Financial management - working capital management theory

1. FINANCIAL MANAGEMENT II
UNIT 02
CASH/CREDIT/INVENTORY MANAGEMENT
SUNIL KUMAR M N

2. CONTENT
Cash
• Cash
management-
cash budget;
cash collection
and
disbursement,
options for
investment of
surplus funds,
Credit
• Credit
management-
credit policy
variables-credit
evaluation.
Inventory
• Inventory
management-
need for
inventories; order
quantity-EOQ
model- monitoring
and control of
inventories-ABC-
JIT techniques.

3. INTRODUCTION
Cash is the most liquid asset. Cash is common
denominator to which all other current assets can be
reduced because receivables and inventories get
converted into cash. Cash is lifeblood of any firm
needed to acquire supply resources, equipment and
other assets used in generating the products and
services. Marketable securities also come under near
cash, serve as back pool of liquidity which provide
quick cash when needed

4. MANAGEMENT OF CASH
Although cash is only 1-3% of total current assets
but its management is very important. Management
of cash includes:¢
• Determination of optimum amount of cash required in the
business.
• To keep the cash balance at optimum level and investment of
surplus cash in profitable manner.
• Prompt collection of cash from receivables and efficient
disbursement of cash.

6. CASH BUDGET
Cash budget is a summary statement of the firms expected cash
inflows and outflows over a projected time period. cash budget
involves a projection of future cash receipts and cash
disbursements over various time intervals.
Cash Budget A cash budget is a forecast of estimated cash
receipts, estimated cash payments and the resultant cash position
for a certain period of time.

7. FUNCTIONS OF CASH BUDGET
Determining the future cash needs of the firm
Planning for financing of those needs.
Exercising control over cash and liquidity of the firm.
{The overall objective of a cash budget is to enable the firm to meet
all its commitments in time and at the same time prevent
accumulation of unnecessary large balance with it}

8. Why are cash
budgets prepared?
Assists with the identification of when commitments are due
• Ensures money is available at that time.
• Important business able to meet commitments as they fall due.
• If debts are not paid on time poor reputation will affect credit rating of
business

9. METHODS OF PREPARING A CASH BUDGET
Receipts and payments
method
Adjusted profit and loss
a/c method
Balance sheet method

10. Preparation of cash
budget.
Receipts and payments method:
under this method all the cash
receipts and payments expected
during the budget period is
considered. However care must be
taken to ensure that cash
adjustments and accruals are not
shown in cash budget.

11. CASH INFLOWS
• Sales and other cash income
• New loans received
•Sales of capital assets
• Nonoperating income

12. CASH OUTFLOWS
Cash expenses
Principal payments
Purchase of capital assets
Nonoperating expenses

13. Do not
include
Depreciation
Opportunity costs
Any other non-cash
income or expense

14. CASH SYSTEM
The cash system of a firm is the mechanism that provides the linkage
between cash flows.
The financial manager of the firm has the responsibilities, at least in part,
of developing and maintaining the policies and procedures necessary to
achieve an efficient flow of cash for the firm’s operations.