it is difficult to predict cash flows accurately, particularly the inflows, and there is no perfect coincidence between the inflows and outflows of cash. During some periods, cash outflows will exceed cash inflows, because payment of taxes, dividends, or seasonal inventory builds up. At other times, cash inflow will be more than cash payments because there may be large cash sales and debtors may be realized in large sums promptly. Further, cash management is significant because cash constitutes the smallest portion of the total current assets, yet management‟s considerable time is devoted in managing it. In recent past, a number of innovations have been done in cash management techniques. An obvious aim of the firm these days is to manage its cash affairs in such a way as to keep cash balance at a minimum level and to invest the surplus cash in profitable investment opportunities. In order to resolve the uncertainty about cash flow prediction and lack of synchronization between cash receipts and payments, the firm should develop
    • appropriate strategies for cash management. The firm should evolve strategies regarding the following four facets of cash management: OptimumUtilizationofOperatingCash Implementation of a sound cash management programme is based on rapid generation, efficient utilization and effective conversation of its cash resources. Cash flow is a circle. The quantum and speed of the flow can be regulated through prudent financial planning facilitating the running of business with the minimum cash balance. This can be achieved by making a proper analysis of operative cash flow cycle along with efficient management of working capital. CashForecasting Cash forecasting is backbone of cash planning. It forewarns a business regarding expected cash problems, which it may encounter, thus assisting it to regulate further cash flow movements. Lack of cash planning results in spasmodic cash flows. CashManagementTechniques: Every business is interested in accelerating its cash collections and decelerating cash payments so as to exploit its scarce cash resources to the maximum. There are techniques in the cash management which a business to achieve this objective. LiquidityAnalysis: The importance of liquidity in a business cannot be over emphasized. If one does the autopsies of the businesses that failed, he would find that the major reason for the failure was their inability to remain liquid. Liquidity has an intimate relationship with efficient utilization of cash. It helps in the attainment of optimum level of liquidity. ProfitableDeploymentofSurplusFunds Due to non-synchronization of ash inflows and cash outflows the surplus cash may arise at certain points of time. If this cash surplus is deployed judiciously cash management will itself b e c o m e a p r o f i t c e n t e r . H o w e v e r , m u c h d e p e n d s o n t h e q u a n t u m o f c a s h s u r p l u s a n d acceptability of market for its short-term investments. EconomicalBorrowings
    • Another product of non-synchronization of cash inflows and cash outflows is emergence of deficits at various points of time. A business has to raise funds to the extent and for the period of deficits. Rising of funds at minimum cost is one of the important facets of cash management. The ideal cash management system will depend on the firm‟s products, organization structure, competition, culture and options available. The task is complex, and decisions taken can affect important areas of the firm. For example, to improve collections if the credit period is reduced, it may affect sales. However, in certain cases, even without fundamental changes, it is possible to significantly reduce cost of cash management system by choosing a right bank and controlling the collections properly. Baumol model of cash management Baumol model of cash management helps in determining a firm's optimum cash balance under certainty. It is extensively used and highly useful for the purpose of cash management. As per the model, cash and inventory management problems are one and the same. William J. Baumol developed a model (The transactions Demand for Cash: An Inventory Theoretic Approach) which is usually used in Inventory management & cash management.Baumol model of cash management trades off between opportunity cost or carrying cost or holding cost & the transaction cost. As such firm attempts to minimize the sum of the holding cash & the cost of converting marketable securities to cash. There are certain assumptions that are made in the model. They are as follows: 1. The firm is able to forecast its cash requirements with certainty and receive a specific amount at regular intervals. 2. The firm‟s cash payments occur uniformly over a period of time i.e. a steady rate of cash outflows. 3. The opportunity cost of holding cash is known and does not change over time. Cash holdings incur an opportunity cost in the form of opportunity foregone.
