chap - 5 cash holding, & analysis final -...

Cash Management in Indian Corporate Sector: A Study of Select Companies

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5.1 Introduction: Cash holding is one of the most important financial decisions that the manager of

the concern organization, has to make in the organization. Some organization use to hold

more cash and some organization hold less cash. But how much to hold is the question.

For this different policies are framed. These policies have been regarded one of the most

important financial policies in the process of managing companies. Suppose, if we are in

the world of Modigliani Miller then holding large amounts of is irrelevant because the

organizations can easily collect funds from money markets or capital markets for their

profitable investment projects at a very negligible transaction costs. It is earlier said that

cash holding is an important decision, a financial manager has to make. At the time of

inflow of cash the manager may think whether it is distributed to the shareholder as

dividend or purchase the shares from market or keep it for future purposes. Generally, it

is seen that the organization hold cash for future purposes is very negligible. During

1990-2003 the average level of cash in U.S firms was 22% (Dittmar and Mahrt-Smith,

2007). Cash holding may be good if the firm invests it in any profitable securities

(Keynes, 1936) or in contrary there may be agency problem (Jensen, 1986). So in case of

investment in profitable securities cash gives some flexibility but when it relates to the

capital market holding cash is not advantageous.

However, many international studies show that holding of cash is important for its

growth. For example, Kalcheva and Lins (2003), find that companies hold on an average

of their total assets in cash or cash equivalents, Ferreira and Vilela (2003) find an average

cash ratio of 15% and Guney et al. (2003) observe that the average cash ratio of the

company is 14%. Therefore, a question rises, why companies hold cash? For ascertaining

the answer several studies have been undertaken. In these studies, generally two

contradictory theories such as Trade-off theory (Myers, 1977) and the Pecking order

model (Myers et Majluf, 1984). In the trade-off theory an optimal cash balance should be

maintained, which results from weighting its marginal benefits and costs. On the other

hand, pecking order theory, which is the extension work of trade off theory, does not

believe the idea of optimal cash level. It is utilized as buffer between retained earnings

and investment needs.


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Earlier studies like Opler et.al. (1999) and Kim et al. (1998) supported the

tradeoff theory. Cash level not only increases the growth opportunities of the company

but also increases the business risk and capital expenditure. And it is difficult to operate

in the capital market. On the other hand it decreases with its size, leverage and its

dividend payments. Most of the studies supported the trade-off theory and shows that

firms which have superior investor protection and in countries where capital markets are

better developed hold less cash. Dittmar et al. (2002), Ferreira and Vilela (2003) and

Guney et al. (2003) are the supporters of this type theory.

Khaoula SADDOUR made a study on French Firm regarding Holding of Cash in

2006. In his study he characterized the French market as high levels of trade credit. He

showed that French firms holds cash on an average 13% of their total assets. For that he

opined two capital structure theories viz. trade off theory and pecking order theory. He

then tried to show which of these two theories would better explain the cash holdings.

For this type of analysis he sub divided the sample into two sub samples, growth

companies and mature companies in his study he collected a sample of 297 French

companies over a period of five years i.e. 1998-2002. In this study he tested whether cash

holdings was positively related to its market value or not. In this study he tried to prove

that both trade off theory and pecking order theories play an important role in explaining

the needs of cash holdings.

He also found that growth firm holds more cash than mature firms. He also

opined that growth firms and mature firms have different needs for holding cash. He

showed that cash holding is negatively related with the firm’s characteristics, size, level

of liquid assets and short-term debt. It is also found in the earlier studies. In case of

mature firm the holding of cash depends on the form of dividends or stock repurchased

and decreases with their research and development expenses. But such result does not

confirm with the result previous studies.

Ultimately he found that cash level of mature companies increases with their

investment level. He also found that cash level of mature companies is negatively related

with trade credit. It confirms the findings of Kim et al. (1998) and Delof’s (1999) studies.


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5.2 Why Cash Holding? Generally, firms hold cash for future purposes i.e. for precautionary purposes or

for investment purposes.

Several studies are undertaken to understand why firms hold cash. The result of

such studies tells us that investment opportunities are very important for holding cash.

Cash would be more beneficial and more important for rising firms. It enables firms to

accept their projects without taking loan from outsides at high transaction costs. It also

reduces the cash flow uncertainty. Due to shortages of fund firms are sometimes unable

to pay dividends to their shareholders. It will affect the goodwill of the firm negatively.

Therefore, holding large amount of cash enables firms to avoid these transactions.

In this study, two theoretical models that can explain the need of cash level: trade

of theory and the pecking order theory, are discussed.

5.3 The trade-off theory:

Similar to debt capital, cash holding creates costs and benefits; and it is very

important in financing the growth opportunities of the organization. The most important

benefit of holding cash is safety buffer (Levasseur 1979) which helps the organization to

avoid the costs of raising external funds or liquidating existing assets and which allows

the organization to finance their growth opportunities. In an imperfect market where the

companies are operating, they have problem in accessing the capital markets and also to

bear external financing cost due to uncertain environment. Therefore, insufficient amount

of cash forces the organization to forgo the profitable investment projects or to take loan

at high rate of interest.

Generally, two main costs are associated with cash holdings. Such costs depend

on whether managers want to maximize shareholders wealth or not. If managers want to

increase shareholders’ interests, the only cost of cash holdings is its lower return related

to other investments in some external or internal projects at the same risk. Contrary, they

increase their cash holdings to raise assets under their control and be able to increase their

managerial diplomacy. In this case, the cost of cash holdings will increase and include the

agency cost of managerial diplomacy.


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The transaction costs motive:

Keynes (1936) opined that firms need liquidity to face their current expenses. So

the firms have to raise funds from capital markets or liquidate existing assets. But, we

know that capital markets are imperfect and there are transaction costs which can be

avoided by holding a sufficient cash level. Therefore, the firm can avoid the situations

where it is forced to forgo its profitable investments, to cut its dividend payments or to

sale its assets. It is one of the principal benefits of holding a sufficient cash level.

That is why firms need cash holding as outside funds are expensive and the access

to capital markets is difficult.

5.3.1 Major determinants of Cash Holdings as per Trade off Theory:

5.3.1.1Growth Opportunities: Most of the firms with strong growth opportunities are to

guarantee their financing. In reality these firms can face two situations: either outside

funds are impossible to get or they are really expensive when accessible. In these

conditions, such firms will be forced to give up these projects. But, if firms hold

sufficient cash levels, they can use it to grab all their profitable investment opportunities

without any hesitation. This would inspire the firms to accumulate more and more cash as

possible.

But, it should be remembered that firms with stronger growth opportunities have

greater financial distress costs. It is also important that in case of bankruptcy the positive

NPV of intangible growth opportunities, which is the part of the firm value, may

disappear. It forces the firms to hold large amounts of cash to avoid this high financial

distress costs.

So, we can conclude that there should have been a positive relationship between a

firm’s cash level and its set of growth opportunities.


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5.3.1.2 Selling Firm’s Assets: For urgency of funds firms can sell their assets. It is very

easy to collect funds. So the firms with mostly firm specific assets collect their funds by

selling such asset at a very high cost. Therefore, holding large amounts of cash help the

firm to overcome the liquidation problems (John 1993). From these we can expect a

positive relation between firm’s cash level and its assets’ specificity.

5.3.1.3 Payment to Shareholders: dividends and stock repurchase: The regular

dividend payment companies can easily collect funds and also a very low cost simply by

reducing their dividend payments (Opler et al. 1999). It help the companies not to hold

high amounts of cash in liquid form and therefore the relation between dividend

payments and cash holdings would be negative.

On the other hand cash holding can increase the dividend payments. Companies

having cash shortages forced to reduce or cut their dividend payments. So, holding large

amount of cash enables companies to avoid these situations. Here, the relation between

dividend payments and cash holdings would be positive.

Hence the predicted relationship between cash holdings and dividend payments is

not clearly determined under the trade-off model.

There should have been a negative relationship between cash holdings and stock

repurchase. But, when the firm repurchases its stocks, it uses its accumulated cash to

finance this repurchase.

5.3.1.4 Instability in Cash flow: Companies with more volatile cash flow face liquidity

problems and experience cash shortage which leads them to forgo some profitable

investment projects. Therefore, it is expected that firms with greater instability in cash

flow to hold more cash. This enables them to avoid the costs relating to liquidity

problems.

5.3.1.5 Cash flow: In order to invest in profitable projects cash flow is another option to

the firms from the point of view of liquidity. Thus cash flow can be used as a cash

substitute and would be negatively correlated to cash level.


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5.3.1.6 Liquid Assets Substitutes: Assets, other than cash, which can easily converted

into cash, are prompt substitutes of cash holding. Therefore, there should have been a

negative relationship between cash holdings and these assets.

5.3.1.7 Investment: Cash holding is positively related with the investment level. In this

theory it is expected that cash holding enable the firms to avoid costly external funds at

the time of investing profitable investment projects.

5.3.1.8 The Trade Credit: Funds transferred between companies are known as trade

credit. In this system customers are given the right to pay their dues in delay. It is similar

to as lending the money to them. It is also applicable for creditors where the companies

are paying money in delay. Therefore, trade credit is an important source of short-term

external finance. The French market is characterized by high levels of trade credit

(Dietsch and Kremp 1998).

Trade credit is computed by differentiating between the receivables collection

period and the payment period for accounts payable. There should have been a negative

relationship between trade credit and cash holdings. Suppose, if the trade credit is

positive, then it is clear that the firm’s commercial policy consists of selling on credit and

paying its suppliers cash. In that situation the company require immediate financing so

that it can uses its cash holdings to pay its suppliers. Consequently, its cash level

decreases. On the other hand, when the trade credit is negative, the company requires

short term payments from its customers and obtains long term payments to its suppliers.

Therefore, it minimizes the immediate financing needs, and it will consequently

accumulate cash to be able to pay its suppliers in the following period.

Alternatively, we can examine the relationship between the trade credit and the

cash holdings and we would consider only the accounts payable. It is very clear from the

above discussion that the terms of payments determine whether the company is a lender

or a borrower.


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There must have been a positive relationship between the cash level and the

accounts payable. But, if the firm gets long payment time from its suppliers, it doesn’t

have immediate financing needs, and then with the accumulated funds the firms is to be

able to pay its suppliers in the following period. However, if the company gets short term

payments from its suppliers or if it pays them cash, it uses its accumulated cash to pay

them.

5.3.1.9 Leverage: Leverage plays a significant role in capital markets. The less leveraged

firms can collect more amounts of cash because they are not monitoring the capital

markets. It is important to mention that debts are used to finance firm’s investment

opportunities and can be seen as a cash substitute. Therefore, there must have a negative

relationship between cash holdings and leverage. However, the leverage ratio acts as a

proxy variable for the ability of firms to issue new debt. Thus, highly leveraged firms

have an easier access to capital markets and hold less cash.

However, inclusion of debt increases the probability and decreases the liquidity

and the firm can suffer from financial distress and bankruptcy. To reduce this probability,

firms with higher leverage are expected to hold more cash.

Hence, the predicted relationship between cash holdings and leverage is not

clearly determined under the trade-off model.

5.3.1.10 Debt structure: The debt structure (i.e. the ratio of short- term debt or long-term

debt to total debt) of the firm can affect the firm’s cash holdings. Short-term debts in the

capital structure of the firm means holding more cash. It is because they have to pay or

renew in regular interval and consist of risk of financial distress. These financial

distresses can be avoided by holding large amounts of cash.

However, there should have been a negative relationship between cash level and

short-term debt. In fact, Barclay and Smith (1995) show that firms with the highest credit

rating issue more short-term debt. These firms have better access to capital markets and

hold consequently less cash. In addition, short-term debt can be used to meet the current

expenses and thus can be seen as a cash substitute.


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5.4 Pecking order theory: Extending pecking order theory (Myers and Majluf 1984) to the explanation of the

determinants of cash, leads to the conclusion that there is no optimal cash level. It is used

as a buffer between retained earnings and investment needs. Under this theory, the cash

level would just depend upon the result of the financing and investment decisions.

According to this theory, due to asymmetries information issuing new equities is

very costly for firms. Therefore, firms finance their investments primarily with the help

of internal funds, then with debt and finally with equities.

At the time of higher cash flow, firms use them to finance new profitable projects,

to repay debts, to pay dividends and finally to accumulate cash. When retained earnings

are insufficient to finance new investments, then firms use their cash holdings, and then

issue new debt.

5.4.1 Major determinants of Cash Holding as per Pecking Order Theory:

5.4.1.1 Growth Opportunities: With the help of information asymmetries between

managers and investors, outside funds are more expensive. In this regard, firms must use

accumulated cash to finance profitable projects and the relationship between cash

holdings and the investment opportunity set should be positive.

5.4.1.2 Cash Flow: At the time of high operational cash flows, firms use them to finance

new profitable projects, to repay debts, to pay dividends and finally to accumulate cash.

So it is expected that cash holdings increases as cash flow level rises.

5.4.1.3 Leverage: We know that cash holdings should decrease with leverage. But, when

it is necessary to invest more and exceed retained earnings, firms issue new debt. So,

leverage increases whereas cash holdings fall. However, when investment needs are less

than retained earnings, firms repay their debt and accumulate cash.


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5.4.1.4 Investment: Generally, it is seen that at the time of financing new investment

projects firms are use primarily accumulated cash. Thus, it is expected that cash holdings

will fall with investments level.

5.4.1.5 The Trade Credit: Generally there should have been a positive relationship

between cash and trade credit. But, when trade credit is negative, the company requires

short term payments from its customers and gets long term payments from its suppliers.

So the firms with no immediate financing needs can consequently use its cash holdings to

finance its new investment projects. It decreases the cash level. Contrary, if trade credit is

positive, the company has immediate financing needs. Thus, the firm will increase its

cash level to be able to pay its suppliers.

Without, examining the relationship between cash and trade credit, we can

consider the relationship between cash and accounts payable (for the reasons explained

under the trade-off theory) and there should have been a negative relationship between

them. But, if the firm gets long term payments from its suppliers, it doesn’t have

immediate financing needs and can consequently use its cash holdings to finance its new

investments projects instead of accumulating cash. It should be remembered that if the

company obtains short term payments from its suppliers or if it pays them cash, it will

increase its cash level to be able to pay them.

