Cash Management of Hero Moto Corp.

Effective Cash Management - Motives & Objectives for Holding Cash

Having an efficient and effective cash management policy in place is vital for a business no matter its net worth. 

In theory, there are 3 motives for holding cash:

1 Transactions Motive

Cash balances are kept in order to meet routine cash needs of the business, such as the purchase of raw materials, payment of employees’ wages, etc…

2 Precautionary Motive

Unanticipated cash demands require that an additional amount is kept to be able to meet such unexpected demands. Unanticipated cash demands can vary from unexpected rise in the prices of raw materials, debtors delaying their payment further than expected, strikes, etc…

3 Speculative Motive

Speculative balances are kept in order to allow the business to take advantages of any opportunities which may present themselves at unexpected times. Suppliers at times may try to attract companies by giving special discounts, but you must pay in cash.

Objectives of Cash Management

In order to ensure you meet the objectives of an effective cash management policy, the financial manager must ensure that the company meets the payment schedule and also minimize idle funds committed to cash balances.

Meeting Cash Balances

The financial manager must ensure he has enough cash in hand to pay suppliers, creditors, employees, shareholders, banks, etc… 

Most financial managers at times go a step further and keep even more than required. This can be the result of various factors such as:

Enhancing the company’s reputation – settling payments on time keeps creditors and suppliers happy

Taking advantage of trade discounts by paying your debts on time

Stronger negotiating power when dealing with suppliers

Unexpected cash requirements can be met with no problem at all

Minimising idle balances

Too much cash tied up in idle balances waiting for something to happen involves an opportunity cost and hence loss of profits. As you minimise the cash balance, you increase the chance of a shortfall and of failing to meet your payments schedule.  A company must always try to find a suitable cash management policy and this at times can be facilitated by having a cash budget in place. By doing so, a company could forecast its cash inflows and outflows for the coming period and thus estimate with reasonable precision the amount of cash balance that it must keep ‘idle’.

The 5 basic principles of cash management include:

1. Increase the speed of receivables collection; by lowering the average collection period for funds, you will have more money to use for operations or investing. Offering a discount for early payment is one method that can be used to speed up the payment process.

2. Keep inventory levels low; maintaining the proper levels of inventory are crucial to maintaining your available cash levels. The cost of inventory and warehousing it is a huge expense; this is why right-on-time is a good way to go if it is feasible for your company. It is also important to consider the shelf life and the depreciation of your products. Most foods have a short shelf life, and items such as computers and computer related items have a fast depreciation rate.

3. Monitor the timing of payment of liabilities; you should take advantage of the full payment period, but do not pay them late, this could damage your credit rating.

4. Plan timing of major expenditures; you should plan the timing of major expenditures; they should be made when you normally have excess cash which is typically during the slow season.

5. Invest idle cash; leaving cash in your safe will earn you nothing. Letting large amounts of cash just sit without reinvesting it is not good money management.

Things can be clearer through the below given diagram:

Cash VS Marketable Securities (Transaction cost VS Opportunity cost trade off analysis of Hero Moto Corp)

If Hero Moto Corp. is maintaining too small a working balance, it may run out of cash .If then must liquidate marketable securities, if available, or borrow from outside. Both the options entails the costs that are known as transaction cost.

If Hero Moto Corp. is maintaining too high working balance, it may help in reducing the liquidity crunch but in maintaining such a balance the firm forgoes the opportunity to earn interest on marketable securities.

Cash management data & Analysis of Hero Moto Corp.

Years 2014 2013 2012 2011 2010

Net cash flow -70.84 101.22 -5.59 -23.38 49.7

Beginning cash 135.40 34.18 39.77 63.15 13.45

Total cash 64.56 135.40 34.18 39.77 63.15

Investment in marketable securities

Borrowing - - - - -

Source: moneycontrol.com

Conclusion

As per the above data analysis the total cash available for the Hero Moto Corp. is positive in all the years from 2010 to 2014.

Thus it signifies that the firm has ideally gone for investment in the marketable securities in order to minimize the opportunity cost.

It also reflects that there were no borrowings by Hero Moto Corp in these five years.