The document discusses various aspects of cash management. It defines cash management and explains the importance of managing cash flows. It outlines different motives for holding cash such as transactions, precautionary and speculative motives. It also discusses cash forecasting and budgeting. Methods for preparing cash budgets using receipts and disbursements approach are explained. Determining the optimal cash balance using models such as Baumol's model and Miller-Orr model is also covered. Finally, it discusses various money market instruments for investing surplus funds.

1. 1
Cash Management
Cash Management 2
Cash Management
• Cash, the most liquid asset, is an important item of Current
assets.
• Although only a small %age of the assets are held in the form of
cash(<5%), yet its management is crucial for the solvency of the
firm.
• Includes near-Cash items such as “marketable securities” &
“bank time deposits” as these can be converted into cash
readily.
• A company should maintain sufficient cash balance all the times
as:
Shortage will disrupt the companies’ operations, while
Excess cash balance would mean funds are idle, which
adversely affect the profitability.

2. 2
Cash Management 3
Motives of Holding Cash
Transactions Motive:
• To conduct the business in the ordinary course, i.e. to make payments
for purchases of R/M, wages, operating expenses, taxes, dividends
etc.
• Need for cash arises as cash receipts and payments are not perfectly
synchronised.
• For those periods when cash payments exceed cash receipts, the firm
should maintain some cash balances to be able to make required
payments.
Precautionary Motive:
• To meet contingencies in the future, so as to provide a cushion to
withstand unexpected emergencies.
Speculative Motive:
• To invest in profit-making opportunities as and when they arise.
Cash Management 4
Cash Forecasting & Budgeting
• Cash Budget - important tool for planning and control of
Cash Receipts and Payments.
• Cash Budget is a summary of the firm’s expected cash inflows
& outflows over a projected time period.
• Gives information about the time and magnitude of expected
cash flows.
• Helps to determine
• future cash needs,
• plan for financing the shortfall (if any), or
• investing the surplus;
• exercise control over cash and liquidity.
• time horizon differs from company to company.

3. 3
Cash Management 5
Receipts and Disbursements Method
A. Cash Inflows:
Operating Cash Flow:
• Cash sales & collections of credit sales forms the most
important portion of the operating cash inflows.
• Requires forecasting of sales.
Non-Operating Cash inflow:
• Sale of old assets, Receipt of Dividends / Interest Income.
Financial Cash Inflow:
• Borrowings / Issue of new securities.
Cash Management 6
Receipts and Disbursements Method
B. Cash Outflows:
Operating Cash outflows:
• Cash purchases, payments for payables, advances to
suppliers,wages/salaries & other operating expenses
Capital Expenditures: Purchase of P & M etc.
Contractual payments: Repayment of loans, payment of
interests,taxes etc.
Discretionary payments: Payment of Dividends etc.
Once the forecasts for cash receipts and payments has been
made, the two are combined to ascertain Net Cash Inflow or
Outflow for each period (month) - Indicates cash deficit or
surplus.
Sometimes Minimum Cash balance has to be maintained at all
times.

