Wcm Ppt Cash Mgt..New

8/2/2019 Wcm Ppt Cash Mgt..New

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WHAT IS CASHMANAGEMENT??????


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MANAGEMENT OF CASH

Determination of optimum amount of cash

required in the business

Keep the cash balance at optimum level andinvestment of surplus cash in profitable

manner.

Prompt collection of cash from receivables and

efficient disbursement of cash.


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MOTIVES OF HOLDING CASH

Transaction Motive

Precautionary Motive

Speculative Motive

Compensating Motive


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FACTORS DETERMINING CASH

NEEDS

Timing of Cash Flows

Cash Shortage Costs

Cash Excess Costs

Cash Management Costs

Uncertainty

Firms Capacity to Borrow in EmergentSituations

Attitude of Management

Efficiency of Management


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METHODS OF CASH

MANAGEMENT

Cash Budget

Cash Flow Statements

Cash Management models


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CASH BUDGET

A cash budget is a summary ofmovement of cash during a particularperiod.It is also known as short term cash

forecasting.Benefits:

In estimating the extent of short fall if any

and to arrange it from some reliable andcheap sources.

In preparing a detailed purchase andpayment schedule in respect toac uirin some ca ital oods(fixed


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COMPONENTS.

The three main componentsnecessary for preparing a cashbudget :-

Time period.

Desired cash position.

Estimated sales and expenses.


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FOUR MAJOR SECTIONS OFCASH BUDGET

Receipts Section-It consists of listingof all of the cash inflows, except forfinancing.

Disbursements Section-It consists ofall cash payment planned for thebudgeted period. These paymentswill include rawmaterial purchases, direct labourpayments.

The Financing Section-It deals the

borrowings and repayments


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ADVANTAGES

It provides a comprehensive pictureof cash inflows and cash outflows asalso the resultant surplus and deficit.

It may also duly alert themanagement of any possible deficitso that a little more vigorous controlon cost and cash outflows can beexercised.


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DISADVANTAGES

The system may not prove to bereliabe incase of delay in receipts ofdues(cash inflow) or sudden

payment(cash outflow) due to someunexpected and urgent needs.

The system does not reveal andreflect the changes in the movementof working capitalcomponents,mainly in regard toinventories andsundry debtors.(bills

receivable or accounts receivable).


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BAUMOL MODEL


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Baumol Model of Cash ManagementThe Baumol model of cash management is

one of many by which cash is managed bycompanies. It is extensively used and highlyuseful for the purposeof cash management.

Use of Baumol ModelThe Baumol model enables companies to

find out their desirable level of cash balanceunder certainty.

RelevanceAt present many companies make an effortto reduce the costs incurred by owning cash.

They also strive to spend less money onchanging marketable securities to cash. The


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50000000 1002 504 339.3333333 258 210

Order Quantity (Z)

Cost ($)

Z*

Total Costs

Holding Costs:(Z/2)*r

Order Costs:(M//Z)*TC

imal Cash Balance via Baumol Mod

Z*Z*= [(2M*TC)/r]


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Q.

A Firm estimates that it isrequired to make cashdisbursements of Rs 567 lakh in

a year which is spread overuniformly at Rs 47.25 lakh permonth.

The firm invests only in treasurybills for cash managementpurposes. The present yield is 8

percent p.a .It costs the firm Rs


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C

[(2*900*56,700,00)/0.08= 1,129,491 OR Rs

11.30 Lakh.

C= [(2M*TC)/r]=

SOLUTION


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Assumptions

There are certain assumptions or ideas that arecritical with respect to the Baumol model of cashmanagement. The particular company should beable to change the securities that they own intocash, keeping the cost of transaction the same.

Under normal circumstances, all such deals havevariable costs and fixed costs.

The company is capable of predicting its cashnecessities

They should be able to do this with a level ofcertainty

The company should also get a fixed amount ofmone . The should be ettin this mone at


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Problems with the Baumol

Model

ash flows may not be very predictable, much lessonstant

Treasurers may want a safety stock of cash


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CONT.

The company is aware of theopportunity cost required for holdingcash. It should stay the same for a

considerable length of time.

The company should be making its

cash payments at a consistent rateover a certain period of time. In otherwords, the rate of cash outflow

should be regular.


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The Miller - Orr Model

The Miller-Orr Model provides a formulafor determining the optimum cashbalance (Z), the point at which to sell

securities to raise cash (lower limit L)and when to invest excess cash bybuying securities and lowering cashholdings (upper limit H).

