MEANING OF CASH:Cash is one of current assets of a business concern should
always keep sufficient cash for meeting its obligations.
Cash means both cash in hand and cash at bank and even
includes marketable securities which can be easily
converted into cash.
NATURE OF CASH:Cash itself does not produce goods and services. It is used
as a medium to acquire other assets. It is the other assets
which are used in manufacturing goods or providing
services. The idle cash can be deposited in bank to earn
interest. A business has to keep required cash for meeting
various needs. These remains a gap between cash inflows
and cash outflow. Sometimes cash receipts are more than
the payments or it may be vice verse at another time. A
financial manger tries to synchronies the cash inflows and
cash outflows.
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Transaction motive:- a firm needs cash for making
transactions in the day to day operations.
Precautionary motive:-a firm is required to keep cash for
meeting various contingencies.
Speculative motive:- it relates to holding of cash for
investing in profitable opportunities as and when they
arise.
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Cash management has assumed importance because it is
the most significant of all the current assets. It is required
to meet business obligations and it is unproductive when
not used.
Cash management deals with the following:
i) cash inflows and outflows.
ii) cash flows within the firm
iii) cash balance held by the firm at a point of time.
a)Cash planning:- it is technique to plan and control the use
of cash.
b)Cash forecasts and budgeting :- a cash budget is the
estimate of cash receipts and disbursements during a
future period of time. it includes short term and long term
cash forecasts. It may be made with the help of following
methods:
i) receipts and disbursements method.
ii) adjusted net income method.
Cash management will be successful only if cash collections are
accelerated and cash disbursements are delayed.
Methods of accelerating cash inflows are:1) Prompt payment by customers:-In order to accelerate cash
inflows collection from customer should be prompt.
2) Quick conversion of payment into cash:-Cash inflows can be
accelerated by improving the cash collecting process.
3) Decentralized collections:-A number of collecting centers are
opened in different areas to reduce the time.
4)Lock box system:- Under this method, the firm selects some
collecting centres at different places
on basis of number of
consumers and remittance to be received.
1)Paying on last date:- The disbursements can be delayed on
making payments on the last due date only.
2) Payment through drafts:- A company can delay payments
by issuing drafts to the suppliers instead of giving cheques.
3) Adjusting payroll funds:- It can be done by reducing the
frequency of payments.
4) Centralization of payment:-The payments should be
centralized and through drafts.
5) Inter-bank Transfer:- An efficient use of cash is possible by
inter-bank transfer.
A firm has to maintain a minimum amount of cash for
setting the dues in time. if a firm maintain less cash
balance then its liquidity position will be weak. If higher
cash balance is maintain then an opportunity to earn is
lost. There are two approaches to determine an optimal
cash balance:i) minimizing cost models
ii)Preparing cash budget.
A number of mathematical models have also been developed to
determine the optimal cash balance:a)operating cycle model
b)Inventory model
c)Stochastic model
d)Probability model
The models mainly used to determine optimum balance of cash are
Inventory model by WilliamJ. Baumol and Stochastic model by
M.H.Miller.
William J. Baumol developed a model which is usually used
in inventory management but has its application in
determining optimum cash balance. The optimal cash
balance is the trade off between cost of borrowing or
holding cash and transaction cost(i.e cost of converting
marketable security into cash). The optimal cash balance
is reached at a point where total cost is minimum. It can
be represented algebrically as:C= (2A x F/O)1/2
Where, C= Optimum balance
A= Annual(or monthly) cash disbursements
F= Fixed cost per transaction
O= Opportunity cost of holding cash.
M.H. miller and Daniel Orr expended on the Baumol
model and developed stochastic model for firms with
uncertain cash inflow and cash outflows. The model
provides two control limits the upper control limit and the
lower control limit along with a return point. the spread
between the upper and lower cash balance limits can be
computed using miller Orr model as below:
Z= 3(3/4 x transaction cost x variance of cash flows
/interest rate)1/3
and return point= lower limit + spread(z)/ 3
variance of cash flows = (standard deviations)2
MEANING:- Receivables represent amounts owe to the firm as a
result of sale of goods or services in the ordinary course of
business. These are claims of the firm against its customers and
from part of its current assets. Receivables are also known as
accounts receivables, customer receivables or book debts. The
period of credit and extent of receivables depends upon the
credit policy followed by the firm.
1. Cost of financing receivables:- The receivables are
financed from the funds supplied by shareholders for long
term financing and through retained earnings.
2. Cost of collection:-Cost of collection include sending
reminders to customers for early payment, legal recourse
taken for collection of receivable
3. Bad debts:- The amounts which the customer fail to pay
are known as bad debts.
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b)
c)
d)
e)
f)
Size of credit sales
Credit policies
Terms of trade
Expansion plans
Credit collection efforts
Habits of customers
A sound managerial control require proper management of
liquid assets and inventory. Receivable result from credit
sales. A concern is required to allow credit sales in order
to expand sales volume and profits.
Receivable management is the process of making decisions
relating to investment in trade debtors. Investment in this
asset involve cost consideration .There is always a risk of
bad debts too.
In the words of Bolton, S.E., the objective of receivables
management is “ to promote sales and profits until that
point is reached where the return on investment in further
funding of receivables is less than the cost of funds raised
to finance that additional credit”. Thus the objective of
receivables management is to take a sound decision as
regards investment in debtors.
Aspects of receivables management:1)Forming of credit policy.
2)Executing the credit policy.
3)Formulating and executing collection policy.
For efficient management of receivables, a concern must adopt
a credit policy. its related:a) Quality of trade accounts or credit standards:-the volume of
sales will be influenced by the credit policy of a concern.
b) Length of credit period:-length of credit means the period
allowed to the customers for making the payment. The
customers paying well in time may also be allowed certain cash
discount. More credit time is allowed to increase sales to
existing customers and also to attract new customers.
c) Cash discount:-cash discount is allowed to expedite the
collection of receivables. The concern will be able to use the
additional funds received from expedited collections due to
cash discount.
d) Discount period:-the collection of receivables is influenced
by the period allowed for availing the discount.
a) Collecting credit information:-The first step is to gather credit
information about the customer to know about their financial
position. The information may be available from financial
statements, credit rating agencies, reports from banks, firm
records,etc.
b) Credit analysis:-The finance manager should analyse the
information gathered to find out the credit worthiness of
potential customers.
c) Credit decision:-The finance manager has to take decision
whether the credit is to be extended and if yes then up to what
level. he will match the creditworthiness of customer with credit
standard of the company.
d) Financing investments in receivables and factoring:-The finance
manager should make efforts to get receivables financed so that
working capital needs are met in time. The banks allow raising of
loans against security of receivable. Another method of getting
funds against receivable is their outright sale to the bank. There
may be other agencies which can buy receivable and pay cash.
This is known as factoring.
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The concern should devise procedure to be followed when
accounts become due after expiry of credit period. The
collection policy can be termed as strict or lenient. The
strict policy will enable early collection of dues and will
reduce bad debt losses. But it may lead to increased
collection cost. On the other hand, a lenient policy may
increase the debt collection period and more bad debt
losses.
The collection policy should also devise steps to be
followed in collecting over due amounts like:a)sending a reminder for payment
b)Personal request through telephone etc.
c)personal visit to customers
d) taking help from collecting agencies and lastly.
e)taking legal action