Jotwani Report

1.
Executive summary
Page 1
KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Executive summary
Flowserve Microfinish Pumps Pvt. Ltd is a joint venture between Flowserve (USA)
corporation and Microfinish Group of companies India. The company is involved in the
processing and sale of ISO pumps and ANSI pumps and component parts of pumps. Their
major sale is however derived from component parts. Flowserve Microfinish Pumps Pvt. Ltd.
is a 100% Export Oriented Unit (EOU)
Cash management plays a very important role in the smooth running of an

organization. Hence it is required to pay special attention to the management of cash in the
organization. A shortage of cash will lead to unnecessary costs and will affect the goodwill of
the firm. On the other hand holding excessive cash will lead to loss in revenue that could
have been earned, had the excess cash been invested in certain short term investment plans.
Hence it is important to hold the right amount of cash so that the most benefit can be derived
out of it
The objective of the study is to analyze the cash management followed at Flowserve
Microfinish Pumps Pvt Ltd, the amount of cash held with the organization and whether is it
desirable to hold so much cash and also to understand the cash cyle at Flowserve Microfinish
Pumps Pvt. Ltd.
For this purpose the inventory turnover ratio, debtors turnover ratio, debtors collection
period, creditors turnover ratio, creditors payment period, cash turnover ratio and cash cycle
has been calculated and based on those calculations and the interpretations derived from them
recommendations (if any) required are given
The information for all the above calculations has been taken from the balance sheet
and profit and loss account of the company and book by Prof. Prassana Chandra has been
referred to understand the topic and concepts better
It has been understood from the study that the debtors are taking longer time to pay
their dues than allowed to them and also that the cash cycle has increased over the period of
time which is not a good sign because the lower the cash cycle the less cash is required for
the organization to conduct its activities
Based on the above findings it has been recommended that the company bring about
some changes in the credit policy and also invest its surplus cash into certain short term
investment options such as term loans, mutual funds, etc.
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A. Introduction to the study
Cash management plays a very important role in the smooth running of an
organization. Hence it is required to pay special attention to the management of cash
in the organization. A shortage of cash will lead to unnecessary costs and will affect
the goodwill of the firm. On the other hand holding excessive cash will lead to loss in
revenue that could have been earned, had the excess cash been invested in certain
short term investment plans. Hence it is important to hold the right amount of cash so
that the most benefit can be derived out of it
B. Project title: An analysis on cash management in Flowserve Microfinish

Pumps Pvt. Ltd.
C. Need for study
To study how the organisation is managing its cash and provide suggestion(s), if any required
for better utilization of available cash or sources from where funds can be obtained if there is
a shortfall
D. Objectives of the study:
 To study the cash management at Flowserve Microfinish Pumps Pvt. Ltd: The
primary objective of the project is to study how the organisation manages its cash.
How much is the optimum balance of cash the company should maintain, and
determine whether there is excessive or deficit of cash or is the cash balance optimum
 To give recommendation(s), if any, based on the findings: After the completion of
the project, with the help of the findings, suggestions can be provided as to what can
be done if the cash held by the company is above or below the optimum level
E. Research methodology
Secondary data
 Books of accounts of the company
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F. Important findings
1) It can be understood from table 1 that the time provided to debtors for payment is very
long at an average of 105 days
2) From table 2 it can be understood that the time period allowed to the company by
their suppliers is at the average of 60 days which is very low as compared to the
debtors collection period
3) It is also understood that the company is losing a lot of what can be earned by opting
for a “sweep in sweep out” facility over other short term investment options
G. Important recommendations
1) The essence of effective cash management is speedy recovery of debts and deferred
payment to creditors, which, we can understand from finding 4 is not happening in the
organisation. Hence the organisation should alter their credit policy allowing lesser
days to their customers for payment and also enter into certain agreements with their
suppliers allowing them more time tom settle their bills
2) Keeping in mind finding 6 it can be understood that the company needs to invest its
surplus funds in short term investment such as term deposits, mutual funds, etc.
Because, otherwise the organisation is losing a lot of money that it can earn in the form
of return on such investments
H. Conclusion
The study on the cash management in Flowserve Microfinish pumps Pvt. Ltd. shows
that there is scope for improvement and that the company needs to make changes in its credit
policy and its cash management policies
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2. Introduction To Industry
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Industry Profile: Valves and Pumps Industry
Pumps: A pump is a mechanical device using suction or pressure to raise or move liquids,
compress gases, or force air into inflatable objects such as tyres
Pumps are used in industries such as
 Pharmaceutical
 Oil and Pumps
 Industrial Chemicals
 Electricity generation
Valves: A valve is a device that regulates, directs or controls the flow of a fluid (gases,
liquids, fluidized solids, or slurries) by opening, closing, or partially obstructing various
passageways.
Valves are used in industries such as
 Pipelines
 Oil and gas
 Food and Beverages
 Marine industry
History of Pumps
After the fall of the Roman Empire, development in pump technology went stagnant
for over a millennia and a half. It wasn’t until the Enlightenment that people started to think
about pumps and hydraulic science again. This allowed a rebirth in thinking about pumps and
over the next few centuries, there was an explosion in new ideas and inventions, which have
contributed to the pumps we have today.
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Looking back at the most significant developments in technology, the last fifty years seem
relatively insignificant. By 1959, all the major pump designs had been introduced and mostly
developed into commercial products.
Types of pumps
 Centrifugal pump
 Electromagnetic pump
 Reciprocating Pumps
Growth and development of industry
 The Indian Pump industry is growing at an annual CAGR of 10% which is higher
than the international CAGR average of 6%.
 The domestic market for Indian Pumps is growing at a healthy rate of 16-18% per
annum.
 The Indian pump market was worth over US$ 1.2 billion in 2014 (i.e. over INR
8,000crore)
 India manufactures more than 4.5million pumps every year and are exported to more
than 100 countries
Why Make in India?
 India offers A ready export market in 100-plus countries
 Healthy domestic market for pumps in India – US$ 1.2 billion-plus
 Above-average growth is projected at a CAGR of 10% from FY 2014 to 2017
 Rapid growth of the Indian chemical market has stimulated the demand for high
quality industrial pumps
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Future Growth Opportunities
 Indian companies are increasingly looking for international partnerships via

technology collaborations to enter foreign markets
 Many small scale pump manufacturers have created price sensitive offerings as
viable alternatives to costly pumps manufactured by large pump manufacturers
 The Indian chemical market– growing at a rapid pace – is fuelling the demand for
industrial pumps
 Government regulations and energy crisis are motivating water pump
manufacturers to develop energy efficient products
 The Government of India is actively encouraging technology development and
transfer to enable the small scale sector (i.e. small pump manufacturers) to enter
high-tech areas such as aerospace and defence
 The other growth drivers for Indian pumps are population growth, higher water-
intensive food consumption and pressure from government bodies on wastewater
discharge
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3. Introduction to the
Company
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A. Company Profile:
Introduction:
Flowserve Microfinish Pvt. Ltd.is a manufacturing unit set up in the Industrial Estate
of Gokul Road. It was established in the year 1997.
Flowserve Microfinish is basically a joint venture of Flowserve USA and Microfinish

