Cash management involves managing a firm's cash flows, balances, and converting surpluses and deficits. It aims to maintain enough cash for transactions while maximizing returns on excess cash. The Miller-Orr model sets upper and lower control limits for cash balances and a return point to buy or sell securities if balances exceed the limits. Firms can accelerate cash collections through decentralized collection centers and lockboxes, and manage disbursements by controlling payment float. Surplus cash can be invested in safe, liquid securities like treasury bills, commercial paper, and certificates of deposit.

1. CASH MANAGEMENT
Prepared By;
Amrutha Menon

2. WHAT IS CASH?
 It is the money which a firm can disburse immediately
without any restrictions.
 The term cash include coins, currencies and checks held by
the firm in balance in its bank account.
 It includes near-cash assets, such as marketable securities and
time deposits in banks.

3. Cash
NARROW
SENSE
Cash in hand
i.e.currency
notes & coins
BRODER SENSE
Cash & its
equipment i.e.
Cash at Bank,
Short term
investment

4. CASH MANAGEMENT
 Cash management is concerned with the managing
of:
 cash flows into and out of the firm,
 cash flows within the firm, and
 cash balances held by the firm at a point of time by
financing deficit or investing surplus cash

5. Business
Operations
Information &
control
Cash
Collections
Cash
Paymemts
Deficit
surplus
Borrow
Invest
Cash Management Cycle

6. FOUR FACETS OF CASH MANAGEMENT
 Cash planning
 Managing the cash flows
 Optimum cash level
 Investing surplus cash

7. MOTIVES FOR HOLDING CASH
 Transaction motive
 Precautionary motive
 Speculative motive

8. TRANSACTION MOTIVES
It refers to the holding of cash required by a firm to carry its day
to day business transactions in the ordinary course of business.

9. PRECAUTIONARY MOTIVE
 The precautionary motive of holding cash is to meet the
unpredictable cash obligations of a firm.
 A cushion to meet unexpected contingencies.
 Floods, strikes and failure of imp customers
 Unexpected slowdown in collection of accounts receivable
 Sharp increase in cost of raw materials
 Cancellation of some order of goods

10. SPECULATIVE MOTIVE
 This refers to maintaining cash balance ,the firm to take
advantage of investing in profit –making opportunities and
which is typically outside the normal course of business.
 Helps to take advantage of:
 An opportunity to purchase raw materials at reduced price
 Make purchase at favorable prices
 Delay purchase on anticipation of decline in prices
 Buying securities when interest rate is expected to decline

11. CASH PLANNING
 Cash Flow Planning is when a business forecasts short &
long term business expenses against the projected incoming
cash.
 It allows us to anticipate trouble by creating a cash flow
cushion, for unexpected expenses.
 A method that an insured can use to control the premium
payments that they must make on their policies.

12. CASH FORECASTING AND
BUDGETING
CASH BUDGET
 Summary statement of the firm’s expected cash inflows and
outflows over a projected time period
CASH FORECASTS
 Estimate of the timing and amounts of cash inflows
and outflows over a specific period

13. SHORT-TERM CASH FORECASTS
 The important functions of short-term cash
forecasts
 To determine operating cash requirements
 To anticipate short-term financing
 To manage investment of surplus cash.
 Short-term Forecasting Methods
 The receipt and disbursements method
 The adjusted net income method.

14. THE RECEIPT AND DISBURSEMENTS
METHOD
 The virtues of the receipt and payment methods are:
It gives a complete picture of all the items of expected cash
flows.
It is a sound tool of managing daily cash operations.
 This method, however, suffers from the following limitations:
1. Its reliability is reduced because of the uncertainty of
cash forecasts. For example, collections may be delayed, or
unanticipated demands may cause large disbursements.
2. It fails to highlight the significant movements in the
working capital items.

15. THE ADJUSTED NET INCOME METHOD
 The benefits of the adjusted net income method
are:
 It highlights the movements in the working capital
items, and thus helps to keep a control on a firm’s
working capital.
 It helps in anticipating a firm’s financial
requirements.
 The major limitation of this method is:
 It fails to trace cash flows, and therefore, its
utility in controlling daily cash operations is limited.