4. 4
Cash Management 7
Preparing Cash Budget
Based on the following information provided by XYZ Ltd, prepare the monthly
cash budget from April to Sept June 2014:
• Actual (Jan – March) and forecast (April - Sept) monthly sales (Rs Lacs) are:
Jan: 1200 ; Feb : 1400; Mar : 1600;
Apr : 600; May : 800; Jun: 800; Jul:1200; Aug: 1000; Sept: 800.
• Credit Sales are 75% of the total Sales.
• Out of the Credit Sales, 60% are collected after one month, 30% after two
months and 10% after three months.
• Anticipated sales of each month are purchased & paid for in the preceding
month.
• Monthly Rent is Rs 8 Lacs.
• Expected Operating Expenses (Rs Lacs) are :Apr: 120; May : 160; Jun: 200;
Jul:200; Aug: 160; Sept: 140.
• The company expects a profit margin of 20%.
• Interest @ 12% on Debentures of Rs 1000 Lacs is to be paid in each quarter.
• Advance Tax of Rs 200 Lacs is due in April.
• Equipment costing Rs 120 Lacs is paid for in June.
• The company has a cash balance of Rs 400 Lacs on 31 December, which is the
minimum monthly cash balance required to be maintained. Funds can be
borrowed @ 18% pa, the interest thereon is to be paid in the next month.
Cash Management 8
Receipts and Disbursements Method
(Rs Lacs)
April May June July Aug. Sept.
A. Cash Inflows:
1. Total Sales 600.0 800.0 800.0 1200.0 1000.0 800.0
2. Credit Sales 75% 450.0 600.0 600.0 900.0 750.0 600.0
3. Cash Sales Collection 150.0 200.0 200.0 300.0 250.0 200.0
4. Credit Sales Collection
- 1 month 60% 720.0 270.0 360.0 360.0 540.0 450.0
- 2 month 30% 315.0 360.0 135.0 180.0 180.0 270.0
- 3 month 10% 90.0 105.0 120.0 45.0 60.0 60.0
1275.0 935.0 815.0 885.0 1030.0 980.0
B. Cash Outflows:
1. Purchases 80% 640.0 640.0 960.0 800.0 640.0 960.0
2. Rent 8.0 8.0 8.0 8.0 8.0 8.0
3. Operating Expenses 120.0 160.0 200.0 200.0 160.0 140.0
4. Equipment 120.0
5. Interest 30.0 30.0
6. Advance Tax 200.0
768.0 808.0 1198.0 1208.0 808.0 1258.0
C. Net Cash Flow (A-B) 507.0 127.0 -383.0 -323.0 222.0 -278.0
D. Opening Cash Balance 400.0 907.0 1034.0 651.0 400.0 548.9
E. Gross NCF 907.0 1034.0 651.0 328.0 622.0 270.9
F. Minimum Cash Balance to be maintained400.0 400.0 400.0 400.0 400.0 400.0
G. Borrowings 0.0 0.0 0.0 72.0 0.0 129.1
H. Interest on Borrowings 0.0 0.0 0.0 0.0 1.1 0.0
I. Repayments 0.0 0.0 0.0 0.0 72.0 0.0
J. Closing Balance 907.0 1034.0 651.0 400.0 548.9 400.0
Total Cash Outflows
Particulars
Forecast
Total Cash Inflows
328-400=72 270.9-400=129.1
1000*12% for 3

5. 5
Cash Management 9
Determining Optimum Cash Balance
• A firm needs cash to meet payments on account of Raw Materials,
wages, other expenses, dividends, interest, and taxes.
• The firm should, therefore, hold sufficient quantum of cash so that it
is able to meet its short term obligations as and when they fall due.
• A trade-off between Excess Cash and Insufficient cash has to be
achieved while determining the optimum level of Cash balance.
• Models for determining Optimum Cash Balance:
• Baumol’s Model
• Miller - Orr Model
Cash Management 10
Baumol’s Model
• Applies the EOQ Model to determine the Optimum Cash
Balance.
• Attempts to minimize the Total Cost consisting of:
Cost of Holding Cash (Holding Cost or Interest Income
Forgone) and
Cost of converting marketable securities into cash.
(Conversion Cost)
where
k = Interest rate on marketable securities
C* = Optimum Cash Balance
c = Transaction cost per transaction
T = Projected Cash requirements
TC = Total Costs
2cT
C*
k
=
C * T
TC k c
2 C *
   
= × + ×   
   
or

6. 6
Cash Management 11
Baumol’s Model
2cT
C*
k
=
Vishal Exports requires Rs.90 million in cash for meeting its transaction needs
over the next three months, its planning horizon for liquidity decisions. The firm
has the amount in the form of marketable securities. The cash payments will be
made evenly over the three months planning period. Vishal Exports earns 8% pa
on its marketable securities. The conversion of marketable securities into cash
entails a fixed cost of Rs.4,500 per transaction. What is the optimal conversion
size as per the Baumol model ?
2*4500*90,000,000
C*= Rs.63,63,961 /
0.08/4
= −
Cash Management 12
Miller - Orr Model
• Baumol’s Model does not allow for the cash balance to
fluctuate. Firms do not use their cash balance uniformly.
• M-O Model considers that changes in cash balance over a
given period are random in size and direction.
• Seeks to answer:
When transfers be made from Marketable Securities to
cash and vice versa and
What should be the amount of such transfers.
• M-O Model provides for three levels of Cash Balances:
• Upper Limit (UL)
• Lower Limit (LL), and
• Return Point (RP)
• Cash Balance may fluctuate randomly between UL & LL.

