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This is very crucial during recessionary conditions
Cash Management Process
Centralize cash management versus decentralized cash management
“ Well co-ordinated cash process” should exist such as investment, disbursement and collections
MNC’s, must use a bank known for quality international services, network, cash concentration and clearing
Use technological tools and services for example; Credit card collections through systems, proper ERP system
Be careful of foreign exchange transaction and exposure
Processing cost in bank must be kept in check
‘ Cash needs’ (greater of deposit held by a bank to compensate its services or precautionary balances) must be defined so all additional cash handling
Major capital expenditure should be timed.
Establish zero balance account for disbursement units
Acceleration of cash receipts versus delay of cash payments
The importance of accurately forecast company cash flow with liquidity management
Effective business cash planning will inform CFO where expenses need to be cut, and whether new ways to make revenue are needed.
Business cash planning also will reveal whether outside financing will be required to maintain a positive cash flow. Ultimately, it will guide CFO and managers on how much money should be spent on particular expense categories, and provide revenue goals.
Business Cash planning is important particularly in these three areas Sales , Expenses and Capital Expansion
Primary goals for the organization and their implementation can be obtained
Surplus funds can be invested with time horizon and with maximization of return.
Primary goals for the organization and their implementation
The primary goals of a good cash management system are:
To maintain adequate monies at hand to meet the daily cash requirements of the organization while maximizing the amount available for investment.
To obtain the maximum earnings on invested funds while ensuring their safety.
In order to reach these primary goals, a CFO should strive to:
Develop strong, internal control of cash receipts and disbursements.
Establish improved procedures for collecting outstanding.
Establish clear lines of communication between CFO and department heads.
Develop solid professional relationships with local bankers and other members of the investment community.
Looking at your balance sheet frequently – do the company has sufficient funding sources?
Type of Long Term Funding Sources
Issue of Equity Shares, Issue of Preference Shares, Issue of convertible and non-convertible Bonds, issue of optionally convertible and non-convertible Debentures, Islamic Finance through long term financial products such as Ijara (Leasing) , Murabaha (Cost-plus financing), Musharaka (Venture Capital), Sukuk (Fixed income securities) etc, Long Term Loan from Banks & Institutions
Type of Short Term Funding Sources
Overdraft, Cash Credit Limits ,Trust Receipts ,Short Term Loans Bridge Finance, Islamic Finance through short term financial products such as Istisna (Progressive Financing), Mudaraba (Trust Financing), Takaful (Islamic Insurance), Wakala (Agency Contract)
The term liquidity risk is meant to capture the risks to a corporation of having its short-term liability funding requirements unmet by its short-term assets. In essence this is the risk that the company will not have sufficient cash to meet its liabilities as they fall due.
Liquidity risk is also used to describe the risk of an increase in a security’s bid-offer spread or a reduction in market depth for a traded security.
Liquidity risk arises from the variable components of short-term assets and liabilities. On the asset side, security values may fall. On the liability side, lenders may make margin calls on security loans, trading counterparties may make collateral calls on repurchase agreements and over-the-counter (OTC) derivative trades, and futures exchanges may make mark-to-market cash demands.
Political Risks : An investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control.
Foreign exchange risk : The risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates
Economic Risk : The danger that the economy could turn against your investment. An example would be a real estate company in a period of high interest rates
Ensuring the right balance of credit and non-credit service utilization for funding process Slide 6 Maintain a right balance between credit and non-credit services with a minimum cost and a target of maximum return on investment
When short-term liabilities exceed short-term assets, to prevent bankruptcy, long-term assets must be converted to short-term assets, or long-term liabilities must be increased, with funds being used to retire short-term liabilities.
As long as short-term assets exceed short-term liabilities, companies will not have many liquidity problems, finding resources or engaging in short-term borrowing to offset liabilities as they become due.
A serious problem arises, however, when short-term assets or short-term liabilities are stochastic, or unpredictably variable.
In these situations, its short-term liabilities can suddenly exceed short-term assets, forcing the company to liquidate long-term assets, increase long-term liabilities, or face bankruptcy.
When these events take place, the company enters “financial distress,” and can find that the market for both its assets and liabilities has diminished or disappeared
Building necessary tools and methods to achieve properly structured balance sheet
A ) Necessary and important tools :
Acid Test = Cash and Near Cash ÷ Current Liabilities
Current Ratio = Current Assets ÷ Current Liabilities
Receivables Turnover = Sales ÷ Receivables
Days Receivables = 30 ÷ Receivables Turnover
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Days Inventory = 30 ÷ Inventory Turnover
Gross Margin Rate = Gross Margin ÷ Sales
Net Profit Rate = Net Profit ÷ Sales
Return on Investment (ROI) = Net Profit ÷ Net Worth
Return on Assets (ROA) = Net Profit ÷ Total Assets
Break Even Sales = Fixed Costs ÷ (Contribution/Sales Ratio)
B ) Necessary and important Methods :
Cash Flow Statement in short term and long term purposes.
Managing complex situations precisely through flexible values (general direction), values with longer lifespan than goals or objectives and past and present corporate actions Slide 10
Corporate Actions Required
Corporations must manage these risks through better contracting and pre-committed contingency plans.
Develop a strategy, policies and practices to manage liquidity risk in accordance with the risk tolerance and to ensure that the corporate maintains sufficient liquidity.
Continuously review information on the liquidity developments and report to the board of directors on a regular basis.
Board of directors should review and approve the strategy, policies and practices related to the management of liquidity at least annually and ensure that senior management manages liquidity risk effectively.