5.4.1.6 Real Size: Larger firms require higher level of operational cash flow. Therefore,

they always try to increase their cash holdings and the relationship between cash holdings

and size is expected to be positive.

Although pecking order theory states that there is no optimal cash level, some of

its empirical predictions are similar to those of the trade-off theory. So, it is difficult to

distinguish empirically between these two theories.


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5.5 Cash Planning:

Prediction of cash is a process of estimating the probable sources and application

of cash over a fixed future period. It is a process through which first of all overall

financial status of a company is identified and then determines probable financial needs

with the help of budget. Therefore, we can say that prediction of cash for future purposes

is called cash planning. For cash planning following points are to be considered.

(1) For obtaining the short run profit what should be the level of cash?

(2) For meeting the needs what should be the level of cash to expect from current

income?

(3) For increase or decrease in cash flows what should be the cash balance?

(4) For meeting the expected cash deficits due to operation what should be the

portion of financing to be imposed from outside.

The above mentioned factors help us to estimate the future flows and needs of the

firm. It also helps us to reduce the idle cash balances which can adversely affect the

profitability of the firm. Cash deficits can affect the firm and may cause failure of the

firm. Cash planning is a combined effort of two types of cash policies and procedures.

Firstly, it meets the regular or normal requirement of business. Secondly, it meets the

abnormal or irregular requirement of business.

Normal requirement of business cash cab be predictable because it is regular in

nature such as raw materials, supplies, interest, wages and salaries, payment of dividends

and taxes etc. But sometimes there would be some abnormal requirement of cash for

replacement of fixed assets other than depreciation, purchase resulting price declines and

any interruptions of the cash flow which directly reduces the receipts without

consideration of cash payments.

In practice, cash needed depends on several factors like the nature of business,

size of sales volume, credit position of the firm, receivable turnover, inventory turnover

and availability of short-term credit. But, where the cash receipts and payments are

properly managed there will be no requirement of cash reserves.


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A business with larger sales volume as compared to assets generally requires

greater cash or bank balances in order to support the sales rather than a business of same

size with smaller sales volume. If the firm purchased goods on credit in such a way that

the credit terms matched with the cash receipts so that the need of cash for purchasing

raw materials and cash reserves would not be required.

Excess inventories indirectly increase the holding of cash requirements. It is also

seen that short-term loans can minimize the need of cash reserve. But a certain funds

must be maintained in order to meet the abnormal cash requirements. Therefore, the

finance manager while taking the decision relating to the holding of cash must consider

the above mentioned conditions.

5.6 Cash planning techniques: Previously we learn that cash planning is very important for any organization.

Due to lack of good cash planning the business organization can suffer from uncertainty

to pay off debt in time. Generally, fundamental accounting techniques for cash planning

are (1) Proforma Balance Sheet, (2) Break Even Analysis, (3) Cash forecast and (4) Cash

Budget. Now, we are discussing the four cash planning techniques one by one.

5.6.1 Proforma Balance Sheet: Through proforma balance sheet the appropriate cash

balance which the management thinks to be the proper minimum balance should be

incorporated with projected balances of assets and liabilities of the firm’s balance sheet.

It helps to display the future financial status of the company. It not only useful to forecast

assets and liabilities of the organization but also the profit statement items, forecasting of

cash needs through this method is not at all satisfactory because the balance sheet shows

the cash balance of a particular day, basically the last day of the financial period1. The

major loophole of this method is that it fails to show the daily cash requirement. So it is

not considered a good technique for determining the cash requirement of the

organization.

1Walker, E.W. and Baughn, W.H., Op. Cit., p. 157


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5.6.2 Break Even Analysis: In break-even analysis future cost and income is predicted

through break-even chart. The management estimates the level of production with help of

cost to output relationship. After achieving the level the financial managers predict the

fund which is beneficial to that level of operation. Similarly, when the production is

increased due to increase of profits or any other reason, then the management is able to

predict how much additional capital is needed. In reality, when the fixed and variable

costs at certain point of level are recovered or known then makes it possible for the

management to determine the rate of return on investment at various levels of production.

It is important due to the fact that management can determine very easily, how much

sales can fall before a loss is incurred. Generally, this technique is used to determine the

level of production and sales for funds requirement.

5.6.3 Cash Forecast: Another important technique of cash planning is forecasting of

cash. It is mainly useful for short range forecasting of cash. It is characterized by lags

which are delays between an action and the cash flow that results from the action2. An

organization which plan and predict the short term cash flows, simply manage the reality

well. Cash forecasting is vey important for the following reasons.

(a) How much cash should be required for meeting the operating expenses?

(b) How much cash should be needed for short-term financing?

(c) How much cash should be invested in money market?

Past experiences, information and future expectations relating to cash help the

cash forecasting. Normally, it is prepared on day to day basis. The format of daily basis

cash forecasting is given below.

2 Hampton, J.J. Op.cit., p.187.


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Cash Forecast for the Day Amount(Rs.)

Cash balance at the starting of the day

Add:- Expected cash to received during the day

Less:- Cash required foe meeting the Payment obligations of the day

Cash Balance at the End of the Day[It may be positive or negative]

**

**

**

**

**

But it should be remembered that forecasting is generally depends on the

assumptions and if assumptions are wrong then forecasting going to be incorrect.

Therefore, the basic requirement of an effective cash management is good cash forecast

and a cash forecast which is deviated from the actual result is not necessarily but a bad

forecast. It is because the objective of preparing cash forecast is to guide appropriate and

timely action toward improved control of cash flow. Hence, forecasting of cash should be

done in such a way that it not only shows the variation due to future consequences but

also provides a sound basis for the management. Cash forecasting is not free from

limitations.

Firstly, cash forecasting is deal with future and we know that future is uncertain,

so it affect the forecasting process.

Secondly, due to the uncertainty nature of information upon which forecasting is

done, so inaccuracy and conceptual errors may also crop up.

Thirdly, forecast must be to some extent depends on past data. As future events

are always changeable and past events may not always be a dependable guide.


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From these discussions it is clear that cash forecasting is good technique of cash

planning unless proper steps are taken to control the cash flow.

5.6.4 Cash Budget: Cash budget is a part of total budgetary system. It helps the

organization to maintain a balance between the expected cash receipts and expected cash

payments. It is a good management tool to measure the size of the cash balance through

time. Depending on cash budget appropriate action is taken to collect funds in the periods

of deficit by borrowing and invest the idle funds at the time of cash surpluses3.

It is a detailed forecast of expected cash flows for future periods. In other words it

is a summarized statement which shows the factors expected to affect cash inflows and

outflows. It not only considers the expected levels of cash but also helps the management

to take appropriate steps at the time of shortages or surplus of cash4.

The objectives of cash budget are,

(i) To know the deficit or surplus in advance for a particular period.

(ii) To know the nature of deficit or surplus, whether it is temporary or

permanent.

(iii) To minimize the carrying cost of cash.5

Therefore, cash budget is an important document in the hands of the management. It

is an aid for financial planning of the organisation6. It is basically a good long term

planning which consider the time and magnitude of expected changes in cash balances

and also the cash flow. The changes in cash balances and cash flows are the results of

different activities of the business and must be traced, well in advance, when and how

much funds will be needed.

3Krepps(Jr.), Clifton H. and Wacht, Richard F., Financial Administration, The Dryden Press, Hinsdalle,

Illinois, 1975, p. 328. 4Christy, G.A and Roden, peyton F., Finance, Environment and Decisions Harper and Row, Publishers, Inc.,

New York, 1973, pp. 327 – 328. 5Rao, S.B., Financial Management, Associated Personnel Services, Bombay,1977, p.59.

6Dutta, Sankar, Cash Budget-Oreparation and Importance, The Management Accountant, Calcutta,

January 1975, p.57.


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Otherwise, the organization can loose suitable investment policy or it may suffer

shortages of funds. Moreover, even if corrective action is still possible the pressure of an

already developed deficiency may not be borrow money but rearrange some phases of the

operating cycle7. Therefore, cash budget is treated as the indispensable technique of

managing cash.

Cash budget is also known as a ‘forward looking’ statement because it considers the

interplay of various transactions8. Suppose, the organization wants to increase sales, it

affects the current assets of the organization. An example can make it clear, suppose if

the organization want to increase credit sales then the cash balance will decline because

the organization pay the amount for goods purchased but does not receive the amount

from the debtors for sale of goods. Invariable change in the amount of stock can affect

not only the cash balance and accounts receivable but also affect the amount of fixed

assets. In cash budget these types of relationships are shown in a significant and

meaningful way. So, cash budget is not only a mathematical calculation but also estimate

cash for future needs. However, it should be remembered that loose cash budget renders

cash management extremely difficult9.

5.6.4.1 Period for which Cash Budget is Prepared: Cash budget can be prepared for

any period of time. When cash flows are frequently changing but predictable then cash

budget is prepared frequently for determining the cash requirement. On the other hand,

when cash flows are relatively stable then cash budget is required to prepared for a

quarter or even for larger intervals10. Shorter periods of cash budget are possible when

the operations of the organization are decentralized. Cash budgets for shorter period is

possible when income of other organization fluctuating sharply.

7 Cohen, J.B. and Robbins, S.M., The Financial Manager – Basic Aspects of Financial Administratin, Harper

and Row, new York,k May 1968, p. 327. 8Bradly, J.F., Administrative Financial Management, the Dryden Press, Hinsdle, Illinois, 1974, p.168.

9Nakra, D.S., Problems of Financial Management in Steel Industry, LokUdyog, New Delhi, August 1972,

p.22. 10

Van Horne, J.C., Financial Management and policy, Prentice Hall of India Pvt. Ltd., New Delhi, 1976, pp.

681 – 682.


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Generally, cash budget is prepared either for a month or a quarter. Monthly cash

budget is prepared for short term activities and help the financial managers consider

effect of expenditures and cash inflows and also helps in preparing quarterly cash budget.

The quarterly cash budget helps the management for preparing cash budget of the year.

The annual budget reflects the position of working capital and cash.

The period for which the cash budget is prepared depends upon different

circumstances. For determining the period of cash budget following points should be

considered.

(a) Where the organization in future years.

(b) What type of products it want to be manufactured in what volume and where?

(c) Which organization will help to do this?

(d) What type of research and development programme will help the organization?

(e) With it the organization must prepare a plan and it should be terms of rupees. As

for example, what amount of funds will be required?

(f) From where the funds should be collected?

(g) If it is collected from other sources not self generated, the when and how such

fund would be refunded?

(h) Is it happen in the organization at a very vital point when there is lack of fund?

(i) What should be the position of the organization at the end of the programme? Is it

better than the position at the beginning of the programme?

(j) What should be the position of the organization relating to its EPS? Will it

increase the return on its investment?

After preparation of the long-term cash budget we can find the answer of the above

questions. So, cash budgeting plays an important role in accumulating all the planned

activities of the organization into a good, sensible one so that the financial executives can

take steps to arrange the funds according to the operations of the organization.


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The period for which cash budget is prepared is depending upon the nature or uses

for which it is applicable. Cash budget for obtaining the short-term credit is made for

monthly or for a year. In case of floating debentures cash budget is prepared generally for

a year of the entire life of the debentures. For daily management cash budget can also be

prepared for a day.

Generally, one year cash budget is more effective than others. Cash budget

become more useful if the annual budget is divided into quarterly and monthly and

totaling accordingly. Some financial managers go a step further and calculate their firm’s

possible cash position on a weekly basis or even daily basis11. Every organization does

not want to broken their cash budget to show their receipts and payments daily or weekly.

But, the businesses whose cash flows are foe longer period can prepare cash budget for

shorter intervals. We know that the expenditures of the organization are predictable and

estimated very easily but the income is very difficult to estimate. And the situations

affecting both the receipts and payments are changing frequently. In case of a

manufacturing organization it is observed that cash declines during the first half year,

rising moderately in the third quarter and highest during the last quarter and payments are

made accordingly. These changes are influenced by the movement of receivables, which

reach their maximum growth in the third quarter and then drop precipitously as customers

pay their obligations12.

Due to uncertainty the business organization must prepare alternative cash budget

to adjust with the situation. Good organization normally prepares the cash budget on an

optimistic, on a pessimistic basis and on a most likely basis. These three tier estimates tell

the finance manager the limits within which credits and repayments might be possible13.

11

Goodman, Dr. Sam. R. Op. cit., p. 17. 12

Cohen, J. B. and Robbins, S.M., Op, Cit., p. 293. 13

Raj, A, Besent. C., Corporate Financial Management: An Introduction Tata- McGraw Hill Publishing

company Ltd., New Delhi, 1979, pp. 64- 65.


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5.6.4.2 Methods of Preparing Cash Budget: Cash Budget can be prepared in two ways.

They are (1) Receipts and Disbursement Method and (2) Adjusted Income Method.

Receipts and disbursement method is based on the projection of cash. Under this

method cash receipts and disbursements are projected for a certain period of time. After

that cash disbursement is subtracted from the cash receipts. If a receipt is higher than

disbursement then the balance is termed as surplus. On the other hand if cash

disbursement is greater than cash receipts then the balance is known as shortage. At the

time of forecasting all the possible sources of cash receipts and disbursements must be

considered.

Under the adjusted income method first of all net income is ascertained and then

other necessary transactions are adjusted to bring it to a cash basis. It is done on the basis

of profit and loss budget and then supplemented by the forecast of assets and liabilities.

In this method net income of a particular future period is estimated and then different

additions and subtractions are made with the help of cash basis. This method of cash

budgeting is applicable to those organizations which have stable earning power and

productivity. It specifically highlights the working capital needs. This method gives the

accurate result of cash position because it takes into account the changes in working

capital and other non-operating items from the balance sheet.

The adjusted income method imposes less control over cash as compare to

receipts and disbursements method. The organization with inconsistent sales and earnings

follow the receipts and disbursements method instead of adjusted income method because

it fails to identify the actual flows of money. Therefore, this method is unsatisfactory to

those organizations which are operating in ‘cash-tight’ and ‘cash surplus’ situations. The

adjusted income method is unsatisfactory for those organizations which have seasonal

and erratic behavior. Again we can conclude that adjusted income method is less

beneficial than receipt and disbursements method because the prior one fails to consider

the aggregate transactions and also in the volume.