Hubli. It is involved in processing of component parts of valves and pumps along with
assembly of pumps and valves.
It is a 100% EOU [Export oriented Unit] and exports component parts of valves and
pumps and also assembled valves and pumps to major regions of Europe, America, and also
some countries of the Asian continents. It has 2 divisions in its premises namely: Flowserve
Microfinish Valves Pvt Ltd [FMVPL] and Flowserve Microfinish Pumps Pvt Ltd [FMPPL].
The company is located in the Industrial Area, Hubli which is one of the Biggest
Industrial centres in the state of Karnataka, India. Hubli is situated midway between Poona
and Bangalore on the NH – 4 Highway and is connected by Road, Rail, and Air. The
company’s manufacturing unit has a 15,000 Sq.ft of built up area to house the facility.
The Company is catering the major needs of industries in the field of petrochemicals,
refineries, fertilizers, fine- chemicals, pharmaceuticals, food & beverages and other general
chemical industries.
Quality and standardization have become a watch word in Indian engineering

industry. With a constant up gradation of technological base and manufacturing range in tune
with global marketing requirements, Flowserve Micro finish Pvt Ltd. has achieved ISO
standard in production of valves and pumps.
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FLOWSERVE PRIVATE LIMITED USA
The Flowserve Corporation is an American multinational corporation and one of the

largest suppliers of industrial and environmental machinery such as pumps, valves, end face
mechanical seals, automation, and services to the power, oil, gas, chemical and other
industries Flowserve has over 19,000 employees in more than 60 countries. Flowserve sells
products and offers aftermarket services to engineering and construction firms, original
equipment manufacturers, distributors and end users. The Flowserve brand name originated
in 1997 with a merger of BW/IP and Durco International.
Flowserve Pvt Ltd. is a U.S.A company which was set up in early 1920. Flowserve
Pvt Ltd produces engineered and process pumps, precision mechanical seals, automated and
manual quarter-turn valves, control valves and valve actuators, and provide a range of related
flow management services, primarily for the process industries. Flowserve engineers products
and provides services to meet the needs of the global flow management industry. Flowserve
serves the flow management industry worldwide. More than 40% of the Companys 2006
sales of $3 billion were outside the United States. Flowserve Pvt Ltd is having its business
more than 30 countries to name few are Canada, Belgium, Australia, India, Argentina,
Mexico, Germany, etc. Flowserve Pvt Ltd of
U.S.A. found an Indian market for its expanding its business and came to India by the
way of joint venture. The Indian Flowserve Micro finish ltd. has a joint venture with a
Flowserve Pvt Ltd of USA. The joint venture is in the form of a technical collaboration which
is nowadays a one kind of mode of entering a foreign market. The one such we find here is a
Flowserve Micro finish Ltd.
Microfinish India:
Microfinish Valves Pvt. Ltd. was established in 1971 to manufacture ball valves,

bellows sealed globe valves, globe valves for chlorine service, and knife edge gate valves. In
the 1980's Microfinish started the manufacture and sale of chemical process and slurry
pumps.
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For the last 35 years we have designed, developed, and supplied our products to:
 Oil and gas facilities, hydrocarbon processing refineries, and petrochemical plants
 Fossil fuel, nuclear, and combined cycle power plants
 Fertilizer, chemical, and pharmaceutical industries
 Food and beverage plants
 Mining, mineral processing, and steel sectors
We are recognized as a quality manufacturer of reliable valves and pumps for industry.
Our wealth of experience has enabled Microfinish to become a prominent supplier of ball
valves throughout the world and a reputable manufacturer of specialized pumps in India.
Industrial technology is progressing at a remarkable rate, so we have established a

research and development department equipped with modern test facilities.
Our manufacturing facilities are located in separate and well laid-out buildings with
ample scope for future expansion. The industrial estate in Hubli is one of the biggest and
fastest developing manufacturing zones in the state of Karnataka. The city of Hubli is well
served by air, rail, and road connections.
The guiding principles of Microfinish are:
 Personal commitment to our customers

 Top quality in everything we do
 Best available technology for all our products and services
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Flowserve Microfinish Pvt Ltd
Micro finish was set up in the year 1978. The Micro finish is manufacturing an
industrial pumps and valves. Micro finish is known for its quality product and has got
certificate of ISO 9002. In 1998 Flowserve Pvt Ltd of USA came to India by entering into a
joint venture with a Micro finish of Hubli. As Micro finish is known for its quality product
worldwide, the Flowserve Corporation made a technical collaboration with the Micro finish
valves.
Flowserve Pvt Ltd came to India and gave technical and management training to the
employees of the Micro finish in the year 1996 and commercialized its business in the year
1998. The training they give was of high standard and then later Micro finish of Hubli was
able to produce spare parts of high quality. When Flowserve Pvt Ltd inspected the spare parts
which came out to be more than their expectation. Later Micro finish started its separate
100% exporting unit and came to be known as a Flowserve Micro finish Pvt Ltd. Hubli.
About the company and history:
As mentioned earlier, Flowserve Micro finish [FMVPL & FMPPL] was

established in the year 1997 to manufacture Valves viz Ball valves and Plug valves and
Industrial Pumps viz ISO pumps and ANSI pumps. The company is formed as a result of
joint venture between Micro finish and Flowserve Corporation USA, with Flowserve as the
major shareholder.
Valves and Pumps manufacturing units have a 15,000 Sq. ft and 10,000 of built up
area to house the facilities respectively. Both the divisions have an open space of 10,000 and
13,000 Sq. ft respectively for further expansion.
In addition, the two units have excellent machining testing facilities consisting of
CNC’s, Centre Lather, Milling, Drilling, Grinding machines etc supported by adequate
gauging measuring instruments. Dedicated staff and workers strive to ensure that the
company’s quality objectives are achieved.
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The company is having a documented Quality system to meet the requirements of ISO
9001 – 2001 to ensure that its orders processed, products manufactured meet the requirements
of the customer. Further the company is also certified for CE – Marking.
Area Of Operation:
Micro finish valves Pvt Ltd., is the joint venture of Flow Serve Company and
Microfinish and is established globally. Flowserve Microfinish Pvt.Ltd. exports its products
to 15 countries. The main countries are USA, UK, GERMANY, AUSTRALIA, SOUTH
AFRICA, BRAZIL,etc.
Mission, Vision and Quality Policy
OUR MISSION
Complete solution provider in the flow control business
OUR VISION
Vision is to manufacture quality valve products for the process industry

worldwide. We embrace the concept of total quality and people involvement to
enhance “TOTAL QUALITY SATISFACTION” and commit to maintain this
standard of excellent through continual improve and use of quality management
systems.
Quality Policy
We commit to excel in manufacture and supply quality pump products for the industries. We
firmly believe to achieve and maintain this through
 Continual improvement of quality management system

 People investment
 Customer satisfaction
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 Promoting safe working place and environment
 Meeting statutory and regulatory requirements
Quality Assurance
Quality assurance Activities
 Documented quality systems

 Approval and monitoring of suppliers
 Corrective and preventive actions
 Stage wise design review and verifications qualification and validation
 Calibration and equipment control
 Maintenance and capability studies and Training
Quality Control Activities
 Raw material, semi finished, and bought out component inspection

 In process inspection of components
 Final product inspection and performance testing
Environmental, occupational, health and safety policy
Environmental Policy of Flowserve Micro finish Group of Company Pvt. Ltd. is complying
with accepted environmental practice including the commitment to meet applicable legal and
other requirements to strive for continuous improvement in their environmental management
system and to minimize the creation of waste and pollution through better management of
their process, their materials and their people in order to reduce the environment impacts
associated with their work.
Top management ensures that the work environment has a positive influence on the
performance of the personnel in order to enhance the performance of the Organization.
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Consideration is given on:
1) Following the safety rules.
2) Providing adequate lighting facilities.
3) Ensuring the proper air circulation.
4) Maintaining cleanliness at all the areas.
Flowserve Microfinish Pvt Ltd Hubli At a glance
Name & Address Of The Flowserve Micro finish Group Of Companies
Industry pvt. Ltd.,

568/1, Industrial Area, Gokul Road,
Hubli – 580 030. India.
Status Of Organization Private Limited (100% EOU).
Date Of Commencement 1 st June 1998
Applicable Act 1) Factory Act:

2) Provident fund:
3) ESI( Employee State Insurance)
4) Bonus Act
5) Payment of Gratuity:
6) Product Processing order:
Email admin@flowservemicrofinish.com
dispatch@flowservemicrofinish.com
Telephone and Fax No. 2233202, 2332301 / Fax – 0836-2333205
Certificates ISO 9001, ISO 2008 and PED97/ 23 / EC.
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Flowserve restricts trade with the following countries
Flowserve (USA) Corporation restricts any kind of direct or indirect trade with the
following countries
 Cuba
 Syria
 North Korea
 Iran
 Sudan
Shareholding pattern
Shareholders % of share holding Number of shares Value
Flowserve 76% 1857900 18579000

(Mauritius)
Corporation
Microfinish Pumps 24% 586734 5867340
Private Limited,
Hubli, India
Total 2444634 24446340
Organization Chart
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Departments: Flowserve Microfinish Pumps Private limited is divided into 5 departments
 Administration and accounts department

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 Purchase and planning department
 Production department
 Quality assurance department
 Stores and sales department
Administration and accounts department: This department is involved with all the
accounting and other related activities of the organisation.
Functions of accounts department: To maintain all the financial data in a organised manner
and to take care of all the taxation compliances
Objectives:
 To provide accurate and complete systematic information of financial activities.