    • 4. The firm will incur the same transaction cost whenever it converts securities to cash. Each transaction incurs a fixed and variable cost. For example, let us assume that the firm sells securities and starts with a cash balance of C rupees. When the firm spends cash, its cash balance starts decreasing and reaches zero. The firm again gets back its money by selling marketable securities. As the cash balance decreases gradually, the average cash balance will be: C/2. This can be shown in following figure: The firm incurs a cost known as holding cost for maintaining the cash balance. It is known as opportunity cost, the return inevitable on the marketable securities. If the opportunity cost is k, then the firm‟s holding cost for maintaining an average cash balance is as follows: Holding cost = k (C/2) Whenever the firm converts its marketable securities to cash, it incurs a cost known as transaction cost. Total number of transactions in a particular year will be total funds required (T), divided by the cash balance (C) i.e. T/C. The assumption here is that the cost per transaction is constant. If the cost per transaction is c, then the total transaction cost will be: Transaction cost = c (T/C)
    • The total annual cost of the demand for cash will be: Total cost = k (C/2) + c (T/C) Optimum level of cash balance As the demand for cash, „C‟ increases, the holding cost will also increase and the transaction cost will reduce because of a decline in the number of transactions. Hence, it can be said that there is a relationship between the holding cost and the transaction cost. The optimum cash balance, C* is obtained when the total cost is minimum. Optimum cash balance (C*) = Ö2cT/k Where, C* is the optimum cash balance. T is the total cash needed during the year. k is the opportunity cost of holding cash balances. With the increase in the cost per transaction and total funds required, the optimum cash balance will increase. However, with an increase in the opportunity cost, it will decrease.
    • Limitations of the Baumol model: 1. It does not allow cash flows to fluctuate. 2. Overdraft is not considered. 3. There are uncertainties in the pattern of future cash flows. Miller-Orr Model for Cash Management Most firms maintain a minimum amount of cash on hand to meet daily obligations or as a requirement from the firm's bank. A maximum amount may also be specified to reflect the tradeoff between the transactions cost of investing in liquid assets (e.g. Money Market Funds) and the cost of lost interest if the cash is not invested. The Miller-Orr model computes the spread between the minimum and maximum cash balance limits as. Spread= 3(0.75 x transaction cost x variance of daily cash flows / daily interest rate) ^(1/3) (wherea^b is used to denote "a to the power b"). The maximum cash balance is the spread plus the minimum cash balance, which is assumed to be known. The "return point" is defined as the minimum cash balance plus spread/3. Whenever the cash balance hits (or exceeds) the maximum, the firm should invest the difference between the amount available and the return point; if the minimum is reached, sufficient securities should be sold to bring it up to the return point.
    • Graph Explanation: i. When cash balance reaches point „A', the upper limit, company will invest the surplus to bring down the cash balance to return point. ii. When cash balance touches down point `B', the lower limit, the company would liquidate some of its securities to increase the balance back to return point. iii. Upper and lower limits are determined as explained above. iv. These limits depend upon variance of cash flow, transaction cost and interest rate. v. If variability of cash flow is high and transaction cost is high too, then the limits will be wide apart, otherwise narrow would suffice. vi. If interest rates are high then the narrow limits would be set vii. To keep interest cost as low as possible, the return point is set 1/3 of the spread between the lower and upper limit. PurposeofCashManagement Cash management is the stewardship or proper use of an entity‟s cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization. The function of cash management at the U.S. Treasury is threefold: 1. To eliminate idle cash balances. Every dollar held as cash rather than used to augment revenues or decrease expenditures represents a lost opportunity. Funds that are not needed to cover expected transactions can be used to buy back outstanding debt (and cease a flow of funds out of the Treasury for interest payments) or can be invested to generate a flow of funds into the Treasury‟s account. Minimizing idle cash balances requires accurate information about expected receipts and likely disbursements. 2. To deposit collections timely. Having funds in-hand is better than having accounts receivable. The cash is easier to convert immediately into value or goods. A receivable, an item to be converted in the future, often is subject to a transaction delay or a depreciation of value. Once funds are