150

Receipts and disbursements identify each and every item of income and expenses

and helps in comparison of the budgeted and actual figures. For these reason most of the

finance manager prefer to use this method. This method of cash forecast consider the

three different estimates of sales forecast which can vary from time to time. Such

estimates are physical volume of sales, average selling price per unit and lastly the

average delay in payment (credit period).

In preparing cash budget following steps should be adopted.

1. Estimating cash disbursement with proper timing.

2. Estimating cash receipts with proper timing.

3. Comparison of cash receipts with expenditures.

4. Forecasting at the time of surplus or deficit of cash.

Cash Budget can be prepared in various forms. The popular form of cash budget is

mentioned below.

Cash Budget For the period

Sl.

No

Particulars Total 1st

Quarter

(AMJ)

2nd

Quarter

(JAS)

3rd

Quarter

(OND)

4th

Quarter

(JFM)

1

DISBURSEMENTS:

A. Cash Purchases

B. Payments for Credit Supplies

C. Advances to Supplies

D. Salaries

E. Gratuity & Provident Fund

F. Rent, Electricity, Phone etc.

G. Printing

H. White washing

I. Other cash expenses


151

2

J. Interest on Loans & deposits

K. Bonus to staff

L. Honorarium

M. Repayment of Non-routine

Loans

N. Dividend on shares

O. Purchase Bonus

P. Security Deposits

Q. Sales tax

R. Income tax

S. Capital expenditure

T. Investment in securities

U. Taxes, license fees

V. Misc. expenditures

Total Disbursements

RECEIPTS

A. Routine Receipts

1) Sales

2) Accounts Receivables

3) Interest/Dividend on

Investments


152

3

4) Return on Security

deposits

5) Royalty

6) Misc. Receipts

Total Routine Receipts

B. Non Routine Receipts

1) Shares , Subscription Fees

2) Shares Admission Fees

3) Deposits

4) Sale of fixed assets

Total Non routine Receipts

C. Total Receipts

Net Change in Cash( + or -)

Cash at the beginning

Cash at the End

Surplus (+) or Deficit (-)

Additional Cash required


153

5.6.4.3 Cash Disbursement:

Cash budget always be started with the estimation of cash disbursement because

disbursement must be made and made in time and for meeting the payments sources have

to be recognized. As there are so many of items in the disbursement list therefore they

may not always co-inside with calendar month and same in each month. The purchase

and payment dates for direct material, indirect material and supplies, capital equipment

etc., are shared in such a way that purchases of the month are paid in the month. In this

ways, wages, salaries, taxes and insurance, dividend and other disbursements are added to

the respective payments for purchase for getting the budgeted cash disbursement of the

month.

Cash budget also include all types of cash transactions whether it is capital

expenditure or revenue expenditure. Acquisition of capital assets, payment of income tax,

payment of dividend etc. must be included in cash budget because these transactions

requiring cash14.

5.6.4.4 Cash Receipts:

Cash receipts depend upon the prediction that the amount will be received from

customer. For estimating the cash receipts, the sales forecast must be converted into

collection of accounts receivable by applying a projected collection period to the sales

forecast. Suppose, the projected collection period is 25 days, therefore the estimated

collections foe a particular month would be equal to the sales forecast of the preceding

month.

Cash receipts can be broadly classified into ‘Routine’ and ‘Non-routine’ receipts.

Routine receipts means receipts from normal business operation, whereas ‘non-routine’

receipts mean receipts from public or members’ deposits, share subscription etc.

Other income receipts viz. dividend income, interest payment received, cash sales,

royalty etc are estimated exactly for the month. Receipts from capital assets, sale of fixed

assets may also be estimated foe the said period.

14

Rao, S.B., Op. cit., pp. 60- 61.


154

After totaling both disbursement and receipts, the ‘net change in cash’ position

should be identified by differentiating the two balances. With it ‘cash at the beginning’

should be added to get the ‘cash at the end figure’.

5.7 Cash Control:

Regulation of cash flow is known as cash control. After projecting the cash flows,

the finance manager is sure that there should not be any difference the projected and

actual figures of cash. It is expected that the cash flows should be approximated to the

projected levels. Deviations must present because forecast and budgets involves certain

assumptions. And these deviations arise due to lack of adequate control15.

Proper management of cash flows, the cost of financing should be minimized and

operating activities of the organization will be better. It helps the organization for

effective planning. Proper cash handling cut down the cost of operations at given level.

But improper control over cash may be disastrous for the organization. Therefore, proper

control of cash ensures utilization of funds.

5.7.1 Techniques of Cash Control:

In cash control, the management’s secret is to collect cash from debtors as early

as possible but pay to creditors in delay. The reason behind this concept is ‘time value of

money’. It tells us that a unit of money received in the immediate future has more value

than one received at some later time, all other things remaining the same16. The main

techniques of controlling cash flows are as under.

15

Bari, R.R(Ed), Selected readings in Cash Management, Triveni Publications, New Delhi, 1981, p.59. 16

Walker, E.W., Essential of Financial management, Prentice Hall, Inc, Englewood cliffs, New Jersey, U.S.A.,

1971, p. 76.


155

5.7.1.1 Accelerating Cash Inflows: Acceleration and concentration of cash is very

necessary due to the time value of money. However, unused or idle funds are the liability

of cash management. Different organizations use different systems for the control of

funds. Technology also supported the system for cash flow control and management

information, cash acceleration actually means increasing the availability of cash within

the purview of the organization. It is possible only when there are more cash cycles or

increasing the speed of cash flow cycle. For running or maintaining the daily work of the

business require some amount of cash. The amount required for the business should be

reduced if possible for converting its products or serviced into cash proceeds for a greater

number of times. Whatever may be the systems adopted for accelerating cash to such

extent depends upon the current value of the immobilized funds, It can be computed by

multiplying daily receipts by the number of extra clearance days gained. However,

whether the system is applicable or not depends upon the opportunity cost benefit of the

system by applying the investment rate of return to the amount.

The organization can investigate the method foe accelerating cash inflows in the

following way.

(�

��)(ROI) > XV

Where, n = Number of days gained

ROI = Return on investment

X = Immobilized funds

V = Cost of accelerating inflows.

Alfred Desalvo has given several measures for increasing the speed of cash flow

into the organization.

Firstly, he suggested for opening incoming mail containing payments so that the

cheques can be deposited in the bank on the same day. Secondly, some minimum staff can be appointed to maintain work in the

treasurer’s office for maintaining the movement of cash through bank even in holidays.


156

Thirdly, by establishing lock boxes at the cities of the regional bank for enhance

the handling of funds from field operations. Fourthly, installing electronic transmitter at the head quarters for authorizing the

central bank with the help of wire specified sums to the banks across the country. Fifthly, by using depository transfer cheques to transmit daily receipts from the

field operation to the regional banks and finally, pay bills only when the date of the bills

are expired and give instructions to the field operators.

Cash positions of business can also be increased by increasing the collections,

minimizing the holding of inventories and greater control over payables (5). Though in

another way the inflow and outflow of cash can be improved that is synchronization of

cash flows and reduction of float (6). Here, float means the funds which are in transit. In

detail it specifies the time required for travelling the cheque and its clearance. For

improving the efficiency of cash management, cash collection method must be

established as a part of cash flow cycle. Such important methods for accelerating cash

flows are as under:

A. Centralisation of Cash functions

B. Internal control over cash receipts

C. Streamlining of banking arrangements.

5.7.1.2 Centralisation of Cash functions: Cash functions must be centralize for getting

availability of cash. It can be done if collections and disbursement functions are

centralized at one centre. Quick movement of remittances from dispersed locations to

central prevents lazy or idle cash balances from inflating the total figure required to

remain ahead of normal disbursement (7). Under this system emphasis should be given

on the avoidance of float which is the results of a decentralized system. Here, the time,

for collection of cheques and its submission to the bank for clearance for uses to the

organization should be considered in such a way that increases the cash position.

Centralization of cash reduces the time in mailing, processing and collection of cheques,

the amount of float is reduced and the proportion of cash increased. This system is

applicable to small organizations whose number of branches and sale of products and

services is limited. In that case only it works efficiently and effectively.


157

This system is not applicable for large organizations where number of branches is

too many and located in different places and time of cheques in transit will be longer.

5.7.1.3 Internal Control over Cash Receipts: In order to improve cash collection, the

management of the organization should establish an internal control system in such a way

that protects the cash from theft and embezzlement. The system of internal control should

be designed in such a way that all the money collected ends up in the organisation’s

treasury. All collections from sales should be seriously, correctly and quickly recorded in

the cash resister or other modern electronic devices in such a way that produce receipt

and money should be locked in properly. Some extraordinary items like collection of

dividend or sale of fixed assets which are not occurred so often should give ample

emphasis.

Cash handling techniques is designed if such a way that it looks like a photo copy

of the monthly statement received from the bank. It is possible if all the receipts and

disbursements are made by cheque. All the payments, except some very small amounts,

should be made by cheques, restricting the authority for payments to a very small

numbers of employees. In addition to that cheques must be signed by two responsible

authority of the organization.

The internal control procedures which include the separation of duties of the

individuals engaged in various cash receipts and disbursement works, the immediate

depositing of cash receipts, disbursement of cash only by authorized cheque with

signature of two personal and regular preparations of bank A/C reconciliations should be

adopted17. Proper internal control procedure can be adopted if the position of the cash

reported by a ‘Daily Financial Position Report’. The ‘daily financial position report’ is

shown in the following diagram.

17

Davidson, S., Stickney, C.P. and Weil, R.L., Financial Accounting – an Introduction to Concepts, Methods

and Uses, The Dryden Press, Hinsdale, Illinoise, Second edition,p.238.


158

Daily Financial Position Report

Receivables:

Balance Fund

+ Daily Billing

- Credits Issued

- Paid via Cash received

+ Adjustments

- Adjustments

New Balance

Payables:

Balance Fund

+ Invoices Posted

-Debits issued

-Bills Paid

+Adjustments

New Balance

Cash

Balance Fund

+Cash Received

-Cash Disbursed

New Balance


159

This statement is more meaningful for the financial managers than a simple cash

report18. Comparison of the actual periodic reports with the budgeted figures will help the

organization in making their decision as to where, when and at what extent financial

plans need to be rectified so that the gap between actual and budgeted reports should be

minimized.

The daily report is good for comparison between the forecast of cash flows and

actual cash flows. As the cash budgets are not showing the daily report indicating the

opening cash balance of the day, cash receipts and payments during a particular day and

closing balance of the cash, the daily report gained ample importance and also a very

useful and valuable document. A close look on the rate of cash flows for a certain periods

tells the management whether the same conform to the expectations or not. When a close

watch is maintained on the direction and movement of the daily closing cash balances,

there is an in built warning mechanism facilitating timely bank negotiations when there is

urgency to draw on the line of credit with the bank or for repayment at bank borrowings

when abundant surplus cash position persists19.

Apart from above benefits it is only a part of the financial picture of the

organization. For sound controlling of organisation’s cash position during a specific time

period the financial manager must also visualize the amounts receivable and payables, the

inventory position and the accrued payroll. For greater control over cash flows, ‘weekly

and monthly cash meeting’ must be organized. These discussions inter change the ideas

which are previously highlighted in the cash budget and take necessary action in these

regard.

5.7.1.4 Streamlining of Banking Arrangements: It is the age of banking and we can not

think our financial decisions without banking facilities, especially cash functions.

Therefore, it is very obvious to streamline the banking arrangements for faster

availability of funds. Generally, two ways we can streamline the banking arrangements.

18

Goodman, Dr. Sam R., Cash Management for small and Medium sized Companies, Prentice Hall’s

Financial Management series, Prentice-Hall, Inc., Englewood cliffs, New Jersey, U.S.A., p.20. 19

Ramamoorthy, V.E., Working Capital management, Institute for financial management, and research,

Madras, 1978, p. 142.


160

1. Concentration banking and

2. Lock-box system

5.7.1.4.(A) Concentration Banking System: Through concentration banking the size of

the float can be minimized. For enhancing the flow of funds establishing strategic

collection centers are necessary20. Multiple collection centers are to be established in

exchange of a single collection center. Customers are instructed to deposit their payments

in the collection center of their particular geographic area. Collection centers are selected

on the basis of volume of billing in the given area. After receiving the payments, they are

deposited in the collection center’s local bank. Then funds are transferred from these

local banks to the concentration bank situated at the head quarter.

The concentration banking system inheritably saves the mailing and processing

time and also reduces the need of financing. Not only that, it reduces the cost of

maintaining the system. The advantages of this system over a centralized system are two

types. Firstly, it reduces the time required for mailing and secondly, the time required to

collect cheques is also reduced21.

This system is always not being accepted. For adopting this system it should be

clear that savings are greater than cost. Small amount transfer through this system is

costly than the conventional system of depository transfer cheque. The earnings possible

on investing the released funds simply do not cover the differentials in cost22. The above

system gives the benefit to the cash manager to pool corporate funds in a central account.

From that account the cash manager efficiently and effectively make payments. In this

regard the cash manager uses the balance and deposit reporting system for monitoring

complex banking networks. It also allows the cash manager to perform the management

of aggregate cash i.e. either funds disbursements or reduces the debts or invests in the

money market.

20

VanHorne, J.C., Financial Management and Policy, Prentice-Hall, of India Pvt. Ltd., New Delhi, 1976,p.

422. 21

Ibid., p. 424. 22

Fredrick, W.S., “Use your hidden cash resources”, Harvard Business Review, 46, March-april, 1968,

pp.74-75.


161

In concentration banking system the cash manager is always searching for

operational efficiency. Cash Managers are always intended for automatic clearing and

expense free transactions of organisation’s funds.

5.7.1.4.(B) Lock-Box System : It is one of the modern pattern of controlling cash. Under

this system collection centers are established according to the billing pattern based on the

feasibility study of the area. Customers’ location and volume of payments are considered

for determining the collection centers. Under this system at every centre a local post

office box is taken as rent and authorities its customers in cash under this area to mail

their payments to that box. After that the organization inform the local banks to collect

the mails from that post box and deposited the amount in the organisation’s A/C and

maintained a detail record of cheques collected. Bank collects the mails from the post box

many times in a day. The organisation receives a deposit and payment statement from the

bank at a regular basis. It helps the organization to handling and deposition cheques.