 To maintain all books of accounts and other financial documents.
 To take care of all the taxation compliances.
Functions of Administration Department
 Training
 Recruitment
 Safety
 House keeping
 Personnel Department
Purchase and planning department: This department is entrusted with the work of
developing a work-plan for the whole organization. The plans are usually made for one
month
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Objectives:
 For usage of resources to meet the delivery commitments.

 To ensure that all the purchase/processed items and services meet the specified
requirement.
 Scope
 Applicable to all work orders and related activities of department with respect to
monthly manufacturing
 Applicable to all raw material, bought out items, sub-contracted items, capital goods,
consumable and services to be produced.
Production Department: As the name suggests this department is involved in the

process of production and assembly of the pumps
Objectives:
 To Improve productivity
 To reduce the cost without compromise on quality
 To minimize the rejection rate and to minimize rework
Quality assurance department: This department is required to make sure that all the
units produced qualify the quality requirements. Inspection is done for 100% production i.e.,
testing does not happen based on random sampling
Quality check is done at 3 stages
 Receiving inspection
 Inspection while in process
 Finished goods inspection
Sales & Store Officer Department:
Objective
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 To ensure that both technical and commercial aspects are received for adequacy,
deviation and capacity.
 To ensure that all the complaints are attended to the customer satisfaction. To ensure
that all suppliers are capable of meeting purchase required consistently
 To ensure accessibility and prevent damages to raw material/components and
products.
Functions
 Preparation of work order and amendments.

 Sales drawing
 Inspection call
 Control of customer property.
 Handling, Clearing, Storage, Packing and Delivery

 Attending customer complaints
 Preparation of invoice and delivery challan
 Shipping and final document
 Servicing
 Customer Satisfaction Survey
Workflow
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Receipt of enquiry
Reply to enquiry with details of

price and lead time
Placement of purchase order
Order booking and release of work

order by sales department
Issue of raw materials from stores

department to production
department
Production department does the

machining work(Processing)
After processing the material is

sent to QA department
If the product is accepted sent to

shipping department. If not sent for
rework
Goods are packed and shipped to

the customer
Products
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 Valves
o Ball Valves
o Plug Valves
 Valve Components
 Pumps
o ISO Pumps
o ANSI Pumps
 Pump Components
The company majorly exports component parts of both valves and pumps. 95% of the
sales of the company are in the form of component forms. Only 5% of the sales are
from selling pumps and valves
.
Competitors
 BDK group of companies in Hubli
The Flowserve Microfinish Pvt Ltd Hubli has only one major competitor, which is, the BDK
group of companies of Hubli.
Future Growth and Expansion
The company is trying to achieve the recognition of ISO -14001 such as waste water
treatment and reducing the decibel (sound) levels in the factory premises.
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B.SWOT ANALYSIS
SWOT ANALYSIS
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Every organization has certain structure where the delegation of authority takes
place.
Departmentation is done in order to accomplish the desired goals and

objectives. Therefore
The organization must be aware of needs and wants of employees of that

organization and it must also strive for the development of the organization.
This is possible only by SWOT ANALYSIS.
The SWOT ANALYSIS throws light on,
S - STRENGTH
W – WEAKNESS
O – OPPORTUNITIES
T – THREATS
STRENGTH:
1. The company has excellent network, which provides good quality product with minimum
time.
2. ISO standard helps in marketing at a International Level.
3. Feed-back information is provided to all employees.
4. Benefits provided by government to 100% EOU Unit.
5. The company has unity of team work, good salary to workers.
6. Regular medical checkups help to motivate employees.
7. They are exempted from tax for 10 Years.

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WEAKNESS:
1. It does not have a separate marketing department
2. No direct exporting.
3. No international recognition by its own name.
OPPORTUNITIES:
1. Potential market for spare parts is growing high.
2. Export order received is greater than what they are able to produce, so opportunity to
increase production capacity for which ready market is available.
3. Whatever is produced is exported.
4. Opportunity to enter plug valve market.
5. International Customers shows more interest to buy Flowserve Micro finish products.
6. Company has an out Bond logistic Management & documentation.
7. They have excellent infrastructure facility to workers.
THREATS:
The company has no threat, in the sense, there are no competitors as it is

not an independent firm but is a joint venture with FLOWSERVE USA.
So the only threat may be any action of FLOWSERVE USA on MICROFINISH

such as Flowserve revoking its venture-ship with Microfinish. Such a step will
lead to the dissolution of the company as a whole.
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C McKinsey’s 7S
McKinseys 7-S Model
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The 7-S model is better known as Mc Kinsey 7-S. This is because the two persons
who developed this model Tom peters &; Robert waterman were consultants at Mc Kinsey &
Co at that time. They published their 7-S model in their article “Structure Is Not
Organization” (1980) &; in their books “The Art of Japanese Management” (1981) “In
Search Of Excellence” (1982).
The model starts on the premise that an organization is not just structure, but consists
seven elements with a complex relationship between them.
a) STAFF:
1. Number and types of personnel within the organization.
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2. Number of employees: 58.
3. The company considers the employees as one of the major resource. The skills of the
employees are constantly improved through various training programmes.
4. The company organizes regular Departmental Meetings, MR meetings with the members
wherein the suggestions and feed backs of the members are discussed.
b) SKILLS:
Skills refer to the fact that employees have the skills needed to carry out the company’s
strategy. Training and development – ensuring people know how to do their jobs and stay up
to date with the latest techniques.
c) STYLE:
1. The style of management in the organization is very much similar to top down
management. The Director from USA who is at the top most level takes strategic decision
and is passed on to the Managing Director of HUBLI of the respective company.
2. Short term decisions are decentralized in FMVPL and Micro Finish Valves Pvt Ltd. as the
number of employees is more and it would be impractical for the MD to take regular
decisions.
3. Though the decision making is concerned only with the top management, the company also
emphasized on PARTICIPATIVE FEEDBACK from the employees and helpers on a regular
basis to enhance thinking capacity of the employees.
4. This is generally done by the Respective department in charge.
d) STRATEGY:
To establish themselves as a global company with strong technology capabilities FMVPL,

has laid increased emphasis on devising its business strategy on aggressive top line growth, a
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de-risked business model, increased operational efficiencies and CPI programmed adopted to
improve the productivity. The company emphasizes on two key elements that from the
cornerstone of the company’s growth strategy:
1. Developing a global product strategy
2. Creating an integrated organization with world class quality valve to produce and full
service supply capability.
e) STRUCTURE:
The design of organizational structure is a critical task of the top management of an