    • due to the Government, they should be converted to cash-in-hand immediately and deposited in the Treasury's account as soon as possible. 3. To properly time disbursements. Some payments must be made on a specified or legal date, such as Social Security payments. For such payments, there is no cash management decision. For other payments, such as vendor payments, discretion in timing is possible. Government vendors face the same cash management needs as the Government. They want to accelerate collections. One way vendors can do this is to offer discount terms for timely payment for goods sold. The importance of cash management 1. Cash is crucial for every business. Every company has to have cash on hand or at least access to cash in order to be able to pay for the goods and services it uses, and consequently, to stay in business. By ensuring the company with the necessary funds for supporting its everyday operations, cash management becomes a vital function for the company. Cash flows have an impact on the company‟s liquidity. Liquidity is the ability of the company to pay its obligations when they come due. It is comprised of: cash on hand, assets readily convertible into cash, as well as ready access to cash from external sources, such as bank loans (Coyle, 2000, p. 3). If cash flows and liquid funds are not effectively and successfully planned and managed, a company may not be able to pay its suppliers and employees in a timely manner. It may be profitable according to its financial statements, but in fact, this company will not be able to pay its obligations when they come due. Moreover, lack of liquidity will incur increased costs in the form of interest charges on loans, late payment penalties and losing supplier discounts for paying obligations on time. Proper cash management can avoid the costs of additional funding and can provide the opportunity for more favorable terms of payment (Dropkin& Hayden, 2001, p. 3). In the worst case scenario, if the liquidity shortage continues for the longer term, the company might face no access to external resources, ending into insolvency (Coyle, 2000, p. 3). Therefore, once again, it follows that cash management has a critical importance for the life of every company.5 another benefit of cash management to the company is that it makes the company financially flexible. Ready access to cash enables the company to undertake
    • expenditure decisions if and whenever it wishes, without the trouble and constraint of finding new financial support (Coyle, 2000, p. 3). The ultimate goal of every company is maximizing shareholder value, i.e. maximizing the net present value of future cash flows. Cash management contributes to attaining that goal as well. If a firm keeps high levels of cash, it increases its net working capital and the costs of holding cash, both of which decrease the value of the firm. Cash management influences the value of the firm by limiting cash levels so that an optimal balance between the costs of holding cash and the costs of inadequate cash is achieved. “In addition, cash management influences firm value, because its cash investment levels entail the rise of alternative costs, which are affected by net working capital levels. Both the rise and fall of net working capital levels require the balancing of future free cash flows, and in turn, result in firm valuation changes” (Michalski, 2006, p. 180).
    • OBJECTIVEOFTHEPROJECT 1. To understand how cash is being managed by BANK OF INDIA 2. To gain knowledge about the system prevailing in Banks. 3. To suggest methods for improving cash management in Banks. 4. To analyze in detail, the way Banks currently manage their finances and make decisions to achieve tradeoff between profitability and liquidity
    • LITERATURE REVIEW Davidson (1992) defined cash management as a term which refers to the collection concentration and disbursement of cash. It encompasses a company‟s level of liquidity, management of cash balance and short term strategies. Weak cash flow makes it difficult to hire and retain good employees (Beranek, 2000). Ross (2000) says that, it is only natural that major business expenses are incurred in the production of goods or the provision of services. In most cases, a business incurs such expenses before the corresponding payment is received from customers. In addition, employee salaries and other expenses drain considerable funds from most business. These make effective cash management an essential part of the business financial planning. Vanhorne (2001) says that, a common cash management tool found in companies is a cash budget. Most companies prepare budgets on the departmental level and roll these individual budgets into one master budget. Creating several smaller budgets, can help managers determine which operations use more cash and struggle to stay on the projected budget amounts. This discovery gives managers an idea of when improvements needed to correct the company‟s cash flow problems. Therefore, cash budgeting is another aid to an effective cash management. Pindado (2004) also defines cash management as part of working capital that makes up the optimal level needed by a company. Bort (2004) noted that, cash management is of importance for both new and growing businesses. Companies may suffer from cash flow problems because of lack of margin of safety in case of anticipated expenses such that they experience problems in finding the funds for innovation or expansion According to Bort (2004) cash is the lifeblood of the business. The key to successful cash management lies in tabulating realistic projections, monitoring collections and disbursements, establishing effective billing and collection measures, and adhering to budgetary parameters because cash flow can be a problem to the business organization. According to Moffet (2004), postponing capital expenditure is one method that can ease cash shortage hence, suggests efficient cash management. Kirkman (2006) states that, some capital expenditures are more important and urgent than others hence, it might be imprudent to postpone expenditure on fixed assets which are needed for the development and growth of business. On the other hand, some expenses are routine and might be postponable without serious consequences. When a lot of cash is used to pay for fixed assets, the company may come up against a cash crunch that prevents it from paying suppliers, buying materials and
    • even paying salaries. It‟s a good idea, to maintain a level of working capital that allows making through those crunch times and continuing to operate the business.