Lock-box system is stated in the diagram below.

Listing & Deposit

Payments

(Payments)

Lock-Box System

Under this system customers mail their payments to the post office box which the

banker access it (shown in the diagram in broken line). In this way the customer relay to

the organisation’s collection office (indicated by the curve line on the top).

Customers Bank Collection Point


162

Generally, payments are collected hourly basis and deposited in the

organisatrion’s A/C automatically and inform the organization for accounting and other

purposes.

The main advantage of the Lock-Box system is that the cheques are deposited and

collected very quickly so that they are processed and bank handles the payments at a

lower cost. This system demolishes the time lag between the time the cheques are

received by the organization and deposited at the bank. However, it involves higher cost

which is the main disadvantage of this system. It is beneficial for large payments with

several transactions. For small or average payments this system is less profitable.

Concentration banking and lock-box system can bring the following benefits for

the organization. They are

1. Saving in interest charges by merging the cash balances or overdraft balances in a

single account.

2. As there is a single account at one places rather than number of accounts the

organization can use the cash credit facility at an optimum level.

3. Past loan can be repaid with in time.

4. At the time of preparing annual budget provision for diversion of operational

funds to capital must be made. It indirectly checks the increase or decrease of

working capital.

5. This system also helps the organization to convert the deposit account with

customs and excise departments into a single account for each part and regulation

of deposits with railways of quarterly, half-yearly and yearly cash for operational

purposes.

6. It makes the organization to take full advantage of expert credit facility and make

the govt. agree to accept payment of interest on six monthly basis and it helps to

reduce the overdraft balance and interest thereon23.

23

Mishra, R.K., “management in cash in public enterprises” in Issues in Public Enterprises, (Ed) Nigam,

R.S., Pragati Publications, 1980, New Delhi, pp.238-253.


163

The cost-benefit analysis proves the necessity of both concentration banking

system and Lock-box system. In this regards a comparison is to be made between the

added costs of the system with the marginal income generated from the released funds. If

the income generated from the released funds is greater than the cost of the system the

system is termed as profitable and obtained by the organization. In contrary, when the

cost is greater than marginal income then it is not profitable for the organization and

hence, rejected. However, it is observed that the degree of profitability depends primarily

on the geographical dispersion of customers, the size of the payments and the earnings

rate on the releases fund24.

Concentration banking and lock-box systems methods are created in order to

(a) Speed up the time of mailing for payments from customers to the organization,

(b) Reduce the time lag between payment received and its collection, and

(c) Speed up the movement of funds to the disbursement bank and it helps to reduce

organisation’s total financing requirement.

These two systems have other advantages like transfers the clerical functions to

the bank, reduction of organization’s cost, improvement of internal control and reduce the

fraud as much as possible25. For getting the benefit it is desirable to make structural

alterations in relations with the bank. It increases the responsibility of a cash manager to:

1. Know why the organization need a new banking services,

2. Determine exactly what programmes and operational capability the

organization require to use available networks and banking and non-banking

facilities available,

3. Know how much and how the firm should pay for the products,

4. To negotiate prices,

5. Follow through with performance evaluations and skillful communication26.

24

VanHorne, J.C., Op, Cit., p.425. 25

Pandey, I.M., financial Management, Vikas Publishing House Pvt. Ltd., New Delhi, 1981, p. 309. 26

Driscoll, M.C., Cash Management: Corporate Strategies for profit John Wiley & sons, New York, 1983, p.

81.


164

Up to that we are discussing from the organisation’s point of view that how, when

and at what point an organization should adopt the system. But, now it is very important

from the point of bank that how well they perform to make the performance of the money

mobilization work of the bank. Location of the bank, size of the bank, efficient staff for

the job and operational capability of the organization are the main factors which should

be considered for selecting the bank for organisation’s cash management. Therefore,

selection of bank is very vital and once it is selected then it is vey difficult to switch over

an0other banking facilities27.

If more banks are operated in the country then it shorter the pipeline of flow of

funds but larger funds remain immobilized at different branches. So, development of an

overall system involves balancing the length of money flows with the clusters of funds

that may be tied up in different spots28.

The financial manager must know the cash position all the times in every

organisation’s bank A/C with in the country so that he can monitor the cash balances. The

main objective behind such function is to impose limitations on the size of the accounts

maintained by such organization. The financial manager must know the cash position at

each center through establishing a working balance at local banks.

When the business organization observe that a particular bank institution or

branch is not performing well then it can switch over to other institution for better

service. At the time of selecting institution cost factor play a great role while paying

service fees, keeping compensating balances, directing suppliers to forward cheques

directly to bank depositors and collecting payments through local sales offices. It is

observed that when the organisation’s suppliers increase the availability of cash by

increasing the collection of cheques then the organization has less use of cash from such

source. Due to the consciousness of the industry many suppliers take measures to

accelerate clearances and increase the flow of funds from customers.

27

Bradly, J.F., Administrative Financial Management, The Dryden Press, Hinsdale, Illinois, Third

edition,1974,p. 171. 28

Cohen, J.B. and Robbins, S.M., The financial Manager – Basic Aspects of Financial Administration,

Harper & Row, New York, 1968, p. 335.


165

In this area the cash manager must take several measures in order to increase the

inflow of cash otherwise the cash balance will decrease. It will affect the funds. It may

also happen that the availability of cash reduces but no change has occurred in the

condition of the business or trade terms. To avoid this condition the financial manager

must consider the direction taken by and time required for its own paid receivables which

converted into usable cash.

For introduction of overall cash control system requires the following planning

decisions.

(1) Where the depositors actually situated.

(2) Selection of the institution depending on the area.

(3) Techniques helping their information status.

(4) Establishing minimum balance method.

(5) Exchanging of instructions.

(6) How to use unsaved funds.

(7) Different producers require various forms.

(8) Co-ordination of various activities.

5.8 Controlling Cash Payments: By developing different techniques which reduces the cash requirement, the

finance manager controls the disbursement of funds. Accounts payable, wages, taxes,

insurance and dividends are included in disbursement. For controlling cash the finance

manager has to keep in mind the following points29.

Are we paying items before their due date?

Are we delivering required disbursements to the banks on their specific due date?

Are we disbursing from the proper bank to take advantage of mail and clearing time?

Are we mailing our cheques at the end of the day?

29

Mathur, I., Introduction to financial Management, McMillan Publishing Company, Inc., New York, 1979,

p. 115.


166

If the objective of cash collection is to ‘maximise acceleration’ then the objective

of cash payments should be slow down the payments as much as possible, which

increases the availability of cash. So, it is better to simply hedge the time of payments

with the due dates. Any technique that delays payment beyond the due date is generally

bad and should not be utilised30. However, one popular way of maximizing cash

availability is ‘playing the float’. ‘Playing the float’ is a common technique of

disbursement float control and it actually predicting the flow of funds considering

disbursement accounts and after these funds no longer show on the organisation’s

books31. If such float is predicted properly, then the funds kept in bank can be reduced

and it increases a positive return on investment on such funds. Therefore, to increase the

organisation’s float in payables and use the funds for short term investment, flowing steps

can be adopted,

1. To make payments very late in the day so cash can be used during the remainder

of the day.

2. To make payments by cheques to extend the cash withdrawal period.

3. Arrangements may be made with vendors to set due dates of bills to coincide with

the organisation’s period of peak receipts32.

The finance manager must decide properly the levels of disbursement float at any

given time. At the time of availing discount the finance manager must consider the loss of

discount. For that the organization must prepare a ledger account where discounts are

recorded and control such funds and give opinion to the management for taking

alternative action regarding the money involved. It is because there is a practice of some

organization to pay some fixed amount in advance in order to get cash discount. On the

other hand, centralization of payables and disbursing increase the working capital at the

head office and reduces the unproductive bank balances in the hands of subsidiaries,

divisions, branches or other offices.

30

Walker, E.W., Op. cit., p. 76 31

Driscoll, M.C, Op. Cit., p. 76. 32

National Industrial Conference Board, Inc., Managing Company Cash Studies in Business Policy, No. 99,

New York, 1961, p. 38.


167

It also permits the head office to expedite the paper flow to schedule payments

more effectively and to invest excess funds generated more productively33. It helps in

payment of bills from single central account. It particularly helps the local payees who

are situated far from central account because it increases the time of sending cheques and

its receipt(transit time) and the organization will be benefited from such delay.

Another important area is the proper investment in inventories. Generally, in a

manufacturing organization, 30% of total working capital is blocked up by inventories.

Inventory controls helps in minimizing storage, demurrage and other handling charges,

accelerating the conversion process, records for slow-moving and obsolete items,

comparisons of actual to budgeted figures and investigating the reasons behind such

variances and return on investment. These techniques invariably help in effective

inventory management.

5.9 Objectives of the study in this chapter:

The present study is prepared to make an in-depth analysis of the selected

companies in Indian It sector, consumer durables sector, pharmaceuticals sector, FMCG

sector and retail sector in respect of their cash holding during the period of 2002-2011.

Holding sufficient cash enables the organization to take the risk of borrowed capital,

enlarge their assets position and investment to some profitable projects.

Holding cash is an indicator of sound liquidity. It helps the organization in

meeting their contractual obligation when they are due. Higher amount holds by the

organization as cash means better the position of liquidity. But excess holding cash can

be dangerous for maximizing profitability. Profit cannot be forgone in order to maintain

liquidity. Therefore, cash holding should be maintained in such a way that both

profitability and liquidity are not affected.

33

Horn, F.E., “ Managing Cash”. Journal of Accountancy, The American Institute of Certified Public

Accountants, Inc., U.S.A, April, 1964, pp. 41-42.


168

More specifically, the objectives of the study in this chapter are as follows.

(i) To measure the average cash holding of the selected companies from five

different sectors from cash balance at the opening and at the end.

(ii) To measure the average cash holding from the average cash holding of the

selected years under study for all companies of five different sectors,

deviation from the average cash holding of each of the selected companies

using relevant statistical tools.

(iii) To rank the companies on the basis of average cash holding. Secondly to rank

the companies on the basis of consistency and finally to rank the companies

on the basis of both average and consistency jointly.

(iv) To measure the degree of relationship between the cash holding and degree of

financial leverage, size of the organization, investment and profitability in

each of the selected companies under study by using Pearson’s simple

correlation technique and to test such coefficients.

(v) To analyse the joint influence of DFL, Size of the organization and

Investment on cash holding of the companies with the help of appropriate

statistical measures like multiple regression analysis and to test the

significance of such regression coefficients.

(vi) Finally, to examine whether the findings of the study conform to the

theoretical arguments or not. 5.10 Methodology of the study:

Twenty five popular companies from five different sectors (IT, Consumer

Durables, Pharmaceuticals, FMCG and Retail) have been selected taking five companies

from each sector. The data of the selected companies for the period 2002-2011 used in

this study, have been taken from the secondary sources i.e. Capitaline Corporate

Database of Capital Market Publishers (I) Ltd. Mumbai. Opening balance and closing

balance of cash are used to determine the average cash balance of each year and again

such cash balances are used to get the average cash holding. Large cash holding is

preferable for better liquidity of the organization. We also used the logarithmic value of

such average cash balances, size of org., investments for getting the continuously

compounded relationship or growth of variables.


169

In this study companies are ranked on the basis of average cash holding and

consistency of cash holding sector wise and then ranking has been done as whole taking

all twenty five companies considering the average cash holding and coefficients of

variation (consistency) of average cash holding. In this study we examined the

relationship between average cash holding and DFL, average cash holding and

Investment and average cash holding and profitability (RONW). Degree of financial

leverage (DFL) is computed with the help of the following formula,

DFL = Operating Profit (EBIT) / (Operating Profit – Interest)

Financial leverage arises due to use of fixed charges bearing capital in the capital structure like debt capital.

Higher debt capital means higher financial leverage. DFL measures the financial

risk of the business. DFL affect the cash holding of the organization. More external

borrowing means more cash holding. It can also be said that external borrowing replaces

cash holding. Size of the organization has been represented through the amount equal to

the log value of total assets. Size of the organization can affect the corporate cash

holding. Generally, small firms hold more cash not only for higher costs of use of

external funds but also for borrowing constraints. But, large organization means too many

expenses and for that purpose nee large cash holding. Investment of the organization has

been represented through the figure equal to the log value of total amount of Investment.

Organisation which have numerous investment opportunities but uncertain internal cash

flow hold more cash otherwise borrowing external funds for profitable investment

opportunity is costly. In this study profitability has been measured by the return on net

worth (RONW). General principle is that higher the liquidity lowers the profitability.

Holding more cash increases the short-term debt paying capacity of the organization, but

decreases the profitability by not using the excess or unused fund in some other profitable

projects. For analyzing the data statistical tools like arithmetic mean, standard deviation,

coefficient of variation etc. and statistical techniques like Pearson’s simple correlation

analysis and multiple regression analysis and statistical test like ‘t’ test have been applied

in appropriate places.


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5.11 Limitations of the study in this chapter:

(1) The study is based only on the date contained in published financial statements.

(2) Only the average cash holding is considered in the study of this chapter.

(3) The impact of some common macroeconomic factors or general factors is not

considered in the study of this chapter for the sake of simplicity.

(4) The multicollinearity factors can exist in the multiple regression analysis for

which no treatment has been done.

(5) More companies can be selected from the selected industries / sectors but for

simplicity, lack of time and unavailability of data it is not possible to select all

companies for general comment.

5.12 Findings of the study in this chapter:

From table-6 it is found that in IT sector the average cash holding (ACH) of

Philips India Ltd. (Philips) is highest in the year 2008 (Rs.596.25 Crore) and lowest in the

year 2002 (Rs. 13.3 Crore). On an average it is Rs.292 Crore. During the first half of the

study period the ACH of Philips followed an increasing trend while in the second half of

the study period a fluctuating trend is noticed. But, in the year 2009, the average cash

holding as percentage of total assets of the company is highest i.e. 65.66%. It indicates

that the liquidity position in respect of ACH is best in the year 2008 as compared to other

years whereas in respect of average cash holding as percentage of total assets it is sound

in the year 2009.