16. LONG-TERM CASH FORECASTING
 The major uses of the long-term cash forecasts are:
 It indicates as company’s future financial needs, especially for its
working capital requirements.
 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.

17. FEATURES OF INSTRUMENTS OF
COLLECTION IN INDIA

18. CLEARING
 mutual settlement of claims
 among member banks
 agreed time and place
 as per instruments drawn
Clearing can be classified as
i. Counter clearing
ii. Non – MICR
iii. Magnetic Ink Character Recognition
iv. Cheque Truncation System

19. TYPES OF RETURN CHEQUES:
◦ INWARD OR PAYING BRANCH
When a particular branch receives instruments, which are on themselves and sent by
other member bank for collection is treated as Inward Clearing of that branch.
◦ INWARD RETURN
Which are presented by collecting bank to other banks for payment but it has been
returned and unpaid by them due to specified reason through the clearing house.
◦ OUTWARD OR COLLECTING BRANCH
When a particular branch receives instruments drawn on the other bank within the
clearing zone and sends those instruments for collection through the clearing
arrangement is considered
◦ OUTWARD RETURN
Instruments which are return by paying bank due to specified reason through the clearing
house.

20. BAUMOL’S MODEL
 The firm is able to forecast its cash needs with certainty.
 The firm’s cash payments occur uniformly over a period of time.
 The opportunity cost of holding cash is known and it does not change over
time.
 The firm will incur the same transaction cost whenever it converts
securities to cash.
Baumol's model for cash balance

21. ASSUMPTION
 The firm is able to forecast its cash with certainty.
 The firm’s cash payment occur uniformly once a period of
time.
 The opportunity cost of holding cash is known and it does not
change over time.
 The firm will incur the same transaction cost whenever it
converts securities to cash.

22. TYPES OF COST
 Holding Cost or opportunity cost
Holding Cost = k (C/2)
k = Opportunity Cost, C/2 = Average cash balance
 Transaction Cost
Transaction Cost = c(T/C)
 Total cost
Total Cost = k(C/2)+c(T/C)
 Optimum cash balance
C*= √2cT/k

23. COST TRADE-OFF: BAUMOL'S MODEL

24. THE MILLER–ORR MODEL
 It provides for two control limits–the upper control limit and
the lower control limit as well as a return point.
 If the firm’s cash flows fluctuate randomly and hit the upper
limit, then it buys sufficient marketable securities to come
back to a normal level of cash balance.
 Similarly, when the firm’s cash flows wander and hit the lower
limit, it sells sufficient marketable securities to bring the cash
balance back to the normal level

26.  LOWER CONTROL LIMIT
=(3/4 x transaction cost X variance of cash flows )1/3
interest rate
Upper Limit= Lower Limit + 3Z
Return Point= Lower Limit + Z
Average Cash Balance = Lower Limit +4/3 Z
Symbolically (Z)= ( 3/4 x cσ²/i )1/3

27. MANAGING CASH COLLECTIONS
AND DISBURSEMENTS
 Accelerating Cash Collections
 Decentralised Collections
 Lock-box System
 Controlling Disbursements
 Disbursement or Payment Float

28. ACCELERATING CASH COLLECTIONS
Decentralised Collections
 Number of collection centres
 Collection centres will collect cheques from customers and deposit in
their local bank accounts
 They will deposit the funds to a central bank
Lock-box System
 Collection centers are established considering the customer locations
and volume of remittances
 At each Centre the firm hires a post office box
 Remittances are directly picked from the bank whom the firm gives the
authority

29. INVESTING SURPLUS CASH IN MARKETABLE
SECURITIES
 Selecting Investment Opportunities:
 Safety,
 Maturity, and
 Marketability.

30. SHORT TERM INVESTMENTS
OPPORTUNITIES
 Treasury bills
 Commercial papers
 Certificates of deposits
 Bank deposits
 Inter-corporate deposits
 Money market mutual funds