    • Chapter2 Company Profile
    • HISTORY OF BANK OF INDIA Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalized banks. The Bank has 3752 branches in India spread over all states/ union territories including specialized branches. These branches are controlled through 50 Zonal Offices. There are 29
    • branches/ offices (including five representative offices) and 3 Subsidiaries and 1 joint venture abroad. The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. . Total number of shareholders as on 30/09/2009 is 2, 15,790. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 29 branches (including five representative offices) at key banking and financial centers viz. London, New York, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 17.82% of Bank's total business. The Bank has a strong position in financing foreign trade. Over 270 branches provide export credit. The expertise in this area has enabled the Bank to achieve a leading position in providing export credit in certain areas like diamond export. The Bank has identified specialized target groups to develop core advantage for future growth. The Bank has specialized branches comprising of Corporate Banking Branches to undertake very large credit business, Overseas Branches specializing in Foreign Exchange Business, NRI Branches which specially cater to the requirements of Non-Resident Indians, Capital Market Branches which undertake all activities relating to capital market such as collection of applications, processing of refund orders, Merchant Banking etc. Commercial &Personal Banking Branches cater to the requirements of high net worth customers. Apart from this, the
    • Bank also has specialized Branches for Asset Recovery, Small Scale Industries, Hi-tech Agriculture Finance, Lease Finance and Treasury. To effectively meet the ever-growing challenges and competition, the Bank has made a good headway in bringing about technological up gradation. MIS and critical functions of controlling offices have been computerized. At present, the operations at about 2618 branches are totally computerized. 26 branches operate in partially computerized mode besides these 1019 branches and 31 extension counters are migrated to Core Banking Solution. New facilities such as, Telebanking, ATM & Signature Retrieval Systems have been introduced in a progressing manner to add value to services. Telebanking facilities with Fax on Demand facility, Remote Access Terminals for Corporate Customers are now available at many branches. The Bank has installed ATMs in Mumbai and other centers in the country. The Bank is a member of the RBI's VSAT Network and has installed 39 VSATs linking strategic branches/offices. The Bank is making a paradigm shift from branch automation to bank automation and is in the process of implementing a Multi-Branch Banking Project that facilitates City-wise Connectivity of Computerized Branches. The Bank is in the process of installing BOINET, a Wide Area Network for providing an inter- and intra-city connectivity, as a part of enhancing its decision support system. The Bank's corporate personality and philosophy are fully reflected in the emblem, which is a five-pronged Star -- a harmonious blend of traditional and the functional. The elongated prong pointingupwards conveys the Bank's drive to achieve ascending goals. The Star is a beacon and guide to those in need of direction.
    • BANK‟S NEW INITIATIVES 1. ACQUISITION The Bank has finalized acquiring 76% stake in P T Bank SwadesiTbk, a listed Bank in Indonesia and the formalities to take over the management of the said Bank is in final stages 2. JOINTVENTURE Bank entered into an arrangement with Dai-Ichi Mutual Life Insurance Company, second largest Japanese company in the field of Life Insurance (sixth largest in the world) and Union Bank of India for setting up a Joint Venture Life Insurance Company with capital stake of 51%, 26%, and 23% respectively. Formalities for incorporation of JV Company are in advanced stage. 3. BRANCHEXPANSION Bank opened 63 new branches and converted 41 Extension counters to full-fledged branches. Total number of domestic outlets is 2845. 4. INTERNATIONALOPERATIONS a) With the opening of a branch at Antwerp (Belgium), number of overseas offices stands at25 spread in 13 countries. Shenzen Representative Office in China was upgraded as a Branch in March 2007. A new Representative Office was opened in Beijing (China). b) Bank has taken over management of Almana Exchange House in Doha Qatar. c) Arrangements with Bank Azizi, Kabul in Afghanistan made for money remittance to India. d) Bank‟s International Operations contribute 20% of Bank‟s total Business. e) Bank is holding approval of Reserve Bank of India for setting up: Subsidiaries in Tanzania and Canada, Branches in DIFC (Dubai) and Dhaka (Bangladesh), and Representative Offices in Dubai, Johannesburg (South Africa) and Doha (Qatar).