Table-6 shows that the ACH of Asian Electronics Ltd. (Asian) is highest in the

year 2007 (Rs. 21.885Crore) and lowest in the year 2005 (Rs.0.065Crore). On an average

it is Rs. 5.92 Crore. A fluctuating trend in the ACH is noticed during the study period of

Asian. The highest percentage of cash holding on total assets is noticed in 2007(7.39%).

It indicates that the company maintained a very low level of cash. It may be due to higher

cost of borrowing of external funds or investment in other projects.


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In case of Wipro Ltd. (Wipro), the picture is quite different. The ACH of Wipro is

highest in 2011 (Rs.5433.8 Crore) and lowest in 2004 (Rs.349.895Crore). On an average

it is Rs. 2083 Crore. Other than the year 2002 and 2003 the company registered an

increasing trend of ACH during the study period. The average cash holding as percentage

of total assets is highest in 2009(23.22%). Though, the company maintained high level of

cash during the study period but the percentage signifies that the company maintained

low level of cash as compared to its total assets. It signifies moderate liquidity condition

of the company.

Table-6 shows that the ACH of CMC Ltd. (CMC) is highest in the year 2011

(Rs.237.95Crore) and lowest in the year 2005 (Rs.15.33 Crore). On an average it is Rs.

76 Crore. Except the year 2002, 2003 and 2004 an increasing trend in ACH is noticed

during the study period. On the other hand cash holding as percentage of total assets is

highest in 2011(39.85%). From table we can conclude that the company improved its

liquidity position during the last part of the study period.

It is found from table-6 that the ACH of Videocon Group is highest in the year

2008 (Rs.219.08 Crore) and lowest in the year 2005 (Rs.138.1 Crore). On an average it is

Rs. 167 Crore. The ACH of Videocon fluctuated during the study period. Cash holding as

percentage of total assets is highest in the year 2003(10.79%). The company maintained a

low level of cash throughout the study period. It indicates that the company maintained a

low liquidity level throughout the study period.

Therefore, among five companies from IT sector Wipro maintained higher level

of cash throughout the study period it helped the company to improve their liquidity

position. Figure-7 also discloses that the average level of Cash Holding of Wipro is

increases throughout study period than other companies of IT sector.

It is found from table-6 that the Average Cash Holding (ACH) of Hawkins

Cooker Ltd. is highest in the year 2011 (Rs.43.73 Crore) and lowest in the year 2006

(Rs.1.755 Crore). On an average it is Rs. 9.63 Crore. The ACH of the company is

fluctuated during the first half of the study period but a steady growth in ACH is noticed

during the second half of the study period. In the year 2011 the cash holding as

percentage of total assets is highest i.e. 65.91%.


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The company maintained very low level of cash during the study period except

last two years. First eight year of the study period the liquidity condition of the company

is not so good but the company improved its liquidity position in the last two years.

It has been observed from table-6 that the ACH of Havells India Ltd. (Havells) is

highest in the year 2010 (Rs.111.56 Crore) and in the year 2005 (Rs. 0.23Crore). On an

average it is Rs. 34.1 Crore. The ACH of the company is very low during the first half.

But during the second half the company increased its level of cash holding. Cash holding

as percentage of total assets is highest in the year 2009(10.93%). As compared to total

assets is very nominal. It also indicates that the company improved its liquidity position

in the second half as compared to the first half of the study period.

From table-6 it is observed that the ACH of Khaitan Electricals Ltd. (Khaitan) is

highest in the year 2002 (Rs.2.1 Crore) and lowest in the year 2011 (Rs.0.64 Crore). On

an average it is 1.44. The company followed a mixed trend in ACH during the period

under study. Throughout the study period the company maintained very low level of

cash. But, from the point of view of cash holding as percentage of total assets year 2002

(2.63%) is the best and decreases during the study period. It may be due to raising

external funds or investment in some profitable projects. It indicates that the company

maintained very low level of liquidity in respect of ACH.

Table-6 shows that the ACH of Voltas Ltd. (Voltas) is highest in the year 2011

(Rs.416.94 Crore) and lowest in the year 2002 (Rs.56.88 Crore). On an average it is 196

Crore. The company maintained a steady increasing trend in ACH during the study

period except the year 2007. In the year 2006, cash holding as percentage of total assets is

highest which 40.56 %. The company maintained moderate level of cash during the study

period. It implies that the short term debt paying capacity of the company is sound

enough.

From table-6 it is revealed that the ACH of Siemens Ltd. (Siemens) is highest in

the year 2011 (Rs.1649.17 Crore) and lowest in the year 2003 (Rs.145.6 Crore). On an

average it is Rs. 627 Crore. A mixed trend in ACH is followed by the company.

Throughout the study period, the company increases the ACH.


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It indicates that the liquidity position of the company is better in the second half

as compared to the first half of the study period. Cash holding as percentage of total

assets is highest in the year 2007 (65.42%). It may be possible due to the fact that the

company used more funds in the first half of the study period in discharging external

funds or investing has been done in profitable projects.

Under Consumer Durables sector Siemens maintained higher level of cash during

the study period as compare to other companies. It helps the company to improve its

liquidity position. From Figure-8 same conclusion can be drawn and it is clear that the

average level of Cash Holding increases throughout the study period.

Table-6 shows that the Average Cash Holding (ACH) of Alchemist Ltd.

(Alchemist)is highest in the year 2010 (Rs.24.885 Crore) and lowest in the year 2005

(Rs.5.8 Crore). On an average it is Rs14.6 Crore. The ACH of the company fluctuated

during the study period. The average cash holding as percentage of total assets is highest

in the year 2004 (28.52%). The company maintained moderate level of cash during the

study period. It implies that the company managed a stable liquidity position during the

study period.

It has been found from table-6 that the ACH of Cipla is highest in the year 2008

(Rs.105.385 Crore) and lowest in the year 2005 (Rs.8.725 Crore). On an average it is Rs.

46 Crore. A mixed trend in ACH of the company is noticed during the study period. On

the other hand, average cash holding as percentage of total assets is highest in the year

2007 (2.61%). Though, the company increased its level of cash during the second half of

the study period. The company maintained a low cash holding level throughout the study

period. It indicates that company’s liquidity position is moderate.

It is found from table-6 that the ACH of Dr. Reddys’ Laboratory is highest in the

year 2007 (Rs.1053.825 Crore) and lowest in the year 2011 (Rs.217.1 Crore). On an

average it is Rs.592 Crore. During the first half of the study period a fluctuating trend in

ACH is noticed whereas during the second half of the study period the ACH of the

company decreased steadily. The average cash holding as percentage of total assets is

highest in the year 2003 which is 32.05%. The company has maintained steady cash level

throughout the study period. It implies sound liquidity position of the company.


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It has been observed from table-6 that the ACH of Lupin is highest in the year

2005 (Rs.39.12Crore) and lowest in the year 2010 (Rs.8.18Crore). On an average it is Rs.

21.5 Crore. The ACH of the company fluctuated throughout the study period. From the

point of view of average cash holding as percentage of total assets the year 2007(23.06%)

is best. The company maintained low level of cash in the last few years as compared to

the middle years of the study period. It may be due to large investment or paying of

external debt. Therefore, the company maintained moderate cash level throughout the

study period.

From table-6 it is found that the ACH of Ranbaxy Laboratories Ltd. (Ranbaxy) is

highest in the year 2009 (Rs.517.175 Crore) and lowest in the year 2006 (Rs.70.605

Crore). On an average it is Rs. 219 Crore. A fluctuating trend in ACH of the company is

noticed during the study period. In the year 2004 (15.01%) the average cash holding as

percentage of total assets is highest. The company maintained a moderate level of cash in

all the years of the study period. It implies that the company has maintained sound

liquidity position throughout the study period.

Hence, under Pharmaceutical sector Dr. Reddys’ Laboratory managed to maintain

high level of cash during the study period as its average is higher than other companies in

this sector. The average level of cash in Alchemist is very low. From Figure-9 it is clear

that the average level of Cash Holding of Dr. Reddys’ Laboratory and Ranbaxy

fluctuated throughout the study period.

It is found from table-6 that in case of Britannia Industries Ltd. (Britannia) the

Average Cash Holding(ACH) is highest in the year 2010 (Rs.308.87Crore) and lowest in

the year 2011 (Rs.9.84Crore). On an average it is Rs. 143 Crore. The ACH of the

company fluctuated throughout the study period. In the last year of our study period the

cash level of the company decreased drastically. In the year 2010 the average cash

holding as percentage of total assets is highest which is 37.39%. Large investment or

refund of external funds may be the reason foe drastic fall in cash balance of the

company. The liquidity position of the company in respect of ACH is sound enough

throughout the study period except in the year 2011.


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Table-6 reveals that the ACH of Dabur India Ltd. (Dabur) is highest in the year

2011 (Rs.178.16 Crore) and lowest in the year 2005 (Rs.11.27 Crore). On an average it is

Rs. 65.5 Crore. The average cash holding as percentage of total assets is highest in the

year2010 (18.37%). During the first half of the study period the ACH of the company is

fluctuated whereas in the second half of the study period a steady increase in ACH is

noticed. Therefore, the company has improved its liquidity position in the last phase of

the study period.

From table-6 it is found that the ACH of Hindustan Unilever Ltd. (HUL) is

highest in the year 2010 (Rs.1834.8 Crore) and lowest in the year 2008(Rs.308.9 Crore).

On an average it is Rs.909 Crore. From the point of view of average cash holding as

percentage of total assets is highest in the year 2010 (71.01%).Throughout the study

period the company maintained a fluctuating trend in ACH. Though, the liquidity

condition of the company in respect of ACH is good.

It has been observed from table-6 that the ACH of Marico Industries Ltd.

(Marico) is highest in the year 2008 (Rs.27.365 Crore) and lowest in the year

2002(Rs.7.085 Crore). On an average it is Rs.19.8Crore. First few years of the study

period the ACH of the company increases but after that it fluctuated. The average cash

holding as percentage of total assets is highest in the year 2004 which is 11.08%.

Throughout the study period, the company holds low level of cash. From the point of

view of ACH the company maintained low level of liquidity during the study period.

It is found from table-6 that the ACH of Nestle India Ltd. (Nestle) is highest in

the year 2011 (Rs.382.405 Crore) and lowest in the year 2002(Rs.12.385 Crore). On an

average it is Rs.152Crore. An increasing trend in ACH of the company is noticed during

the first half of the study period whereas the ACH of the company has fluctuated in the

second half of the study period. Similarly, the average cash holding as percentage of total

assets is highest in the year 2010 which is 50.53 %. The company improved its cash

level, in last phase of the study period which helped the company to improve its liquidity

condition.


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Therefore in FMCG sector the average cash holding of HUL is best. It signifies its

greater liquidity. On the other hand Marico registered poorer liquidity for it lower cash

holding. From Figure-10 it is clear that the average Cash Holding of HUL is fluctuated

during the study period to reach the top position among the companies of FMCG sector.

From table-6 it is observed that the average Cash Holding (ACH) in Bata India

Ltd. (Bata) is highest in the year 2006 (Rs.17.505 Crore) and lowest in the year

2004(Rs.3.23 Crore). On an average it is Rs.10.1Crore. The ACH of the company is

fluctuated throughout the study period. In the year 2006 the average cash holding as

percentage of total assets is highest which is 5.10%. The company maintained low level

of cash which also decreases the liquidity position of the company.

It has been revealed from table-6 that the ACH of Siyaram Silk Mills (Siyaram) is

highest in the year 2011(Rs.2.905 Crore) and lowest in the year 2002(Rs.0.845 Crore).

On an average it is Rs.1.55 Crore. The ACH of the company fluctuated in the first half of

the study period whereas an increasing trend is noticed during the second half of the

study period. The average cash holding as percentage of total assets is highest in the year

2004 which is 0.75 %. The company maintained very low level of cash in the entire study

period. It indicates that the liquidity position of the company is very poor.

In case of Gini Fabrics table-6 depicts that the ACH of the company is highest in

the year 2007 (Rs.1.295 Crore) and lowest in the year 2010(Rs.0.09 Crore). On an

average it is Rs.0.55Crore. The ACH of the company has fluctuated throughout the study

period. The table shows that Gini Fabrics maintained very low level of cash during the

study period. From the point of view of average cash holding as percentage of total

assets, highest percentage is noticed in the year 2007 (11.05%). It implies that the

liquidity position of the company from the point of view of ACH is very poor.

It is revealed from table-6 that the ACH of Raymond is highest in the year 2010

(Rs.36.68Crore) and lowest in the year 2006(Rs.19.14 Crore). On an average it is Rs.25.6

Crore. The ACH of the company fluctuated throughout the study period. In the year

2003 the average cash holding as percentage of total assets is highest which is only

1.72%. The company maintained a standard cash level during the study period. It implies

that the company followed a moderate liquidity position during the study period.


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From table-6 it is observed that the ACH of Titan Industries Ltd. (Titan) is highest

in the year 2011 (Rs.640.805 Crore) and lowest in the year 2003(Rs.20.63 Crore). On an

average it is Rs.106 Crore. The company followed an increasing trend in ACH

throughout the study period except in the year 2003. The average cash holding as

compared to total assets is highest in the year 2011 which is 58.62%. It implies that the

company has improved its liquidity position from year after year.

Therefore, in Retail sector, Titan holds higher level of cash as compared to other

companies. In consequence with we can say that the liquidity condition of Titan is far

better than other companies in respect of cash holding. Figure-11 discloses that except

Titan all the companies of Retail sector registered very low level of average Cash

Holding.

In table-7 the values of average cash holding as percentage of total assets of the

companies under study have been ascertained by applying arithmetic mean and

consistency of ACH have also been measured by using the coefficient of Variation (CV)

of their average cash holding. First of all industry wise ranks have been assigned to the

selected companies both in respect of average and consistency.

It is found from table-7 that that among IT sector the average cash holding as

percentage of total assets of Philips is the highest, followed by CMC, Wipro, Videocon

and Asian respectively in that order. The table also reveals that in respect of consistency

of designing average cash holding, Videocon captured the top most position and it is

followed by Philips, Wipro, Asian and CMC respectively. Combining both average and

consistency aspect together Philips occupied the first rank whereas Videocon has got the

second rank, followed by Wipro, CMC and Asian in that order.