Depends on: transaction costs of buying or selling

securities

variability of daily cash (incorporatesuncertainty)

return on short-term investments


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Days of the Month

DollarsintheCashAccount

The Miller - Orr Model

Lower Limit

Upper Limit

Z

Sell Securities

Buy Securities

H

L


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CONT.

The Miller and Orr Model of Cash Managementis one of the various cash management models inoperation.

It is an important cash management model as well. Ithelps the present day companies to manage their cashwhile taking into consideration the fluctuations in dailycash flow.

As per the Miller and Orr model of cash management

the companies let their cash balance move within twolimits - the upper limit and the lower limit.


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CONT

The companies buy or sell the marketable securities only if the

cash balance is equal to any one of these when the cash

balances of a company touches the upper limit it purchases a

certain number of salable securities that helps them to come

back to the desired level

If the cash balance of the company reaches the lower level then

the company trades its salable securities and gathers enough

cash to fix the problem. It is normally assumed in such casesthat the average value of the distribution of net cash flows is

zero. It is also understood that the distribution of net cash flows

has a standard deviation. The Miller and Orr model of cash

management also assumes that distribution of cash flow isnormal

Application of Miller and


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Application of Miller andOrr Model of Cash

Management The Miller and Orr model of cash management is widelyused by most business entities. However, in order for itapplied properly the financial manages need to makesure that the following procedures are followed:

Finding out the approximate prices at which the salablesecurities could be sold or bought

Deciding the minimum possible levels of desired cashbalance

Checking the rate of interest

Calculating the SD (Standard Deviation) of regular


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The Miller-Orr Model- Target Cash Balance (Z)

3 x TC x V

4 x rZ = + L

3

where: TC = transaction cost of buying

or selling securities

V = variance of daily cash flowsr = daily return on short-term

investments

L = minimum cash requirement


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Day 1 2 3 4 5 6 7

Cash flowForecast

+24 +13-12 -16 +36 +4 +28

Q: A company projects the daily netcash flows for the next seven days asfollows:

The policy of the company is to maintaina minimum cash balance of Rs 10,000 at

all times.Fixed cost for every security transactionis Rs 1600 and return on marketablesecurities is 10% p.a. The company

desires to know the target cash


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(Xi) (X) (Xi-X) (Xi-X)2 V

24 Xi/n=2

1/7

21 441 (XI-

X)2/n

13 =RS 3 10 100 =3178/7

-16 -19 361 =Rs

454

-12 -15 22536 33 1089

4 1 1

-28 -31 961

TOTAL= 0 3178

Calculation of the Variance of cashFlows Forecast


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Findings

These two findings signify that thefinance manager will allow the dailycash balance to fluctuate till it

reaches the upper limit of Rs185,104.

When the balance becomes greater

than this figure he will purchasesufficient worth of securities toreduce the cash balance to Z of Rs

68,368


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On the lower side when the cashbalance drops to the minimumbalance of Rs 10,000 he will sell

adequate amount of securities toraise the cash balance to Rs 68,368


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Z-Score 1968 model

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 +

.999X5 where:

X1 is working capital total assets

X2 is retained earnings (profit) totalassetsX3 is EBIT total assetsX4 is market value ofequity

book value of debtX5 is sales total assets

Zones of Discrimination:

Z > 2.99 -Safe Zone
http://moneyterms.co.uk/working_capital/http://moneyterms.co.uk/retained-profit/http://moneyterms.co.uk/ebit/http://moneyterms.co.uk/equity/http://moneyterms.co.uk/book-value/http://moneyterms.co.uk/revenue-recognition/http://moneyterms.co.uk/revenue-recognition/http://moneyterms.co.uk/book-value/http://moneyterms.co.uk/equity/http://moneyterms.co.uk/ebit/http://moneyterms.co.uk/retained-profit/http://moneyterms.co.uk/working_capital/


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Z-Score cont

A more recent estimate by Altman (in2000) is significantly different:

Z = 0.72X1 + 0.85X2 + 3.1X3 +

0.42X4 + X5 Once again, this has been rounded to

two significant figures.

Altman's 2000 paperrevisits the z-score and his proprietary z.

Other single number measures of

financial strength exist, including'
http://www.brianzatrading.com/trading_masters/Altman/predicting_financial_distress_of_companies_revisiting_the_zscore_and_zeta_model.pdfhttp://moneyterms.co.uk/f-score/http://moneyterms.co.uk/f-score/http://www.brianzatrading.com/trading_masters/Altman/predicting_financial_distress_of_companies_revisiting_the_zscore_and_zeta_model.pdf


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Wcm Ppt Cash Mgt..New