    • BACKOFFICESERVICES OFBANK Delegation of powers Bank will ensure that authorities at various levels will be empowered with adequate powersto take prompt decisions with regard to sanctioning of loans and advances, issuance of guarantees, settlement of claims of deceased depositors, issuance of duplicate demand drafts,deposit receipts, other claims and administrative matters concerning customer service. Reorganization In order to facilitate quick decision-making and to suit the changing requirements, the organizational structure has been revamped. More specialized branches like Personal Banking Branches, Corporate Branches, Small Scale Industries Branches, Hi-tech Agricultural Finance Branches, Housing Finance Branches, Capital Market Branches, Overseas and NRI Branches have been opened at important centers. in all business operations at all stages. Customers will be educated about the various products and facilities available. A uniform strategy will always be adopted to eliminate any possibility of discrimination on caste, creed and religion or economic status of the clients. Secrecy norms will be simultaneously observed to protect the interests of our customers. Surveys by outside agencies All steps will be taken by bank to improve Customer Service and enhance customer satisfaction. Towards this end, bank services will be got evaluated through outside reputed marketing agencies with a view to assessing the quality of services extended at the branches and to ensure that bank customer service match the expectations of bank‟s variousclientele. Cash Management Services generally offered by banks The following is a list of services generally offered by banks and utilized by larger businesses and corporations: 1. Account Reconcilement Services: Balancing a checkbook can be a difficult process for a v e r y l a r g e b u s i n e s s , s i n c e i t i s s u e s s o m a n y c h e c k s i t c a n t a k e a l o t o f h u m a n m o n i t o r i n g t o u n d e r s t a n d w h i c h c h e c k s h a v e n o t c l e a r e d a n d t h e r e f o r e w h a t t h e company‟s true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a
    • daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known aspositive pay 2. Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site. 3. Armored Car Services: Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the cash. 4. Automated Clearing House: services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy groups; because under this system banks assume that the company initiating the debit is correct until proven otherwise. 5. Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web -based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection).Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc.
    • 6. CashConcentrationServices: Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing Housetoelectronically "pull" the money from these banks into a single interest-bearing bank account. 7. Lockbox services: Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, open their mail, and deposit any checks found. This is referred to as a "lockbox" service. 8. Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore wil l only paychecks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud. 9. Sweep Accounts: are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds. 10. Zero Balance Accounting: can be thought of as somewhat of hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. To help correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main
    • bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting their systems so that companies can tell which store made a particular deposit, even if these deposits are all deposited into a single account. Therefore, zero balance accounting is being used less frequently. 11. Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call. 12.Controlled Disbursement: T h i s i s a n o t h e r p r o d u c t o f f e r e d b y b a n k s u n d e r C a s h Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds req uirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time. In the past, other services have been offered the usefulness of which has diminished with the rise of the Internet. For example, companies could have daily faxes of their most recent transactions or be sendof images of their cashed checks.
    • CORPORATE SOCIAL RESPONSIBILITY FOLLOWED BY BANK: 1. Bank as part of its centenary celebrations promoted a Trust, „ABHAY‟, to offer credit counseling services, free of cost, with the following objectives: Advising on gaining access to structured financial system including banking Counseling people who are struggling to meet the repayment obligations and helping debt resolution Helping in rehabilitation of borrowers in distress 2. Bank has pioneered a Mega Project for Integrated Development of 129 villages in 78Districts and 17 States covering 60,000 households, identified for holistic development and showcased as Model Villages. The Bank has so far extended financial assistance over Rs.150 crores to the rural households in the identified villages. An evaluation study conductedin select villages has revealed that there is 20-25% improvement in the household income after the implementation of the scheme.