It has been found from table-7 that under consumable sector the Average Cash

Holding as % of Total Assets Siemens is the highest and followed by Voltas, Hawkins,

Havells, and Khaitan respectively in that order. Table-7 also reveals that in respect of

consistency of formulating ACH, Khaitan holds the first position followed by Voltas,

Siemens, Havells and Hawkins respectively. Considering both average and consistency

aspects together Voltas and Siemens are jointly the best and it followed by Khaitan,

Hawkins and Havells in that order.


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From table-7 it is found that in the Pharmaceutical sector the Average Cash

Holding as % of Total Assets, Dr. Reddy’s Laboratory is the highest and it followed by

Alchemist, Lupin, Ranbaxy and Cipla respectively in that order. On the other hand table-

7 all so reveals that on basis of consistency in designing ACH, Alchemist captured the

first place and followed by Lupin, Dr. Reddys’ Laboratory, Cipla and Ranbaxy in that

order. Now from the point of view of both average and consistency aspects, Alchemist

remain holds the first position and it followed by Dr. Reddy’s Laboratory, Lupin,

Ranbaxy and Cipla respectively.

It is found from table-7 that among FMCG sector the Average Cash Holding as %

of Total Assets, HUL is the highest, followed by Nestle, Britannia, Dabur and Marico

respectively in that order. The table also depicts that in respect of consistency in

constructing ACH, Marico occupied the top position followed by HUL, Britannia, Nestle,

and Dabur respectively in that order. Combining both average and consistency aspect

together HUL holds the first position and it followed by Britannia, Marico, Nestle and

Dabur in that order respectively.

Among the companies of Retail sector selected in this study, the Average Cash

Holding as % of Total Assets, Titan is the highest, followed by Gini Fabrics, Bata,

Raymond and Siyaram respectively. The table also reveals that according to consistency

of constructing ACH, Raymond captured the top most position and it followed by

Siyaram, Bata, Gini Fabrics and Titan. Considering both average and consistency point of

view Raymond occupied the first place and it followed by Bata, Gini Fabrics, Titan and

Siyram.

In table-8 the values of the average cash holding as % of total assets of all the

companies from five different sectors under study have been ascertained by applying

arithmetic mean and the consistency of constructing ACH of the companies have also

been measured by using the coefficient of variation (CV). The ranks have been assigned

to the selected companies as a whole both in respect of average and consistency. The

ultimate ranks have been determined on the basis of composite score (sum total of ranks)

which have been ascertained by taking ranks based on average and ranks based on

consistency.


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It is found from table-8, that the average cash holding as % of Total Assets of

Siemens is highest, therefore, it is ranked as first and it followed by Philips, Voltas, HUL,

Nestle, Britannia, CMC, Hawkins, Dr. Reddy’s laboratory, Wipro, Titan, Alchemist,

Dabur, Lupin etc. respectively in that order. From Figure-12 we can draw the same

conclusion and it makes easy to understand.Table-8 also shows that in respect of

consistency of designing average cash holding as a whole Videocon captured the top

most position, and it is followed by Raymond, Marico, Khaitan, Alchemist, Siyaram,

Lupin, Dr. Reddy’s Laboratories, Bata, HUL, Voltas respectively in that order.

Considering both average and consistency aspect together Voltas and HUL jointly

registered first position and they followed by Philips, Videocon, Siemens, Alchemist, Dr.

Reddy’s laboratory, Britannia, Nestle, Marico, Lupin, Raymond, Khaitan, CMC, Bata,

Wipro, Siyaram, Dabur, Hawkins, Ranbaxy etc. respectively in that order.

Coefficient of correlation is the measurement of degree of association between

two variables. A positive value of ‘r’ indicated high values of one variable are generally

associated with the high values of other variables and low values with low values. In

table-9 an effort has been made to measure the degree of relationship between ACH and

each of the factors related with cash holding such as degree of financial risk (DFL), size

of the organization, Investment of the organization and lastly profitability (RONW). To

test the significance of such coefficient ‘t’ test has been applied.

Financial leverage represents sensitivity of earning per share (EPS) to change in

operating profit. The degree of financial leverage is expressed in the following ratio.

DFL = Operating Profit (EBIT) / (Operating Profit – Interest)

Financial Leverage arises due to use of fixed charges bearing capital in the capital

structure, like debt capital. Higher the use of debt capital in the capital structure higher

the DFL and vice-versa. The reason behind the use of debt capital is to magnify the

earning per share by increasing the operating profit of the organization. DFL measures

the financial risk of the business. DFL may affect the cash holdings. More external funds

(debt capital) used by the business require high cash holding for meeting such extra cost


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(Barclay and Smith, 1996). Kim et. al. (1998) find cash holding are inversely related to

debt ratios while Opler et al. (1999) argued that firms with greater likelihood of financial

distress should hold more cash. Funey, Ozkan and Ozkan (2007) find a non-monotonic

relation between cash holding and leverage. Using a large sample of firms from France,

Germany, Japan, UK and USA, they find a negative relationship between cash holding

and leverage at low levels of leverage. They opined that debt acts as a substitute for cash

holding at low levels. Therefore, cash holding is positively related with DFL at high

levels due to increases of the cost of financial.

In this study we adopted another variable called Size of the Organization. Here

total value of assets is considered as size of the organization. For computation purposes

we adopted the log value of assets.

Size of the organization my affect the corporate cash holdings. Small firms hold

more cash not only for incurring higher costs for use of external funds (Barclay and

Smith, 1996) but also because they are more likely to face borrowing constraints

(Whited, 1992, Fazzariand Petersen, 1993). Opleret. al. (1999) find that large firms with

strong credit ratings hold less cash, while Kim, Mauer and Sherman (1998) report an

insignificant negative relationship.

If we think differently, we can say that large organization means too many

expenses and for that purpose need large cash holding. Therefore, cash holding is

positively related with the size of the organization.

Investment is another factor which determines the cash holding of the

organization. In this study we adopted the Investment from total assets. For analysis

purposes we convert the rupees value of investments into log value.

Organisation, which has tremendous investment opportunities and uncertain cash

flow, may hold more cash to ensure being able to fund investments when internally

generated cash flow is low and raising external funds is costly. We must consider the

opportunity cost whether to accept or reject the valuable investment proposal for lack of

liquid funds or when external capital is too expensive. Kim et al.(1998) and Opler et al.


181

(1999) incorporates proxies for the extent of investment opportunities and variability of a

firm’s cash into their optimal trade off models. Kim et al. use a logarithmic growth rate in

the index of leading economic indicators as a proxy for the extent of profitable

investment opportunities, while Opler et al. use market-to-book ratio. From the above

studies it is clear that a firm’s cash holding increases with the level of investment

opportunities and uncertainty in future cash flow. Baskin (1987) argues that firms with

abundant investment opportunities also have an incentive to hold more cash to maintain

their competitive positions. Holding more cash may help the organization to overcome

the completion in a firm’s product markets.

Therefore, investment opportunity is positively related with the cash holding of

the organization.

Another important factor of a company is its profitability. Profitability affects the

cash holding. In this analysis we adopted Return on Net worth as profitability. We

collected the value from Balance sheet of selected companies.

Earlier in the theoretical section, we discussed the trade-off theory and pecking

order theory. According to the trade-off theory cash holding is negatively related with the

profitability. Trade-off theory predicts that the relationship between profitability and cash

holdings is negative, though profitable firms have enough cash flows to overcome

underinvestment problems (Kim et. al., 1998; Caglayan, Ozkan and Ozkan, 2002).

Contrary, according to pecking order theory cash holding fluctuates with cash flows.

Ferreira and Vilela (2003) supported the pecking order theory rather than the trade-off

theory regarding the cash holdings in EMU countries. Almeida et. al. (2004) also finds

the same result for the financially constrained firms. Bates et.al.(2009), however find the

opposite result that profitability is negatively related with cash holding. We expect to find

a negative relationship between cash holding and a firm’s profitability. Nguyen (2005)

found that cash holdings are positively associated with firm level risk, but negatively

related to industrial risk. He also found that cash holding decrease with the firm is size

and debt ratio and increases with its profitability, growth prospects and dividend payout

ratio.


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It has been found from table-9 that in IT sector the correlation coefficient between

Average Cash Holding and Degree of financial leverage (DFL) in Philips, Asian, Wipro,

CMC, Videocon are 0.723, 0.072, 0.660, (-) 0.774 and 0.379 respectively. Out of which

the correlation coefficient between ACH and DFL in Philips, Asian, Wipro and Videocon

is positive and the same in Philips and Wipro is statistically significant at 5% level. It

implies the strength of positive association between ACH and DFL in Asian, Videocon,

Philips and Wipro and correlation Coefficient of last two companies are highly

significant. But in CMC Ltd is negative and statistically significant both at 5% and 1%

level of significance. It follows the theoretical principle.

In Consumer Durable sector table-9 reveals that the correlation coefficient

between ACH and DFL in Hawkins, Havells, Khaitan, Voltas and Siemens are 0.12, (-)

0.497, 0.101, 0.760 and (-) 0.603 respectively. Out of which the correlation coefficient

between ACH & DFL in Voltas is statistically significant at 5% level. It indicates the

strength of positive association between ACH and DFL in Hawkins, Khaitan, and Voltas.

On the other hand, the correlation coefficient between ACH and DFL in Havells and

Siemens are negative.

From table-9, it is observed that in Pharmaceutical Ltd. the correlation coefficient

between ACH and DFL in Alchemist , Cipla, Dr. Reddys’ Laboratory, Lupin and

Ranbaxy re 0.802, 0.016, 0.369, (-) 0.591, (-) 0.766 respectively. Out of which the

correlation coefficient between ACH and DFL in Alchemist, Cipla, Dr. Reddy’s

laboratories are positive and the coefficient of Alchemist is statistically significant at 1%

level of significance. It implies the strength of positive association between ACH and

DFL. Contrary, the correlation coefficient between ACH and DFL in Lupin and Ranbaxy

are negative and the coefficient of Ranbaxy is statistically significant at 1% level.

It is found from table-9 that in FMCG sector the correlation coefficient between

ACH and DFL in Britannia, Dabur, HUL and Nestle are (-) 0.638, (-) 0.346, (-) 0.106 and

(-) 0.899 respectively. All the correlation coefficients are negative and out of which


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coefficient of Britannia are statistically significant at 5% level and coefficient of Nestle

Ltd is significant both at 5% and 1% level of significance.

It implies that the negative association between ACH and DFL in Britannia,

Dabur, HUL and Nestle are highly impressive. Only in casew3 of Marico the correlation

coefficient between ACH and DFL is positive. It implies positive relationship between

ACH and DFL in Marico.

Table-9 shows that in Retail sector the correlation coefficient between ACH and

DFL in Bata, Siyaram, Raymond and Titan are (-) 0.368, (-) 0.210, (-) 0.206 and (-) 0.679

respectively. All the correlation coefficients are negative out of which the coefficient of

Titan is statistically significant at 5% level. Only the correlation coefficient between

ACH and DFL in Gini Fabrics is 0.358, positive. It implies that incase of Gini Fabrics it

is positive.

It has been found from table-9 that in IT sector the correlation coefficient between

Average cash holding (ACH) and size of the organization in Philips, Asian, Wipro, CMC,

and Videocon are 0.980, 0.356, 0.983, 0.861 and 0.433 respectively. All the correlation

coefficients are positive and out of which the same in case of Philips, Wipro and CMC

Ltd is statistically significant both at 5% and 1% level. It implies the ACH and Size of the

organization is positively related in case of all the companies in IT sector selected in the

study.

It is found from table-9 that in Consumer Durable sector, the correlation

coefficient between ACH and Size of the organization in Hawkins, Havells, Khaitan,

Voltas and Siemens are 0.706, 0.894, (-) 0.916, 0.951 and 0.969 respectively. Out of

which the correlation coefficient between ACH and size of the organization in Hawkins,

Havells, Voltas and Siemens are positive and statistically significant either in 5% or 1%

or both 5% and 1% level of significance. It implies the strength of positive association

between ACH and Size of the Organisation in these companies. On the other hand, the

correlation coefficient between ACH and Size of the organization in Khaitan is negative

and statistically significant at 1% level. It indicates that in Khaitan Ltd the relationship

between ACH and Size of the organization is negative.


184

From table-9 it is revealed that in Pharmaceuticals sector the correlation

coefficient between ACH and Size of the organization in Alchemist, Cipla, Lupin and

Ranbaxy are 0.568, 0.874, 0.378 and 0.312 respectively. Out of which the correlation

coefficient between ACH and Size of the organization in Cipla is statistically significant

both at 5% and 1% level of significance. It indicated that all four companies mentioned

above the ACH and Size of the organization is positively related. On the other hand the

correlation coefficient between ACH and Size of the organization in Dr. Reddey’s

Laboratory is negative and which is (-) 0.022, very nominal negative relationship. It

implies that ACH and Size of the organization is negatively associated in Dr. Reddy’s

Laboratories.

Now, from table-9 it is observed that the correlation coefficient between ACH and

Size of the organization in all the companies selected in this study from FMCG sector are

positive. Such correlation coefficient between ACH and Size of the organization in

Britannia, Dabur, HUL, Marico and Nestle are 0.167, 0.867, 0.388, 0.261 and 0.592

respectively. In that the coefficient in Dabur is statistically significant both at 5% and 1%

level. IT implies that all the FMCG companies selected in this study have positive

relationship between ACH and Size of the organization.

It has been depicted from table-9 that in Retail sector, the correlation coefficient

between ACH and Size of the organization in Bata, Siyaram, Gini Fabrics, Raymond and

Titan are (-) 0.118, 0.657, (-) 0.740, 0.684 and 0.846 respectively. Out of which the

correlation coefficient between ACH and Size of the organization in Siyaram, Raymond

and Titan are positive and are statistically significant either at 5% or 1% or both at 5%

and 1% level of significance. It indicates that in Siyaram, Raymond and Titan the ACH

and Size of the organization are positively related. On the other hand, the correlation

coefficients between ACH and Size of the organization in Bata and Gini Fabrics, ACH is

negatively associated with size of the organization.