organization. Organizational structure refers to the relatively more durable organizational
arrangements relationships among various positions & activities.
f) SYSTEM:
The system is to ensure the performance of the supplier with respect to Quality, Delivery and
service. These ratings are applicable to all the Suppliers, like sub-contractors, vendors, traders
and suppliers.
g) SHARED VALUES:
Guiding concepts, fundamental ideas around which a business is built- it is generally simple,
usually stated at abstract level, have great meaning inside the organization even though
outsiders may not see or understand them.
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4. Introduction to the study
A: Introduction (Theoretical background)
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Cash: Cash is the medium of exchange on the common purchasing power and which
is the most important component of working capital. It includes coins, currency, cheques held
by the firm and the balances in its bank accounts. Sometimes near-cash items also are
included.’ Cash is the basic input required to keep the firm running on a continuous basis.
At the same time it is the ultimate output expected to be realized by selling goods and
services. A firm should hold sufficient cash, neither more, not less. Excessive cash remains
idle which simply increase the cost without contributing anything towards the profitability of
the firm and in the opposite case, i.e., deficit in the cash, trading and/ or manufacturing
operation will be disrupted.
Why do businesses require cash: The need for Cash to run the day-today
business activities cannot be overemphasized. Few reasons why cash is so important are:
1. Cash Flow: For any company to survive, cash flow is the single most important
financial factor. A company could have fantastic revenue, reasonable expenses, and
significant income, but if its financial operations are not designed efficiently, it could still
have negative cash flow.
And without positive cash flow, any company, no matter how promising the business model
will go bankrupt. Of course, if a business has just been launched, it may be able to endure
negative cash flow in the short-term in hopes of achieving long-term success. But eventually,
any company must focus on creating positive cash flow. Without it, a company will not even
be able to accomplish the simplest of tasks: paying its monthly expenses.
2. Capital Expenditure Investments: To grow, a company often will need to invest in

factories, real estate, machinery, or technology. These are typically one-time costs that
require significant funds. Without cash on hand, a business may not be able to make these
necessary investments and, as a result, may never be able to experience company growth.
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3. Company Acquisition: One popular way for companies to expand is to acquire other
companies, either within their niche or as a way to branch out into new areas. Consider these
real life examples: Disney and Pixar, Exxon and Mobil, and eBay and PayPal. All of these
acquisitions have one thing in common – cash. Without the necessary cash, these companies
would never have been able to jump on the once-in-a-lifetime opportunity to buy a valuable
company at a reasonable price. It is acquisitions like these that do wonders for any company’s
growth potential.
4. Dividends and Share Repurchases: Two key ways that public companies reward
their shareholders is through dividends and share repurchases. Dividends are a fantastic way
to put money back in the shareholder’s pocket without forcing them to sell their ownership.
Share repurchases are an excellent way for management to express its confidence in the
company’s future growth potential and, in some situations, to signify that it feels its shares
are undervalued on the public market. By instituting a share repurchase plan, each remaining
share will become more valuable. However, neither dividends nor share repurchases would
be options for a public company without cash.
5. Survival During Down Economies: Every company is going to have periods when
things are not running at full potential. Consider a global recession that eats into a company’s
sales. Without cash on hand, that company would be forced to drastically downsize its
employee operations and may even have to declare bankruptcy in order to pay off its fixed
expenditures. With cash, the company will be more flexible and better able to survive the
downturn.
6. Emergency Preparation: Like individuals, businesses face emergencies where they

need to pay expenses right away. These include legal fees and unexpected costs associated
with natural disasters. Since these fees are often not built into a company’s budget, businesses
must have access to the necessary cash should such situations arise. This is essentially the
equivalent to an individual’s emergency fund.
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7. Cuts Transaction Costs: Small businesses need to keep their expenses as low as
possible. One way to do so is to avoid electronic transaction systems including services like
wire transfers and PayPal, which often charge excessive fees. By paying with actual cash,
businesses can cut back on these fees, which can significantly reduce their costs and increase
their bottom line profits, leading to more cash.
8. Helps Businesses Expand in the Absence of Loans: Many small businesses

have had to learn the hard way that lenders are becoming thriftier with how they loan money.
If a business has cash available, it can better take advantage of opportunities to expand and
make important acquisitions – options that may otherwise not be available in the absence of
loans.
Cash Management: Cash management is the corporate process of collecting and

managing cash, as well as using it for short-term investing. It is a key component of ensuring
a company's financial stability and solvency. Cash is not productive on its own i.e., it is
sterile and that is why firms should invest their excess cash in order to make it productive.
Cash Planning: Cash flows are inseparable parts of the business operations of
firms. A firm needs cash to invest in inventory, receivable and fixed assets and to make
payment for operating expenses in order to maintain growth in sales and earnings. It is
possible that firm may be making adequate profits, but may suffer from the shortage of cash
as its growing needs may be consuming cash very fast. The ‘poor cash’ position of the firm
cash is corrected if its cash needs are planned in advance. At times, a firm can have excess
cash may remain idle. Again, such excess cash outflows. Such excess cash flows can be
anticipated and properly invested if cash planning is resorted to. Cash planning is a technique
to plan and control the use of cash. It helps to anticipate the future cash flows and needs of
the firm and reduces the possibility of idle cash balances ( which lowers firm’s profitability )
and cash deficits (which can cause the firm’s failure)
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Cash planning protects the financial condition of the firm by developing a projected
cash statement from a forecast of expected cash inflows and outflows for a given period. The
forecasts may be based on the present operations or the anticipated future operations. Cash
plans are very crucial in developing the overall operating plans of the firm.
Cash planning may be done on daily, weekly or monthly basis. The period and
frequency of cash planning generally depends upon the size of the firm and philosophy of
management. Large firms prepare daily and weekly forecasts. Medium-size firms usually
prepare weekly and monthly forecasts. Small firms may not prepare formal cash forecasts
because of the non-availability of information and small-scale operations. But, if the small
firms prepare cash projections, it is done on monthly basis. As a firm grows and business
operations become complex, cash planning becomes inevitable for its continuing success.
Importance of cash management
1. Cash management ensures that the firm has sufficient cash during peak times for purchase
and for other purposes.
2. Cash management helps to meet obligatory cash out flows when they fall due.
3. Cash management assists in planning capital expenditure projects.
4. Cash management helps to allow the firm to take advantage of discount, special purchases
and business opportunities.
5. Cash management helps to invest surplus cash for short or long-term periods to keep the

idle funds fully employed.
Cash management is also important because it is difficult to predict cash flows accurately,
particularly the inflows, and there is no prefect coincidence between the inflows and outflows
of cash. During some periods, cash outflows will exceed cash inflows, because payments for
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taxes, dividends, or seasonal inventory buildup. At other times, cash inflow will be more than
cash payments because there may be large cash sales and debtors may be realized in large
sums promptly. Further, cash management is significant because cash constitutes the smallest
portion of the total current assets, yet management’s considerable time is devoted in
managing it. In recent past, a number of innovations have been done in cash management
techniques. An obvious aim of the firm these days is to manage its cash affairs in such a way
as to keep cash balance at a minimum level and to invest the surplus cash in profitable
investment opportunities.
In order to resolve the uncertainty about cash flow prediction and lack of synchronization
between cash receipts and payments, the firm should develop appropriate strategies for cash
management.
The firm should evolve strategies regarding the following four facets of cash management.
 Cash planning: Cash inflows and outflows should be planned to project cash surplus
or deficit for each period of the planning period. Cash budget should be prepared for
this purpose.
 Managing the cash flows: The firm should decide about the properly managed. The
cash inflows should be accelerated while, as far as possible, the cash outflows should
be decelerated.
 Optimum cash level: the firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be matched to
determine the optimum level of cash balances.
 Investing surplus cash: The surplus cash balances should be properly invested to
earn profits. The firms should decide about the division of such cash balances
between alternative short-term investment opportunities such as bank deposits,
marketable securities, or inter-corporate lending.
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Objectives of Cash Management:
(i) To maintain optimum cash balance
(ii) To keep the optimum cash balance requirements at a minimum level by prompt collection
and late disbursement of cash
The efficiency of cash management depends upon:
(i) Speeding up collections of accounts receivables: In order to manage cash efficiently, the
process of cash inflow can be accelerated through systematic planning and refined
techniques. There are, however, two broad approaches to do this, which are:
(a) The customers should be encouraged to pay as quickly as possible by introducing cash
discounts;
(b) The payment from customers should be converted into cash without any delay.
(ii) Delaying payments on accounts payable, i.e. deferring disbursements: Various items
of payments may be differed till they affect the smooth running of the operation and at the
same time, damage the goodwill of the firm. There are certain items, viz. Wages, Salaries
etc., which are very difficult to defer payments. But the most significant item is the payment
to creditors for this purpose.
Techniques to Overcome the Difficulties of Cash Management: In

