WelcomeWelcomeManagement of cash & Marketable Securities

Presentation by-GhanShyamNaynika Gupta99817-86817

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Agenda……………

1. Introduction2. Motives for holding cash3. Objectives of cash management4. Factors determining cash needs5. Determining cash need6. Cash management: Basic Strategies7. Cash management techniques/processes8. Marketable securities9. Cash management practices in India10.Check your presence and memory

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Introduction

1. One of the key areas of working capital management

2. Most liquid current asset

3. Common denominator

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Motives for maintaining cash

1. Transaction motive2. Precautionary motive3. Speculative motive4. Compensating motive

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Transaction motive1. To meet routine cash requirements to finance

transaction in the ordinary course of business2. To balance current receipts and disbursement3. Example: Cash payment for purchasing,

operating expenses, financial charges

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Precautionary motive

1. Defensive in nature2. Holding cash/near-cash as a cushion to meet

unexpected contingencies/demand for cash3. Floods, strikes and failure of important

customers4. Earlier settlement of bills5. Unexpected slow down in collection of

accounts receivable6. Cancellation of some orders7. Sharp increase in cost of row materials

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Speculative Motive

1. Holding cash/near-cash to quickly take advantage of opportunities typically outside the normal course of business

2. Positive and aggressive approach3. Examples-

i. An opportunity to purchase raw materialsii. A chance to speculate on interest rate

movementsiii. Make purchase at favorable prices

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Compensating motive

1. Holding cash/near-cash to compensate banks for providing certain services or loans

2. Example: compensation balances-i. An absolute minimumii. A minimum average balance

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Objectives of cash management

1. To meet cash disbursement needs (payment schedule)

2. To minimize funds committed to cash management

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Factors determining cash needs

1. Synchronization of cash flows2. Short cost3. Excess cash balance4. Procurement and management5. Uncertainty

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Determining cash need

1. Minimizing cost cash model

2. Cash budget model3. Baumol model4. Miller-orr model5. Orgler’s model

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Baumol model

1. Provides for cost-efficient transactional balances2. Assumes that the demand for cash can be

predicted with certainty3. Determines the optimal conversation size/lot4. Total cost associated with cash management has

two elements-i. Cost of converting marketable securities into cashii. The lost opportunity costTotal conversion cost per period= Tb/C

T- total transaction cash needs for the period

b- cost per conversionC- value of marketable securities sold at

each conversion

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Miller-orr model

1. Provides for cost-efficient transactional balances

2. Assumes uncertain cash flows3. Determines an upper limit and return point for

cash balances (optimum cash balance level)

C= bE (N)/t + iE (M)

b- the fixed cost per conversionE(N)- the expected numbers of conversionst- the number of days in the periodi- the lost opportunity costE(M)- the expected average daily cash balanceC- total cash management costs

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Orgler’s model

1. Provides for integration of cash management with production and other aspects of the firm

2. Comprises three sections-I. Selection of appropriate planning horizonII. Selection of appropriate decision variables

i. Payment scheduleii. Short-term financingiii. Transaction of marketable securitiesiv. Cash balance

III. Formulation of cash management strategy itself

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Case budget: management tool

“Cash budget is a statement of the inflows and outflows of cash that is used to estimate its short-term requirements”

1. Identifies the excess or shortage of cash2. It pinpoints the period/ds 3. Assists in drawing capital financial plan4. Helps in saving from cash crunch

Elements/preparation of cash budget-– Planning horizon– Selection of factors:

• Operating cash flows• Financing cash flowsCash receiptsCash disbursements

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Cash management: basic strategies

1. Cash cycle2. Cash turnover3. Minimum operating cash

a) Stretching accounts payableb) Efficient inventory-production

managementc) Speedy collection of accounts receivabled) Combined cash management strategies

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Cash management techniques1. Speedy cash

collection2. Prompt payment by

customers3. Early conversion of

payments into casha) Postal floatb) Lethargyc) Bank floatd) Deposit floate) Concentration

bankingf) Lock-box system

4. Slowing disbursements-a) Avoidance of early paymentsb) Centralized disbursementsc) Float (Cheque-kitting)d) Paying from a distant banke) Cheque-encashment

analysisf) accruals

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Marketable securities

1. Breath of market2. Depth of market3. Selection criterion-

a) Financial/Default riskb) Interest rate riskc) Taxabilityd) Liquiditye) Yield

Marketable security alternatives

• Treasury bills• Negotiable certificates of

deposits• Commercial papers• Bankers acceptances• Repurchase (Repo)

agreements• Units• Intercorporate deposits• Bills discounting• Money market mutual

funds/liquid funds

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Cash management practices in India

1. Collection methodsa) Bulk collectionb) Post-dated cheque (PDC) managementc) Electronic clearing service- debit schemed) Cheque truncation

2. Payment mechanisma) Chequeb) Cheque payable at parc) Customers’ or pay orderd) Demand drafte) Real-time gross settlement (RTGS)f) EFTg) SEFTh) ECSi) Interest/dividend warrantsj) Payment outsourcing

3. Electronic banking

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Check your presence

1. Formula given by Baumol’s Model?2. Four Motives of cash management?3. Maximum no. of marketable

securities mentioned in the ppt?4. Cash management basic strategies?5. No. of pictures used in the ppt?

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