185

It is observed from table-9 that in IT sector the correlation coefficient between

Average Cash Holding (ACH) and Investment in Philips, Asian, Wipro, CMC, and

Videocon are (-) 0.155, 0.499, 0.842, 0.978 and 0.218 respectively. Out of which the

correlation coefficients between ACH and Investment in Asian, Wipro, CMC and

Videocon are positive. The coefficients in case of Wipro and CMC are highly significant

both at 5% and 1% level. It implies high positive association between ACH and

Investment among the four companies in IT sector mentioned above. The correlation

coefficient in Philips is negative. It shows the negative association between ACH and

Investment in Philips.

Table-9 shows that in consumer durables sector the correlation coefficients

between and Investment in Hawkins, Havells, Khaitan, Voltas and Siemens are(-)0.271,

0.856, (-) 0.819, 0.940 and 0.908 respectively. In these correlation coefficients, the same

in case of Havells, Voltas, and Siemens are positive and are statistically significant both

at 5% and 1% level of significance. It indicates that in Havells, Voltas and Siemens, ACH

is positively related with Investment. Contrary, the correlation coefficients between ACH

and Investment in Hawkins and Khaitan are negative. Out of which the coefficient in

Khaitan is statistically significant both at 5% and 1% level of significance. It implies that

in Hawkins and Khaitan the relationship between ACH and Investment is negative.

It has been revealed from table-9 that there is a low positive correlation between

ACH and investment in all the companies selected in this study from Pharmaceutical

sector and none of these is statistically significant. The correlation coefficient between

ACH and Investment in Alchemist, Cipla, Dr. Reddys’ Laboratory, Lupin and Ranbaxy

are 0.173, 0.330, 0.101, 0.102, and 0.279 respectively. It indicates that in all the

companies in Pharmaceuticals sector selected in this study ACH is positively related with

Investment.


186

In FMCG sector, table-9 shows that the correlation coefficient between ACH and

Investment in Britannia, Dabur, HUL, Marico and Nestle are (-) 0.046, 0.648, (-) 0.298,

0.611 and 0.834 respectively. In these correlation coefficients, the same in Dabur and

Nestle are statistically significant at 5% and both at 5% and 1% level of significance

respectively. It signifies that in Dabur, Marico and Nestle the relationship between ACH

and Investment is positive. But the correlation coefficient between ACH and Investment

in Britannia and HUL is negative. It portrays that in Britannia and HUL, ACH is

negatively associated with Investment.

From table-9 it is depicted that in Retail sector the correlation coefficient between

ACH and Investment in Bata, Siyaram, Gini Fabrics, Raymond and Titan are 0.626,

0.884, (-) 0.749, 0.414 and (-) 0.660. Out of which the correlation coefficient between

ACH and Investment in Bata, Siyaram and Raymond is positive and the coefficient of

Siyaram is statistically significant both at 5% and 1% level of significance. It signifies

that in Bata, Siyaram and Raymond the association between ACH and Investment is

positive. On the other hand, the correlation coefficients between ACH and Investment in

Gini Fabrics and Titan are negative and both are statistically significant at 5% level. It

implies that in Gini Fabrics and Titan, ACH is negatively related with Investment.

It has been observed from table-9 that in IT sector the correlation coefficient

between Average Cash Holding (ACH) and profitability (RONW) in Philips, Asian,

Wipro, CMC and Videocon are (-) 0.839, 0.274, (-) 0.429, 0.199 and (-) 0.325

respectively. In these correlation coefficients, the same in Philips, Wipro and Videocon is

negative. The coefficient of Philips is also significant both at 5% and 1% level of

significance. It implies that in Philips, Wipro and Videocon, the ACH is negatively

associated with RONW. On the other hand there is a low positive relationship between

ACH and RONW in Asian and CMC is observed from table-9. It indicates that in Asian

and CMC the association between ACH and RONW is positive.


187

Now, incase of Consumer durable sector it is found from table-9 that the

correlation coefficient between ACH and RONW in Hawkins, Havells, KHaitan, Voltas

and Siemens are 0.712, (-) 0.572, 0.835, 0.657 and 0.425 respectively. Out of which the

correlation coefficients between ACH and RONW in Hawkins, Khaitan, Voltas and

Siemens are positive and the same in Hawkins, Khaitan and Voltas are significant either

at 5% or at 1% level of significance. It implies that ACH and RONW is positively

associated in Hawkins, Khaitan, Voltas and Siemens. But the correlation coefficient

between ACH and RONW in Havells is negative. It implies the negative association

between ACH and RONW.

Table-9 shows that in Pharmaceutical sector all the correlation coefficients except

in Lupinthe correlation between ACH and RONW are negative. The correlation

coefficients between ACH and RONW in Alchemist, Cipla, Dr. Reddys’ Laboratories,

Lupin and Ranbaxy are (-) 0.710, (-) 0.584, (-) 0.233, 0.366 and (-) 0.111 respectively.

Out of which the coefficient in Alchemist is statistically significant at 5% level. It implies

that the strength of negative association between ACH and RONW in Alchemist, Cipla,

Dr. Reddys’ Laboratories and Ranbaxy are highly impressive. The correlation coefficient

in Lupin is positive. It implies that in Lupin ACH is positively related with RONW.

It is found from table-9 that in FMCG sector the correlation coefficient between

ACH and RONW in Britannia, Dabur, HUL, Marico and Nestle Ltd. are (-) 0.441, 0.547,

0.383, 0.749 and 0.826 respectively. Out of which the correlation coefficient between

ACH and RONW in Dabur, HUL, Marico and Nestle are positive and coefficient of last

two companies is statistically significant at 5% and both at 5% and 1% level of

significance respectively.It signifies that in Dabur, HUL, Marico and Nestle the

relationship between ACH and RONW is positive and significant. On the other hand the

correlation coefficient between ACH and RONW in Britannia is negative. It indicates

that in Britannia ACH is negatively related with RONW. At last in Retail sector table reveals that the correlation coefficient between ACH

and RONW in Bata, Siyaram, GiniFabrics, Raymond and Titan are 0.831, 0.725, (-)

0.736, (-) 0.591 and 0.568 respectively. Out of which the coefficients in Bata, Siyaram

and Titan are positive. The coefficients of Bata and Siyaram are also significant at 1%


188

and 5% level of significance respectively. It implies that in Bata, Siyaram and Titan the

strength of relationship between ACH and RONW in Gini Fabrics and Raymond are

negative. Out of which the coefficient of Gini Fabrics is statistically significant at 5%

level. It implies that in Gini Fabrics and Raymond ACH is negatively associated with

RONW. It follows the principle. Table-9 shows that out of twenty five correlation coefficients between ACH and

DFL of selected companies from five different sectors in this study, twelve correlation

coefficients are positive out of which four coefficients are found to be statistically

significant while in the remaining thirteen correlation coefficients are negative, of which

five coefficients are found to be statistically significant. It implies that in most of the

companies under the study ACH is negatively related with DFL. Table-9 exhibits that out of twenty five correlation coefficients between ACH and

Size of the organization of the selected companies from five different sectors, twenty one

correlation coefficients are positive, out of which twelve correlation coefficients are

statistically significant. On the other hand the remaining four correlation coefficients are

negative, out of which two coefficients are statistically significant. Therefore, the present

study indicates that most of the companies, in the study from five different sectors, ACH

is positively related with size of the organization.

Table-9 reveals that out of twenty five correlation coefficients between ACH and

Investment of the companies selected under study, eighteen correlation coefficients are

positive out of which eight correlation coefficients are statistically significant whereas

remaining seven correlation coefficients are negative, of which three are statistically

significant. It implies that in most of companies from five different sectors ACH is

positively related with investment. It followed the general accepted principle of higher

cash holding insists higher investment.

Table-9 shows that out of twenty five correlation coefficients between ACH and

Profitability (RONW), fourteen correlation coefficients are positive out of which seven

correlation coefficients are statistically significant while the remaining eleven correlation

coefficients are negative, of which three correlation coefficients are statistically

significant. It indicates that most of the companies from five different sectors ACH is

positively associated with RONW. The study failed to provide any clear indication in

favour of the generally accepted principle that higher the cash holding lower the

profitability.


189

In table-10 an attempt has been made to assess the influence of DFL, Size of the

organization and Investment on Average Cash Holding. In this study DFL has been taken

as the measure of financial risk, log value of total assets has been taken as the measure of

size of the organisation and log value of total investment has been taken as the measure

of Investment. The linear regression equation has been fitted in this study ACH = b0 + b1

DFL + b2 Size of the org. + b3 Investment, b0 is the value of intercept term (constant) and

b1, b2 and b3 are the slopes of the line, i.e. the regression coefficient of ACH on DFL,

Size of the organization and Investment. This regression equation has been tested by‘t’

test.

It has been found from table-10 that in case of IT sector, for one unit increase in

DFL the ACH of Philips stepped up by only 0.255 units, which is statistically

insignificant. The above table also reveals that for one unit increase in the size of the

organization the ACH of Philips go up by 2.205 units which is found to be statistically

significant at 1% level.

Table-10 exhibits that for one unit increase in Investment, the ACH of Philips

goes up by only 0.049 units, which is also statistically insignificant. It implies that the

influence of DFL, Size of the organization and Investment on ACH is positive. The

coefficient of determination (R2) makes it clear that only 97.3% of the variation of the

company’s ACH is accounted for by the variation in DFL, Size of Org and Investment.

Table-10 exhibits that, for one unit increase in DFL, the ACH of Asian Electronic

Ltd. is go down by only 0.127 units which is also statistically insignificant. It is revealed

from table-10 that for one unit increase in size of the organization the ACH of Asian go

down by only 0.752 units which is insignificant. Table-10 also shows that for one unit

increase in Investment the ACH of the company stepped up by only 0.518 unit which is

insignificant. It signifies that the influence of Investment on ACH is positive but not

statistically significant whereas the influence of DFL and size of the organization on

ACH is negative. The coefficient of determination (R2) makes it clear that only 33.6% of

the variation of the company’s ACH is accounted for by the variation in DFL, Size of

Organisation and Investment.


190

It is found from table-10 that for one unit increase in DFL the ACH of Wipro

stepped up by 1.955 units which is statistically insignificant. Table 10 depicts that for one

unit increase in size of org the ACH of Wipro increase by 1.750 units which is

statistically significant at 1% level. Table-10 also reveals that for one unit increase in

Investment the ACH of Wipro go down by only 0.448 units which is statistically

significant at 1% level. It indicates that the influence of DFL and size of the organization

on ACH is positive and statistically significant while Investment is negatively influence

the ACH Wipro. The coefficient of determination (R2) makes it clear that only 99.1% of

the variation of the company’s ACH is accounted for by the variation in DFL, Size of


The table-10 depicts that for one unit increase in DFL, the ACH of CMC

decreased by 2.938 units which is statistically insignificant. It is found from table-10 that

for one unit increase in size of the organization the ACH of CMC Ltd increased by 0.527

units which is statistically insignificant.

It is also found from table-10 that for one unit increase in Investment, the ACH of

CMC increased by 0.442 units which is statistically significant at 1% level. It indicates

that size of the organization and Investment of Wipro positively influenced the ACH

which DFL of the company negatively influence the ACH. The coefficient of

determination (R2) makes it clear that only 97.4% of the variation of the company’s ACH

is accounted for by the variation in DFL, Size of Org and Investment.

It is revealed from table-10 that for one unit increases in DFL, the ACH of

Videocon increased by 0.046 units which is statistically insignificant. Table-10 portrays

that for one unit increase in size of the organization, the ACH of Videocon stepped up by

only 0.111 units which is insignificant. The table 10 also displays that for one unit

increase in Investment the ACH of Videocon Ltd is go up by 0.107 units which is

insignificant. It implies that the influence of DFL, Size of the organization and

Investment on ACH is positive. The coefficient of determination (R2) makes it clear that

only 23.6% of the variation of the company’s ACH is accounted for by the variation in

DFL, Size of Org. and Investment.


191

Therefore, from table-10 it is clear that in case of both Philips and Videocon the

influence of DFL, Size of the organization and Investment on ACH are positive.

Now in case of Consumer Durable sector table-10 depicts that for one unit

increase in DFL the ACH of Hawkins stepped down by only 0.045 units which is

statistically insignificant. The table-10 shows that for one unit increase in Size of the

organization, the ACH increased by 3.196 units which is statistically significant at 1%

level. The table also reveals that for one unit increase in Investment the ACH of Hawkins

decreased by 0.724 units which is insignificant. It indicates that only size of the

organisaiton positively influence the ACH of the company whereas the influence of DFL

and Investment on ACH is negative. The coefficient of determination (R2) makes it clear

that only 74.3% of the variation of the company’s ACH is accounted for by the variation

in DFL, Size of Org and Investment.

It has been found from table-10 that for one unit increases in DFL, the ACH of

Havells decreased by only 0.028 units which is insignificant. Table-10 also shows that for

one unit increase in Size of the organization the ACH increased by 1.733 unit which is

statistically significant at 10% level. The table also portrays that for one unit increase in

Investment the ACH of Havells stepped up by 0.374 units which is insignificant. It

signifies that the influence of size of the organization and Investment on ACH is positive

whereas the influence of DFL on ACH is negative. The coefficient of determination (R2)

makes it clear that only 84.6% of the variation of the company’s ACH is accounted for by

the variation in DFL, Size of Org and Investment.

It is found from table-10 that for one unit increase in DFL the ACH of Khaitan

stepped up by only 0.011 units which is statistically significant at 10% level. It is also

depicted from table 10 that for one unit increase in size of the organization, the ACH of

Khaitan go down by 4.245 units which is statistically in significant. Table 10 also

portrays that for one unit increase in Investment the ACH of Khaitan go down by 0.101

unit which insignificant. It indicates that the size of the organization and Investment

negatively influence the ACH of Khaitan, while DFL positively influenced the ACH of

the company. The coefficient of determination (R2) makes it clear that only 90.8% of the

variation of the company’s ACH is accounted for by the variation in DFL, Size of Org.

and Investment.


192

Table-10 exhibits that for one unit increase in DFL the ACH of Voltas decreased

by 1.017 units which is statistically significant at 5% level. Table 10 also exhibits that for

one unit increase in size of the organization the ACH of Voltas stepped up by 1.211 units

and which is statistically significant at 1% level. The table shows that for one unit

increase in Investment, the ACH of Voltas go down by 0.257 units which is also

insignificant. It implies that only the size of the organization influenced the ACH

positively whereas DFL and Investment are negatively influenced the ACH of Voltas.