order to overcome the difficulties in reducing the span between the time a customer makes
payment and the time such funds are available for use by a firm, two techniques are used.
They are:
(1) Concentration Banking; and
(2) Lock-box System.
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(1) Concentration Banking: Under this system, the firms which have a large number of
branches at different places, may select some of these which are strategically located as
collection centre’s for recurring payment from different customers, i.e., multiple collection
centre’s are established instead of a single collection centre.
The purpose of this system is to speed up the time in the collection process from customers.
Customers in a particular geographic area are instructed to remit their payments to the
specific collection centre in that area.
The establishment and the selection of collection centres, however, depend upon the volume
of business and geographic areas served. Under this system, when payments are received,
they are deposited in the local account of the concerned collection centre after meeting local
expenses.
Surplus funds are then transferred from these local bank accounts to a central or disbursing or
concentration bank. In short, a concentration bank is one with which the company has a
major account- usually a disbursement account. In other words, collections are decentralized
but disbursements are centralized.
The advantages of concentration banking are:
(i) The time required for mailing is reduced. Since the local collection centre prepares bills
against the customers, the customer usually receives the bills earlier than if the bills were sent
by the head office directly from a distant place.
At the same time, when customers pay their bills at the local collection centre instead of
mailing the same to the head office, it will also reduce time. Thus, in this way, it is estimated
that there will be a saving of approximately one day in mailing time.
(ii) The time taken for collecting the cheque is also reduced. When remittances are made at
the banks, the collection centre transfers immediately to the company which enables the
company to have the use of the funds without delay. Naturally, the company can release
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nearly double the amount of average daily remittance by saving the time taken in mailing and
in the collection of cheques.
(iii) Moreover, the concentration bank permits the firm to ‘store’ its cash more efficiently.
Thus, concentration banking, as a decentralized billing and multiple collection points system,
is a useful device to expedite the collection of accounts receivables
(2) Lock-Box System: The alternative means of accelerating the flow of funds is a lock-box
arrangement. In concentration banking, cheques are received by collection centre’s and
deposited in the bank after processing so that mailing float is reduced. But there remains the
cheque processing float.
It is needless to mention that lock-box system will eliminate the cheque processing float.
Under this system, the firms hire a post office box under the control of a bank at important
collection centres.
The customers are directed to remit their payments to the lock-box. The local banks are
authorized to open the box and collect the remittances/cheques received from the customers.
Normally, the bank so authorized to collect the cheques, pick up the cheques several times a
day and deposits the same to the firm’s accounts.
The banks send a deposit slip together with the list of payments and other enclosures to the
firm by way of proof record and information after crediting the respective account of the
firm. After the realization of cheques, surplus funds are transferred to the central account of
the firm.
Lock-box system, in a sense, is like concentration banking since the collection is

decentralized. One significant difference between the two is that, under a concentration
banking system, the customers send the cheques to the collection centre, while, under lock-
box system, they send them to a post office box.
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Thus, lock-box system is, no doubt, an improvement over the concentration banking system
since under the former; one step in the collection process is being eliminated. In short,
processing time within the firm is eliminated before the actual deposit of a cheque into a
bank. Therefore, extra saving in mailing time is possible as direct collection is made by bank
The lock-box system, as an improved method of collection for accounts receivables over
the concentration banking, enjoys the following advantages:
(i) The primary advantages of a lock-box system are that the time lags between cheques are
received by a company and they are actually deposited into bank, is eliminated.
(ii) This system reduces the overhead expenses
(iii) It also facilitates control by separating remittance from the accounts section.
(iv) It also reduces the credit losses by expediting the time at which data are posted to the
ledgers
However the disadvantage of this system is: The cost, which is charged by the bank for
these additional services and as such, requires compensation for this purpose, usually
preferring increased deposits. Therefore, this system is not feasible if there is an unlimited
remittance.
Factors Involved In Cash Management:
(i) Ascertainment of the minimum cash balance;
(ii) Proper arrangement to be made for collection and payment of cash in such a way so that
minimum balance can be maintained; and
(iii) Surplus cash to be invested in temporary investments or to be invested in fixed assets.
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Factors to be considered while ascertainment of minimum cash balances:
(i) Synchronization of cash inflows and outflows
(ii) Cash shortage costs
(iii) Excess cash balance costs
(iv) Firms capacity to borrow in case of emergency
(v) Uncertainty
Investment of surplus funds: Companies often have surplus of funds for a short period
of time before they are required for investment or to pay off expenses. Instead of allowing
these surplus funds to accumulate in current account where they earn no interest, companies
invest them in a variety of short term instruments like term deposits with banks, money
market mutual funds, and so on.
Investment Portfolio: It is usually advised to divide a firm’s investment into 3

portfolio’s/segments known as
(i) Ready cash segment

(ii) Controllable cash segment
(iii) Free cash segment
Ready cash segment: It represents a reserve for the company’s cash account. It is meant to
enhance the cash resources of the company to meet unanticipated operational needs.
Investment in this segment must be highly liquid in nature.
Controllable cash segment: It represents that part of the investment segment which is meant
to meet the needs of known expenses such as taxes, dividends, interest payments. It is advised
that investments this segment be matched in size and maturity to that of that known expenses.
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Free cash segment: It represents the surplus funds available with the firm, after setting aside
the above 2 segments, for short term investments to generate income.
Investment options: For employing the surplus funds there are various avenues
available for the organizations.
Fixed Deposits with banks: Banks accept term deposits for periods ranging from 15 days to
5 years. The interest rate varies from 5%-8% per annum.
Treasury Bills: These are government issued bills with a maturity of 91,182, and 364days.
These instruments do not carry a interest, rather they are sold at a discount and later
redeemed at face value. Hence the benefit earned by the investor is the difference between the
face value and the discounted rate. The benefit is such instruments are they are risk free.
Commercial papers: They are short-term unsecured promissory notes issued by firms that
are generally considered financially strong. They generally have a maturity of 90days to 180
days. Like treasury bills they are sold at discount and redeemed at par. They are either
directly placed with investors or sold through dealers. The major drawback with commercial
papers is that they do not have a well developed active secondary market.
Certificates of Deposit: It represents a negotiable receipt of funds deposited in a bank for a

fixed deposit. It maybe in registered form or bearer form. However, the latter is more popular
as it can be easily transacted in the secondary market. These instruments carry an interest rate
and on maturity the bearer gets the principal amount along with interest earned on it.
Inter-Corporate deposits: A deposit made by one company with another, normally for a
period of 6 months is referred to as inter-corporate deposit. Such deposits are usually of 3
types
 Call deposits: A call deposit is withdraw-able by the lender on giving a days notice;
however, in practice the lender has to wait for atleast 3 days.
 Three-month deposits
 Six-month deposits
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Bill-Discounting: A bill arises out of a trade transaction. The seller of the goods draws the
bill on the purchaser, which maybe payable on demand or after a usance period which
ordinarily does not exceed 90 days. On acceptance of the bill by the purchaser, the seller
offers it to the bank for discount. The bank releases the funds to the seller after discounting.
A company may also use its surplus funds to discount bills the way a bank does.
Mutual fund schemes: A variety of schemes are offered by mutual funds
 Equity schemes: The corpus of an equity scheme is invested substantially in equity or