7. 7
Cash Management 13
Miller & Orr Model
Purchase Marketable
Securities
Sell Marketable
Securities
Upper Level
Time
CashBalance
Lower Level
Return Point
• If the cash balance hit the UL,
the firm must reduce cash
balance by buying sufficient
marketable securities such
that the cash balance reached
RP.
• If the cash balance hit the LL,
the firm must increase cash
balance by selling sufficient
marketable securities so as to
reach RP.
Cash Management 14
• Lower Control Level is set by the company based on the
Minimum Cash Balance,below which it should not fall.
• Return Point & Upper Level are derived by M-O Model, based
on minimization of total costs.
where,
b = Conversion Cost per transaction.
i = Daily Interest rate (%) on Marketable Securities.
σ = Std. Deviation of daily cash balance.
Upper Level = Lower Level + 3 Z
Return point = Lower Level + Z
1/ 3
2
3 b
Z
4 i
  × σ
=   
  
Miller & Orr Model

8. 8
Cash Management 15
Hanson Corporation expects its cash flows to behave in a random manner, as
assumed by the Miller and Orr model. The following information has been
gathered.
• Annual yield on marketable securities = 8 percent
• Fixed cost of effecting a marketable securities transaction = Rs. 1,700
• Standard deviation of the change in daily cash balance = Rs.27,000
• Desired minimum cash balance = Rs.35,00,000
What are the ‘return point’ and ‘upper control point’?
Miller & Orr Model
UL = LL+ 3Z = 35,00,000 + 3*161120 = Rs. 39,83,360/-
RP = LL + Z = 35,00,000 + 161120 = Rs. 36,61,120/=
1/ 3
2
3 b
Z
4 i
  × σ
=   
  
1/3
2
3 1700×27000
Z= =Rs.161,120/-
4 0.08/360
  
  
  
Cash Management 16
Investing Surplus funds
• Treasury Bills
• Commercial Papers
• Certificates of Deposits
• Bank Deposits
• Inter-corporate Deposits
• Money Market Mutual Funds
• Call & Money market
• Repurchase Options (Repos)

9. 9
Money Market Instruments 17
Treasury Bills
• Issued by RBI on behalf of GOI
• RBI auctions 91-day (on weekly basis), 182-day
& 364-day (on fortnightly basis).
Money Market Instruments 18
Commercial Paper
• Commercial Paper is an unsecured short-term promissory note
issued by a company to raise short-term funds mainly to meet
working capital requirements.
• CPs are privately placed and usually held till maturity by the
investors.
RBI Guidelines on issue of CPs(July 2013 RBI MC)
Eligibility: Companies with minimum tangible net worth of Rs. 4
Crores. Should have sanctioned working capital limit from a bank
and the account should be “Standard Asset”.
Minimum Credit Rating: A-3 (as defined by SEBI)
Maturity: Min 7 days; Max: One Year.
Denomination: Rs 5Lacs and thereafter in its multiples.
Investors: Individuals, Banks, Companies, NRIs, FIIs (within limits set
by SEBI) , Financial Institutions can invest in CPs.
Underwriting of CP issue is not allowed.
CPs issued at a discount to the Face Value.

10. 10
Money Market Instruments 19
Commercial Paper (Contd.)
Discount Yield on CPs: =
• At what price should a company issue its 90
day CP of FV Rs 5,00,000/- so as to give a
Discount yield of 6%.
• Price = Rs 4,92,500/-
Face Value Price 360
Face Value No. of Days
 − 
×   
   
5,00,000 Price 360
6%
5,00,000 90
−   
× =   
  
Money Market Instruments 20
Certificate of Deposits
• Certificate of Deposits (CDs) are negotiable money market
instruments issued by Scheduled commercial banks or FIs
RBI Guidelines on issue of CDs (July 2013 RBI MC)
Maturity: Banks: Min 7 days; Max: One Year.
FIs: Min: 1 year & Max: 3 years
Denomination: Rs 1 Lacs and thereafter in its multiples.
Investors: Individuals, Banks, Companies, NRIs (on non-
repatriable basis), Financial Institutions can invest in CDs.
CDs issued at a discount to the Face Value.
Freely transferable by endorsement and delivery

11. 11
Money Market Instruments 21
Repurchase Agreements (Repos)
• An investor buys a part of a dealer’s holding of
Treasury securities and simultaneously agrees to sell
them back at a later date at a specified higher price.
• The borrower is said to have entered into a repo, the
lender (buyer/investor) is said to have a reverse
repo.