The coefficient of determination (R2) makes it clear that only 96.9% of the variation of

the company’s ACH is accounted for by the variation in DFL, Size of the Org. and

Investment.

It is found from table-10 that for one unit increases in DFL, the ACH of Siemens

decreased by 1.018 units, which is insignificant. Table-10 also exhibits that for one unit

increase in size of the organization the ACH of Siemens increased by 0.721 units which

is statistically significant at 1% level. Table-10 reveals that for one unit increase in

Investment the ACH of Siemens increased by only 0.184 units which is also not

significant. It signifies that size of the organization and Investment influence the

company positively whereas the influence of DFL on ACH is negative. The coefficient of

determination (R2) makes it clear that only 96% of the variation of the company’s ACH is

accounted for by the variation in DFL, Size of Org and Investment.

Therefore, we can conclude that the three factors influenced the ACH of

companies either positively or negatively during the study period. The most interesting

fact is that out of five consumers durable companies the size of the organization in four

cases positively influenced the ACH and out of which three are statistically significant.

In Pharmaceutical sector, it is found from table-10 that for one unit increase in

DFL the ACH of Alchemist stepped up by 1.879 units which is statistically significant at

1% level. Table-10 also reveals that for one unit increase in size of the organization the

ACH of alchemist go down by 0.346 units which is insignificant. Table-10 depicts that

for one unit increase in Investment the ACH of Alchemist stepped up by 0.542 units

which is also insignificant.


193

It indicates that DFL and Investment influence the company positively, whereas

size of the organization influenced the ACH of Alchemist negatively. The coefficient of



Table-10 exhibits that for one unit increase in DFL, the ACH of Cipla goes down

by 4.518 units which is insignificant. Table-10 depicts that for one unit increase in Size

of the organization the ACH stepped up by 1.238 units which is statistically significant at

1% level. Table-10 also depicts that for one unit increase in Investment the ACH of Cipla

decreased by only 0.001 units which is insignificant.

It signifies that only size of the organization influenced the ACH of Alchemist

positively whereas the influence of DFL and Investment on ACH in Cipla is negative.

The coefficient of determination (R2) makes it clear that only 78% of the variation of the


The table-10 reveals that for one unit increase in DFL the ACH of Dr. Reddys’

Laboratory increased by 3.006 units which is insignificant. Table-10 also shows that for

one unit increase in Size of the organization the ACH of Dr. Reddys’ Laboratory go

down by 0.689 units which is insignificant. Table-10 portrays that for one unit increase in

Investment the ACH of Dr. Reddys’ laboratory increased by 0.382 units which

insignificant. It indicates that DFL and Investment of Dr. Reddys’s Laboratory positively

influence the ACH whereas the influenced of Size of the Organisation on ACH is

negative in Dr. Reddys’ laboratory. The coefficient of determination (R2) makes it clear

that only 23.8% of the variation of the company’s ACH is accounted for by the variation

in DFL, Size of Org and Investment.

It is found from table-10 that for one unit increase in DFL the ACH of Lupin

decreased by 1.985 units which is insignificant. Table-10 also reveals that for one unit

increase in size of the organization the ACH of Lupin stepped up by 1.249 units which is

statistically insignificant. It is observed from table-10 that for one unit increases in

Investment the ACH of Lupin goes down by 0.486 units which is insignificant.


194

It indicates that only size of the organization influenced the ACH positively,

otherwise there is a negative influence of DFL and Investment on ACH is exists in Lupin.

The coefficient of determination (R2) makes it clear that only 51.3% of the variation of

the company’s ACH is accounted for by the variation in DFL, Size of Org and

Investment.

It has been found from table-10 that for one unit increase in DFL and size of the

organization the ACH of Ranbaxy stepped up by 4.011 units and 0.771 units respectively

and out of which the first one is statistically significant at 5% level. The table also reveals

that for one unit increase in Investment the ACH of Ranbaxy stepped up by 0.518 units

which is insignificant.

It implies that DFL and size of the organization influence ACH of Ranbaxy

negative while the influence of Investment on ACH in Ranbaxy is positive. The



Hence, all the factors influenced the ACH of the companies either positively or

negatively in Pharmaceutical sector. Only in two cases the influence of DFL and Size of

the organization the multiple regression coefficient are statistically significant at 1% level

of significance.

Among FMCG sector table-10 shows that for one unit increase in DFL the ACH

of Britannia go down by 11.814 units which is statistically significant at 1% level. Table-

10 depicts that for one unit increase in size of the organization the ACH of Britannia

stepped up by 3.104 units which is statistically significant at 10% level. From table-10 it

is found that for one init increase in Investment the ACH of Britannia decreased by 0.093

units which is insignificant. It indicates that only the influence of size of the organization

on ACH is positive whereas the influence of DFL and Investment on ACH in Britannia is

negative. The coefficient of determination (R2) makes it clear that only 79.2% of the

variation of the company’s ACH is accounted for by the variation in DFL, Size of Org

and Investment.


195

From table-10 it is found that for one unit increase in DFL the ACH of Dabur

stepped down by 3.589 units which is statistically significant at 5% level. Table-10 also

portrays that for one unit increase in size of the organization the ACH of Dabur go up by

2.761 units which is highly statistically significant at 1% level. Table-10shows that for

one unit increase in Investment the ACH of Dabur stepped down by 1.287 units which is

statistically significant at 5% level. It implies that the influence of DFL and Investment

on ACH in Dabur is negative whereas the influence of Size of the organization on ACH

is negative. The coefficient of determination (R2) makes it clear that only 91.5% of the


and Investment.

Table-10 reveals that for one unit increase in DFL, the ACH of HUL go down by

2.191 units, which is insignificant. Table-10 shows that for one unit increase in size of the

organization, the ACH of HUL go up by 1.406 units which is statistically significant at

10% level. Table-10 also portrays that for one unit increase in Investment the ACH of

HUL decreased by 0.478 units which is insignificant. It signifies that only the influence

of Size of the organization on ACH in HUL is positive whereas the influence of DFL and

Investment on ACH is negative. The coefficient of determination (R2) makes it clear that

only 43% of the variation of the company’s ACH is accounted for by the variation in

DFL, Size of Org and Investment.

It is found from table-10 that for one unit increase in DFL the ACH Marico goes

up by 1.342 units which is insignificant. Table-10 also reveals that for one unit increase

in size of the organization the ACH of Marico go down by 0.584 units which is

statistically significant at 10% level. Table-10 also reveals that for one unit increase in

Investment the ACH of Marico stepped up by 0.314 units which is statistically significant

at 5% level. From this analysis it is clear that DFL and Investment of Marico positively

influenced the ACH whereas the influence of size of the organization on ACH is

negative. The coefficient of determination (R2) makes it clear that only 66.8% of the


and Investment.


196

Table-10 exhibits that for one unit increase in DFL, the ACH of Nestle goes down

heavily by 32.854 units, which is statistically significant at 1% level. Table-10 also

exhibits that for one unit increase in size of the organization the ACH of Nestle stepped

up by 1.455 units which is statistically significant at 1% level. Table-10 also portrays that

for one unit increase in Investment the ACH of Nestle go up by 0.084 units, it also

statistically not significant. It signifies that the influence of Size of the organsation and

Investment on ACH in Nestle is positive whereas the influence of DFL on ACH in Nestle

is negative. The coefficient of determination (R2) makes it clear that only 96.9% of the


and Investment.

Thus, all the factors are influenced the ACH of each company in FMCG sector

either positively or negatively depending upon the situation. But, the most interesting

factor is that in most of the cases only size of the organization influence the ACH of each

company positively, are highly statistically significant.

Now, in Retail sector, Table-10 exhibits that for one unit increase in DFL the

ACH of Bata decreased by only 0.031 units which is insignificant. Table-10 is also

revealed that for one unit increase in size of the organization the ACH of Bata increased

by 0.215 units which is insignificant. Table-10 shows that for one unit increase in

Investment the ACH of Bata increased by 0.557 units which is statistically not

significant. It signifies that both the size of the organization and Investment is positively

influenced the ACH of Bata whereas DFL has negative influence on ACH. The



It has been observed from table-10 that for one unit increase in DFL the ACH of

Siyaram goes down by 0.156 units, which is insignificant. Table-10 also portrays that for

one unit increase in size of the organization the ACH of Siyaram goes up by 0.079 units

which is insignificant. Table-10 also reveals that for one unit increase in Investment the

ACH of Siyaram increased by 0.150 units which is statistically significant at 5% level.


197

It implies that size of the organization and Investment influenced the ACH

positively which is also significant whereas DFL, negatively influence the ACH of

Siyaram. The coefficient of determination (R2) makes it clear that only 79.3% of the


and Investment.

Table-10 exhibits that for one unit increase in all the factors like DFL, Size of the

Organisation and Investment the ACH of Gini Fabrics are go down by 0.416 units,

1.780units and 0.350 units respectively and none of them is significant. It indicates that

all the factors have negatively influence the ACH of Gini Fabrics. The coefficient of



Now, table-10 exhibits that for one unit increase in DFL and Size of the

organization, the ACH of Raymond stepped up by 0.028 units and 1.284 units

respectively, out of which last one is statistically significant at 10% level. The table-10

also shows that for one unit increase in Investment the ACH of Raymond go down by

0.763 units which is insignificant. It indicates that DFL and Size of the organization in

Raymond influenced the ACH positively whereas Investment influenced the ACH

negatively. The coefficient of determination (R2) makes it clear that only 56% of the

variation of the company’s ACH is accounted for by the variation in DFL, Size of


Table-10 shows that for one unit increase in DFL and Investment, the ACH of

Titan go down by 0.272 units and 0.068 units respectively and out of which, first one is

statistically significant at 10% level. Table also reveals that for one unit increase in size

of the organization, the ACH go up by 2.808 units, which is statistically significant at 5%

level. It implies that DFL and Investment influence the ACH in Titan negatively while

Size of the organization positively influenced the ACH of Titan. The coefficient of


is accounted for by the variation in DFL, Size of Organisation and Investment.


198

Therefore, it is clear that only in case of Gini Fabrics all the factors influenced the

ACH negatively. In most of the cases Size of the organization influenced the ACH

positively with high level of significance.

The regression equation of ACH on DFL, Size of the organization and Investment

fitted in this study shows that out of twenty five cases only eight cases the effect of DFL

on ACH are positive out of which only in two cases the effect is statistically significant

and in remaining seventeen cases the effect is negative and out of which six cases the

effect is statistically significant. Again, out of twenty five cases, the impact of Size of the

organization on ACH is positive in eighteen cases out of which thirteen cases the effect is

statistically significant. In remaining cases the impact of Size of the organization on ACH

are negative, out of which only in one case the effect is statistically significant. The

equation fitted in this study shows that out of twenty five cases only thirteen cases the

impact of Investment on ACH is positive out of which only three cases the effect is

statistically significant. In remaining twelve cases the impact of Investment on ACH are

negative but out of which only in two cases the effect is statistically significant.


199

5.13 Conclusion:

Cash Holding is an important decision, a financial manager has to make. At the

time of inflow of cash the manager may think whether it is distributed to the shareholder

as dividend or purchase the shares from market or keep it for future purposes. Generally,

it is seen that the organization hold cash for future purposes is very negligible.

It is also found that growth firm holds more cash than mature firms. It can also

opine that growth firms and mature firms have different needs for holding cash. Cash

holding is negatively related with the firm’s characteristics, size, level of liquid assets and

short-term debt. In case of mature firm the holding of cash depends on the form of

dividends or stock repurchased and decreases with their research and development

expenses.

Ultimately, cash level of mature companies increases with their investment level.

It is also found that cash level of mature companies is negatively related with trade credit.

The liquidity position in relation with cash holding of Wipro in IT sector, Siemens in

Consumer Durable sector, Dr. Reddy’s Laboratories in Pharmaceuticals sector, HUL in

FMCG sector and Titan in Retail sector are good among the companies selected under

this study.

Considering both average and consistency aspects of Average Cash Holding

together, Videocon in IT sector, Khaitan in Consumer Durable sector, Alchemist in

Pharmaceuticals sector, Marico in FMCG sector and Raymond in Retail sector occupied

the first place among other companies selected in this study. From overall point of view

considering both average and consistency of Average Cash Holding of Videocon is the

best.

The correlation analysis implies that in most of the companies under the study

ACH is negatively related with DFL. The present study indicates that most of the

companies, in the study from five different sectors, ACH are positively related with size

of the organization. It also implies that in most of companies from five different sectors

ACH is positively related with investment. It followed the general accepted principle of

higher cash holding insists higher investment.


200

It indicates that most of the companies from five different sectors ACH is

positively associated with RONW. The study failed to provide any clear indication in

favour of the generally accepted principle that higher the cash holding lower the

profitability.

The linear regression equation signifies that the effect of DFL on ACH is negative

in most of the companies selected under this study. The impact of Size of the

organization on ACH is positive in most of the companies under study. The equation

fitted in this study shows that in majority of the companies the impact of Investment on

ACH is positive.

It is often observed that presently companies are holding less cash, rather to say

their working capital is very minimum or even negative. The reason behind such decision

is investment of such excess cash or even amount of working capital in Derivative market

or Stock Market. More interesting factor is that the companies can easily collect money

from such market by selling the securities instantly without incurring any extra cost. But,

in our study we are not considering such factors due lack of time and information.


201

Figure-7

Avg. Cash Holding of IT Sector

Figure-8

Avg. Cash Holding of Consumer Durable Sector

Figure-9

Avg. Cash Holding of Pharmaceuticals Sector

0

1000

2000

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4000

5000

6000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

PHILIPS

ASIAN

WIPRO

CMC

VIDEOCON

0

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

HAWKINS

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KHAITAN

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SIEMENS

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

ALCHEMIST

CIPLA

DR. REDDYS

LUPIN

RANBAXY


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Figure-10

Avg. Cash Holding of FMCG Sector

Figure-11

Avg. Cash Holding of Retail Sector

Figure-12

Avg. Cash Holdingas percentage of total assets of all companies as a whole

0

200

400

600

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1000

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

BRITANIA

DABUR

HUL

MARICO

NESTLE

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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