equity related instruments. The balance may be in debt scheme. This is done so to
achieve a minor safety for the instruments
 Balanced schemes: A balances scheme, as the name suggests, invets its corpus across
2 broad asset classes, viz., equity and debt in a more or less balanced form
 Debt schemes: A debt scheme invests its corpus mainly in debt instruments. Some
schemes may have a small exposure to equity instruments.
For investing short term surpluses the most popular schemes are debt schemes because of
their low or nil exposure to equities. Within the category of debt schemes, money market
schemes are more accepted. The corpus under money market schemes is invested in
instruments such as Treasury bills, commercial papers, certificates of debt, and call and
notice money. The principal value of a unit in a money market scheme remains stable.
Money market schemes are very convenient for firms that do not have in-house expertise
for managing short-term surpluses. They offer safety of principal, near-instantaneous
liquidity, and a post-tax return that is higher than that of short term bank deposits
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Criteria for evaluating investment instruments
 Safety
 Liquidity
 Yield
 Maturity
Safety: The most important criterion is the safety. Safety refers to the probability of getting
back the amount invested. Treasury bills maybe considered as the safest of all the instruments
as they are the obligation of the government. The safety of other instruments depends on the
type of instrument and the issuer. A high degree of safety is essential for an firm to consider
investing in that specific instrument.
Liquidity: The liquidity of an instrument refers to the ability of the investor to convert it into
cash on short notice without incurring a loss. An instrument maybe quite safe if it is held till
maturity, but it may not be possible to sell it prematurely without suffering a loss. For a
traded instrument, a large and active security market ensures liquidity, whereas, for a non-
traded instrument, liquidity is high if the penalty for premature liquidation is negligible.
Yield: The yield of an instrument is the return earned from it by the way of interest, dividend
and capital appreciation. Some instruments like treasury bills and commercial papers do not
pay interest, but they are sold at a discount and redeemed at par. Yield has to be measured in
post-tax terms, taking into account the tax rate applicable to the returns earned by the
investment instrument
Maturity: The maturity of the investment instrument means the term period of the particular
investment instrument. There are basically two types of investment instruments with respect
to the term periods – the short-term investment instruments and the long-term investment
instruments.
It has been observed that the yields provided by an investment instrument are directly
proportional to the term period of the same. In most of the investment instruments the term
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periods are fixed. However, there are also certain investment instruments where the term
period can be adjusted to meet the demands of the investors.
The Level of Cash Balance: Adequate cash balance should always be maintained by a
firm. But it does not mean that the firm should hold excessive cash balance since it is a non-earning
asset Excessive cash balance will not only impale the firm’s profitability but also gives a lower asset
turnover ratio. Therefore, optimum cash balance should be maintained by a firm.
OTHER FACTORS THAT AFFECT THE SIZE OF CASH

BALANCE
 Availability of short-term credit: To avoid holding unnecessary large balances of

cash, most firms attempt to make arrangements at borrow money is case of
unexpected needs. With such an agreement, the firm normally pays interest only
during the period that the money is actually used.
 Money market rates: If money will bring a low return a firm may choose not to
invest it. Since the loss or profit is small, it may not be worth the trouble to make the
loan. On the other hand, if interest rates are very high, every extra rupee will be
invested.
 Variation in cash flows: Some firms experience wide fluctuation in cash flows as a
routine matter. A firm with steady cash flows can maintain a fairly uniform cash
balance.
 Compensating balance: If a firm has borrowed money from a bank, the loan
agreement may require the firm to maintain a minimum balance of cash in its
accounts. This is called compensating balance. In effect this requires the firm to use
the services of bank a guaranteed deposit on which it pays no interest. The interest
free deposit is the bank’s compensation for its advice and assistance.
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Motives for holding cash:
 The transactions motive;

 The precautionary motive, and
 The speculative motive
(i) The Transactions Motive: This motive refers to the holding of cash in order meet the
day-to-day transactions which a firm carries on in the ordinary course of the business.
Primarily, these transactions include purchase of raw materials, wages, operating expenses,
taxes, dividends etc. We all know that a firm may enter into a variety of transactions to
accomplish its objectives. Similarly, there is regular inflow of cash from revenues.
Thus, the receipts and payments constitute a continuous two-way flow of cash Since the
inflows and outflows of cash do not perfectly synchronize, an adequate or a minimum cash
balance is required to uphold the operations if outflows exceed the inflows. Therefore, in
order to meet the day-to-day transactions, the requirement of cash is known as transaction
motive.
So, it refers to the holding of cash to meet anticipated obligations when timing is not
perfectly synchronized with the inflows of cash. Although, a major part of transactions
balances is held in cash, a part may also be held in the form of marketable securities whose
maturity conforms to the timing of the anticipated payments, such as payment of taxes,
dividends etc.
(ii) The Precautionary Motive: This motive for holding cash has to do with maintaining a
cushion or buffer to meet unexpected contingencies. The unexpected cash needs at short
notice may be the result of
 Uncontrollable circumstances, such as, floods, strikes, droughts etc.;
 Bills which may be presented for settlement earlier than expected;
 Unexpected delay in collection of trade dues;
 Cancellation of some order for goods due to inferior quality; and
 Increase in the cost of material, labor etc.
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Precautionary balances are the cash balances which are held as reserve for random and
unforeseen fluctuations in cash flows, i.e., this motive implies the need to hold cash to meet
unpredictable obligations. The more predictable the cash flows, the less precautionary
balances that are needed and vice-versa.
Moreover, the need for this types of cash balance may be reduced if there is already
borrowing power in order to meet the emergency cash outflows. Sometimes a portion of such
cash balances may be held in marketable securities, i.e., near-money assets.
(iii) The Speculative Motive: This motive refers to the holding of cash for taking advantages
of expected changes in security price In other words, when the rates of interest are expected
to fall, cash may be invested in different securities so that the firm will benefit by any
subsequent fall in interest rates and rise in security prices.
On the other hand, when the rates of interest are expected to rise, the firm should hold cash
until the rise in interest rates ceases. The precautionary motive is defensive in nature while
speculative motive represents a positive and aggressive approach.
The speculative motive helps to take advantages of:

 An opportunity to purchase raw materials at a reduced price against immediate
payment, i.e., benefit of cash discounts;
 A change to speculate of interest rate movements by purchasing securities when rates
of interest are expected to decline;
 The purchase at favourable prices.
Cash Turnover: The cash turnover means the numbers of times firm’s cash is
used during each year. A company’s cash turnover ratio measures how many times per year it
replenishes its cash balance with its sales revenue. A higher cash turnover ratio is generally
better than a lower one. Analyzing the cash turnover ratio can help one determine how
efficiently the company keeps cash flowing through the business. The higher the cash
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turnover, the less cash the firm requires. The firm should, therefore, try to maximize the cash
turn.
The cash turnover ratio is also a benchmark tool. Companies can compare their use of cash to
the industry standard or a leading competitor. The comparison indicates which company was
more efficient when using cash.
Formula: The formula divides sales revenue by the average cash balance for a specific
period
360
Cash turnover = ----------------
Cash cycle
Cash Cycle: Cash conversion cycle, refers to the time between purchasing the raw
materials used to make a product and collecting the money from selling the product. Cash
cycles are typically measured in days. A shorter cash cycle is better than a longer cash cycle. A
company with a shorter cash cycle has more working capital and less cash tied up in inventory and
receivable accounts, which means it is less dependent on borrowed money. Cash cycle depends
largely on operational efficiency. Factors that affect the cash cycle include labour efficiency, the
quality of raw materials, quality of equipment, efficiency of management structures for processing
materials, economic and market influencers, and more.
Formula:
Cash cycle = Average age of firm’s inventory (+) Days to collect its accounts receivables
(-) Days to pay its accounts payable.
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CASH FLOW ANALYSIS
The cash flow analysis is done with the help of cash flow statement. A cash flow
statement is a statement depicting changes in cash position from one period to another. It is
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an important planning tool. Cash flow statement gives a clear picture of the source of cash,
the uses of cash and the net changes in cash. The primary purpose of cash flow statement is
to show that as to where from the cash to be acquired and where to use them.
UTILITY OF CASH FLOW ANALYSIS
A Cash flow analysis is an important financial tool for the management. Its chief
advantages are as follows.
1. Helps in efficient cash management: Cash flow analysis helps in evaluating financial
policies and cash position. Cash is the basis for all operation and hence a projected cash flow
statement will enable the management to plan and co-ordinate the financial operations
properly. The management can know how much cash is needed from which source it will be
derived, how much can be generated, how much can be utilized.
2. Helps in internal financial management: Cash flow analysis provides information about
funds, which will be available from operations. This will helps the management in
repayment of long-term debt, dividend policies etc.,
3. Discloses the movements of Cash: Cash flow statement discloses the complete picture of
cash movement. The increase in and decrease of cash and the reasons therefore can be
known. It discloses the reasons for low cash balance in spite of heavy operation profits on for
heavy cash balance in spite of low profits.
4. Discloses success or failure of cash planning: The extent of success or failure of cash
planning can be known by comparing the projected cash flow statement with the actual cash
flow statement and necessary remedial measures can be taken
Strategies for managing surplus funds: There are 7 strategies a firm can adopt to
manage the surplus cash according to Kevin. V. Smith
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1. Do nothing: The financial manager simply allows surplus liquidity to accumulate
in the current account. This strategy enhances liquidity at the expense of profits that
could be earned from investing in surplus funds.
2. Make an adhoc investment: the FM makes investments in somewhat adhoc