    • MISSION AND VISION OF BANK OF INDIA MISSION To provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders. VISION To become the bank of choice for corporates, medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business, mass market and rural markets.
    • Chapter3 ResearchMethodology
    • OBJECTIVEOFTHEPROJECT 1. To understand how cash is being managed by BANK OF INDIA 2. To gain knowledge about the system prevailing in Banks. 3. To suggest methods for improving cash management in Banks. 4. To analyze in detail, the way Banks currently manage their finances and make decisions to achieve tradeoff between profitability and liquidity RESEARCH DESIGN: For this research descriptive research design is used. POPULATION: All the employees who are directly or indirectly related to the Bank of India, New Delhi. SAMPLE UNIT: All the employees who are directly or indirectly related to the Bank of India, New Delhi. SOURCE OF DATA: Primary Data: - Structured direct Interviews with the concerned persons of Finance & Stores Department Secondary Data: - Annual Report, Store Records & various books. LIMITATIONS OF THE STUDY: 1- Some of the respondents refused to fill questionnaire during the research work. 2- Some of the lower level store department employees were not well educated.
    • Chapter4 DataCollection&Analy sis
    • Cash Management Services The menu of cash management services offered by banks is indeed diverse and tempting. The services broadly fall under collection services, disbursement services, information and control services, services related to electronic data interchange commercial web banking services, sweep services, fraud detection solutions, global trade solutions and investment solutions. Collection Services accelerate receipt of payments from sales and quickly turn them into usable cash in accounts. Disbursement Services make efficient payments by reducing or eliminating idle balances in company‟s accounts. Information and Control Services receive the data and provide the management capability needed to monitor company cash picture, control costs, reconcile and audit bank accounts, and reduce exposure to fraud. Financial Electronic Data Interchange is a computerized exchange of payments between a company‟s business and its customers and vendors. Commercial Web Banking Services give a wide range of services from any Internet connection, which can help streamline banking process quickly and efficiently. Sweep Services maintain liquidity and increase earnings without having to actively monitor accounts and move money in and out of them. Information reporting solutions assist companies, which need to receive account data that is timely, precise, and easy to access and interested in initiating online transactions. Investment solutions help to minimize excess balances and maximize return on available funds.
    • Chapter-5 Findings & Conclusions
    • Conclusions regarding cash management services In today‟s competitive world the key differentiator between a successful bank and other bank is the stress each lays on technology.
    • The above chart gives a clear explanation regarding the Cash Management infrastructure provided by all the three sectors. The network, technology and the corporate relationship services provided by all the three sectors are highly sophisticated and good but the scalability, marketing provided by the Public sector is low in terms of the Private and MNC sector. As well as the services provided by the public sector is not fairly good and up to the standard. As Cash management is constantly changing to meet the needs of the corporate treasurer. The challenge for both corporation and provider is to keep up with developments, technology, changing regulations and fitting these in with normal business. A changing regulatory environment, new technology and mergers that expand the scope of traditional banking are redefining the traditional treasury management paradigm for both banks and corporations. Electronic commerce is evolving far beyond simply ordering goods online or buyer-to supplier commerce. In a vast country like India Providing Cash Management Services do posses a challenge to the Cash Manager as well as the banks. Considering the present Indian scenario, where Cheques are the basic form of payment and cheque clearing takes a long time, cash management services need to devise innovative methods and means to expedite the clearing to benefit the corporate customer. As the Indian economy becoming an open market economy, residents may maintain accounts in other countries and non-residents may hold accounts in India. As a result, Indian treasurers may often find themselves managing cash across geographies and time zones. In India the transaction types run from the classic paper cheque to the latest Internet initiated electronic payment. Corporations initiate and receive paper-based transactions, as well as high value and low value electronic transactions on a daily basis. Expectations from new services may not eliminate or fully replace the older traditional services. Change will be gradual but, probably, it will be firm. Fee structures for cash management services in India vary from bank to bank and also from customer to customer. Many banks price the services based upon the overall relationship, especially for