manner. Such a strategy makes some contribution, though not optimal contribution to
profitability without impairing the liquidity of the firm. It is followed by the firms
which cannot devote enough time and resources to management of securities.
3. Ride on yield curve: this is a strategy to increase the yield from a portfolio of
marketable securities by betting on the interest rate changes. If the financial manager
expects that interest rates will fall in the near future, he would buy longer term
securities as they appreciate more, compared to shorter term securities. On the other
hand, if the FM believes that the interest rates will rise in the near future, he would
sell longer term securities. This strategy hinges on the assumption that the FM has
superior interest rate forecasting ability. Empherical evidence, however suggests that
it may be futile to try to do better than average. The expected higher return is almost
invariably accompanied by higher risk.
4. Develop guidelines: A firm may develop a set of guidelines which may reflect the
view of the management toward risk and returns.
(i). Do not speculate on interest rate changes.
(ii) Hold marketable securities till they mature.
(iii) Do not put more than a certain percentage of liquid funds in a particular security
or instruments.
(iv) Minimize transaction costs
5. Utilise control limits: While deciding the cash balance that a firm should hold, a
finance manager may utilize number of models. Some cash models do specify the
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fixing of upper and lower limit of cash with a firm. A firm should try to establish the
higher and lower limit of cash beyond which it should not be allowed to increase or
decrease as the case may be. If cash moves towards upper limit and touches it, it
means cash balance is increasing and firm should invest the excess cash. While in the
opposite case, the firm should sell the securities to bring the cash to the desired level.
6.Manage with a portfolio perspective: According to the portfolio theory there are
two key steps in portfolio selection
(i)Define the efficient frontier: The efficient frontier represents a collection of all
efficient portfolios. A portfolio is efficient if there is no alternative with (a) the same
expected return and a lower standard deviation, or (b) the same standard deviation and
a higher expected return or (c) a higher expected return and a lower standard deviation
(ii) Select the optimal portfolio: The optimal portfolio is that point on the efficient
frontier which enables the investor to achieve the highest attainable level of utility. It
is found at the point of tangency between the efficient frontier and a utility
indifference curve.
7.Follow a Mechanical procedure: The financial manager may switch funds

between the cash account and marketable securities using a mechanical procedure.
Some models have been developed that provide rules for such mechanical procedures.
The success of such a strategy depends on how well the behaviour of firm’s cash-
flows confirms with the assumptions of the model. However in practice, mechanical
procedures are of limited use
Optimum Cash Balance: The ideal amount of cash that a company wishes to hold in
reserve at any given point in time. This figure hopes to strike abalance between the
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investment opportunity costs of holding too much cash and the balance sheet costs of holding
too little.
One of the primary responsibilities of the financial manager is to maintain a sound liquidity
position of the firm so that the dues are settled in time. The firm needs cash to purchase raw
materials and pay wages and other expenses as well as for paying dividend, interest and
taxes. The test of liquidity is the availability of cash to meet the firm’s obligations when they
become due.
A firm maintains the operating cash balance for transaction purposes. It may also
carry additional cash as a buffer or safety stock. The amount of cash balance will depend on
the risk-return trade-off. If the firm maintains small cash balance, its liquidity position
weakens, but its profitability improves as the released funds can be invested in profitable
opportunities (marketable securities). When the firm needs cash, it can sell its keeps high
cash balance, it will have a strong liquidity position but its profitability will be low. The
potential profit foregone on holding large cash balance is an opportunity cost to the firm. The
firm should maintain optimum – just to enough, neither too much nor too little – cash
balance.
Hence it is important to determine and maintain the optimum cash balance. A firm
maybe certain about its cash-flows for the period in question, whereas, some other firms
maybe uncertain about what their requirements maybe, so the question that arises is “how to
determine the optimum cash balance if cash flows are predictable and if they are not
predictable?”
There are 2 cash management models that answer the question
(i)Baumols Model (when there is certainty)
(ii)Miller and Orr model (when there is uncertainty)
Baumols Model: Baumol model of cash management helps in determining a firm’s

optimum cash balance under certainty. It is extensively used and highly useful for the
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purpose of cash management. As per the model, cash and inventory management problems
are one and the same.
William J. Baumol developed a model which is usually used in Inventory management &
cash management. Baumol model of cash management trades off between opportunity cost or
carrying cost or holding cost & the transaction cost. As such firm attempts to minimize the
sum of the holding cash & the cost of converting marketable securities to cash
At present many companies make an effort to reduce the costs incurred by owning cash. They
also strive to spend less money on changing marketable securities to cash. The Baumol model
of cash management is useful in this regard.
In the model, the carrying cost of holding cash-namely the interest forgone on marketable
securities is balanced against the fixed cost of transferring marketable securities to cash, or
vice- versa. The Baumol model finds a correct balance by combining holding cost and
transaction costs, so as to minimize the total cost of holding cash.
Assumptions: There are certain assumptions or ideas that are critical with respect to the
Baumol model of cash management:
(a) The rate of cash usage is constant and known with certainty. The model has limited use in
times of uncertainty and firms whose cash flows are discontinuous or bumpy.
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(b) The surplus cash is invested into marketable securities and those securities are again
disposed of to convert them again into cash. Such purchase and sale transactions involve
certain costs like clerical, brokerage, registration and other costs. The cost to be incurred for
each such transaction is assumed to be constant/fixed. In practice, it would be difficult to
calculate the exact transaction cost.
(c) By holding cash balance, the firm is would incur the opportunity cost of interest forgone
by not investing in marketable securities. Such holding cost per annum is assumed to be
constant.
Limitations of the Baumol model:
(i) The model can be applied only when the payments position can be reasonably assessed.
(ii) Degree of uncertainty is high in predicting the cash flow transactions.
(iii) The model merely suggests only the optimal balance under a set of assumptions. But in
actual situation it may not hold good.
The optimum level of cash balance is found to be:
Where,
C = Optimum level of cash balance
A = Annual cash payments estimated
T = Cost per transaction of purchase or sale of marketable securities
I = Interest on marketable securities p.a. (i.e., carrying cost per rupee of cash)
Miller-Orr Cash Management Model:
Page 55