    • multiple product solutions. As Indian banks become more consultative and total solution oriented rather than product-driven, pricing will become even more customized. Corporate treasurers will consider the amount they can save on banking fees and the level of efficiency in their departments as a sequel to the new cash management services. After they have negotiated the best possible price, treasurers then focus on the return on excess balances. SWOT Analysis of Competition in the CMS Market
    • The above Chart gives the explanation of the SWOT analysis and the competition in the cash management services in the market. It tells about the products offered and the services it provides. Importance of Cash Management for a Corporate Entity There is a need to put in place a specialized cash management system by Corporates. Good Cash Management is a conscious process of knowing when, where, and how a company‟s cash needs will occur; knowing what the best sources for meeting additional cash needs; and being prepared to meet these needs when they occur by keeping good relationships with bankers and other creditors. Cash management results in significant savings in time decrease in interest costs, less paper work and greater accounting accuracy. Proper cash management creates more control over time and funds; provides timely access to information; enables easy employee related payments; supports electronic payments; produces faster electronic reconciliation; allows for detection of bookkeeping errors; reduces the number of cheques issued and earns interest income or reduces interest expense. Corporations with subsidiaries worldwide can pool everything internationally so that the company can offset the debts with the surplus monies from various subsidiaries. The end result will transform treasury function as a profit-centre by optimizing cash and put it to good use. Creative and pro-active cash management solutions can contribute dramatically to a company‟s profitability and to its competitive edge. The ultimate purpose of proper management of liquidity, needless to emphasize, is to improve the overall productivity of funds. How Corporate Select a Bank for Sourcing Cash Management Services? Probably, it is important to consider what the companies expect from their bankers in this regard. It is normally the client-bank relationship, which is a main consideration in choosing a bank for cash management. Pricing, obviously, is a very dominant factor. Making a choice between the local banks and the more highly priced foreign banks usually depends on how
    • cost savings are presented by the banks. Multinational corporate with complex treasury operations admire their respective banks‟ expertise and ability to offer creative solutions. There are some common requirements related to basic cash management systems. Flexibility, reliability, security and stability have been cited as vital parameters for any electronic banking system. The systems should be tailored to provide pertinent reports and the ability to upgrade easily in future. The technology should allow real-time cash management with strategic banking partners. It should integrate easily with legal framework in place. It should lower operating costs and resolve disputes quickly by providing secure and legally enforceable audit trails. It should be capable of reducing risk of fraud in electronic funds transfers and other treasury activities. It should also be able to use a low-cost public network infrastructure like Internet, which eliminates the need for dedicated leased lines. For instance, availability of requisite bandwidth for Internet connection is still a problem faced by various financial institutions. With a highly technology savvy there are several exciting new opportunities for both user and provider in the cash management arena. Cash management worldwide is constantly evolving to meet the needs of the corporate treasurer, take advantage of new technology and support customers as they move into new markets. The challenge for both company and service provider is to keep up with developments in technology and changing regulations and espouse them to their normal business. The key to success will be active partnerships between corporations and their providers as no one will be able to keep up with all developments on their own. Because of the mounting importance of fee-based financial services, all banks need to finetune their strategies, if they want to harness the potential in this area. They need to appreciate the dynamics of the new fee-based market, which is driven by the growth of the Internet and inter-connect applications. But it won‟t be easy for all banks to capture their share and profit of the swiftly expanding fee-based market. Taking advantage of the opportunities and avoiding the threats of unprofitable products, insufficient customer service, and diverse IT applications entails an understanding of the market place, the needs and expectations of the customer and of course the competition. It is an important point to note that offering fee-based services is no longer a choice today to the beleaguered banker. It is a desirable compulsion to thrive. Managing cash in the emerging milieu will require a new mind-set of banker and his client.
    • BIBLIOGRAPHY Internet:Websites 1- www.google.com 2- www.wikipedia.org/ 3- http://wiki.answers.com 4- http://www.slideshare.net 5- www.wikipedia.org/inventory 6- www.pdfsearchengine.com/cashmanagement 7- www.scribd.com Books: 1- Introduction to operation Research By HamdyA.Taha 2- Introduction of operation Research By J.K.Sharma 3- Learning operation Research By S.K Jaiswal