Miller and Orr model (1966) assumes that the cash-flow of the firm is assumed to be
stochastic, i.e. different amounts of cash payments are made on different points of time. It is
assumed that the movements in cash balance occur randomly. Miller and Orr suggested a
model with control limits, which sets control points for time and size of transfers between an
Investment Account and Cash Account.
The model asserts that transfer money into or out of the account to return the balance to a
predetermined ‘normal point whenever the actual balance went outside a lower or upper limit.
The lower limit would be set by management, and the upper limit and return points by way of
formulae which assume that cash inflows and outflows are random, their dispersion usually
being assumed to repeat a pattern exhibited in the past.
The model specifies the following two control limits:
h = Upper control limit, beyond the cash balance should not be carried.
0 = Lower control limit, sets the lower limit of cash balance, i.e. the firm should maintain
cash resources at least to the extent of lower limit.
z = Return point for cash balance
This is represented in the below figure:
The Miller-Orr model, will work as follows:
Page 56

(i) When cash balance touched the upper control limit (h), securities are bought to the extent
of Rs. (h-z).
(ii) Then the new cash balance is z.
(iii) When cash balance touches lower control limit (o), marketable securities to the extent of
Rs. (z-o) will be sold.
(iv) Then the new cash balance again return to point z.
Assumptions: The basic assumptions of the model are:
(a) The major assumption with this model is that there is no underlying trend in cash balance
over time.
(b) The optimal values of ‘h’ and ‘z’ depend not only on opportunity costs, but also on the
degree of likely fluctuations in cash balances.
The model can be used in times of uncertainty and random cash flows. It is based on the
principle that control limits can be set which when reached trigger off a transaction. The
control limits are based on the day-to-day variability in cash flows and the fixed costs of
buying and selling government securities.
Spread Between the Control Limits:
The higher the variability in cash flows and transaction cost, the wider and higher the control
limits will be. Conversely, the higher the interest rate, the lower and closer they will become.
Within the control limits, the cash balance fluctuates unpredictably.
Page 57

When it hits an upper or lower limit, action is taken by buying or selling securities to restore
the balance to its normal level within the control points. In applying the model one must set
the lower limit for the cash balance. This could be zero or some minimum safety margin
above zero.
Benefits
1. Allows for net cash flows occurring in a random fashion.
2. Transfers can take place at any time and are instantaneous with a fixed transfer cost.
3. Produces control limits which can be used as basis for balance management.
Limitations
1. May prove difficult to calculate.
2. Monitoring needs to be continuous for the organisation to benefit.
Page 58

B. Need for study
To study how the organisation is managing its cash and provide suggestion(s), if any required
for better utilization of available cash or sources from where funds can be obtained if there is
a shortfall
C. Project title: An analysis on cash management in Flowserve Microfinish

Pumps Pvt. Ltd.
D. Objectives of the study:
 To study the cash management at Flowserve Microfinish Pumps Pvt. Ltd: The
primary objective of the project is to study how the organisation manages its cash.
How much is the optimum balance of cash the company should maintain, and
determine whether there is excessive or deficit of cash or is the cash balance optimum
 To give recommendation(s), if any, based on the findings: After the completion of
the project, with the help of the findings, suggestions can be provided as to what can
be done if the cash held by the company is above or below the optimum level
E. Research methodology
Secondary data
 Books of accounts of the company
Page 59

5. Analysis
Page 60

The most important factors for effective cash management are
 Debtors collection period

 Creditors payment period
 Cash cycle
As a result emphasis has been given on the calculation of the above mentioned factors and
understanding what better ways can be adopted to manage cash effectively
Debtors collection period: To yield the maximum results of available cash it is

advised that the debtors collection period be reduced so that the company has more cash that
it can use to invest
Credit sales
Debtors turnover ratio=
Average debtors
365
Debtors Collection period=
Debtors Turnover Ratio
Table No. 1
Particulars 2013-14 2014-15 2015-16

Credit Sales 270225000 195199000 92385000
Opening Debtors 81476000 69465000 43557000
Closing Debtors 69465000 43557000 5094000
Average debtors 75470500 56511000 24325500
Debtors Turnover 3.58 3.45 3.79
Ratio
Debtors collection 110 days 106 days 96days
Period
Page 61

Inference: It can be inferred from the above table that the organisation allows an average
of 105 days to its customers for the payment of their bills.
It can also be noted that there is a reduction in the time period allowed year by year
Creditors turnover ratio: Another important method for the company to yield
maximum results is delaying the payments to suppliers i.e., having a arrangement with the
suppliers to allow them more days to pay their dues. The more the number of days the better
Credit Purchases
Creditors turnover ratio=
Average creditors
365
Creditos Payme nt period=
Creditos Turnover Ratio
Table No.2
Particulars 2013-14 2014-15 2015-16

Credit Purchases 111178000 89505000 41386000
Opening Creditors 19483000 17854000 10173000
Closing Creditors 17854000 10173000 3894000
Average Creditors 18668500 14013500 7033500
Creditors turnover 5.96 6.38 5.89
ratio
Creditors payment 61 57 62
period
Inference: It can be inferred from the above table that the company is allowed an average
of 60 days to pay their dues to their suppliers, meaning the organisation needs to enter into
arrangements with their suppliers to provide them more days for payments
Page 62

Inventory Turnover ratio: It is also important to determine the number of times
inventory rotates in the company and how many days completes one turnover
Sales
Inventory turnover ratio=
Average inventory
365
Inventory conversion period=
Inventory Turnover Ratio
Table No.3
Particulars 2013-14 2014-15 2015-16

Sales 270225000 195199000 92385000
Opening Inventory 31327000 28115000 19099000
Closing Inventory 28115000 19099000 17567000
Average Inventory 29721000 23607000 18333000
Inventory Turnover 9.09 8.27 5.04
Ratio
Inventory Conversion 40days 44ays 72days
Period
Inference: It can be inferred from the above table that there has been a increase in the
number of days the company takes for its inventory conversion of a period of time i.e., the
company is taking longer time to produce its goods
Page 63

Cash cycle: Another important factor is the cash cycle i.e., the number of days
required for the whole cash cycle to complete. The smaller the cash cycle the better because it
indicates that the company requires less cash
Cash turnover ratio=Days of inventory+ Days of collection period−Days of payment period
365
Cash Cycle=
Cash Turnover Ratio
Table No. 4
Particulars 2013-14 2014-15 2015-16

Days of inventory 40 44 72
conversion
Days of collection 110 106 96
period
Days of payment 61 57 62
period
Cash Cycle 89 93 106
Cash turnover Ratio 4.1 3.9 3.44
Inference: It can be inferred from the above table that the organisation has a long cash
cycle and it has increased over the years, meaning over the years the company is required to
hold more cash for their activities
Page 64

Cash management at flowserve microfinish pumps pvt. Ltd.
The organisation holds all its money in current account at 2 different banks.
They are not involved in any kind of short term investing activities except for term deposits.
However, the organisation is provided with a facility known as the “sweep in sweep out”
from the banks.
Sweep in sweep out accounts are a extended facility to the current accounts where if the cash
balance is above a certain limit, the cash over and above the limit is sweeped out of the
account to a different account and interest is provided on that amount and whenever the
organisation is in need of those funds the cash is sweeped in the account
The benefit of this kind of facility is that the organisation can store the whole amount in
current account and earn interest on it without having to worry about running out of funds.
Also such accounts are not attached with any form of transaction costs
However, the sweep in sweep out account does not provide such returns as any other short
term investment option would provide
Credit policy at flowserve microfinish pumps pvt ltd
Flowserve Microfinish pumps pvt ltd allows their debtors a period of 90 days to pay
their bills
Flowserve Microfinish Pumps pvt ltd is allowed a period of 60 days to pay their bills to the
suppliers other than MSME’s (Micro, Small, Medium Emterprises)
And a period of 30 days to pay their bills to MSME suppliers
Page 65

6. Findings
Page 66

Findings:
4) It can be understood from table 1 that the time provided to debtors for payment is very
long at an average of 105 days
5) It can also be found from the same table that the number of days allowed to debtors
for payment of their dues has been reducing from year to year, i.e,, it can be
understood that the company is putting efforts to reduce the debtors collection period
6) From table 2 it can be understood that the time period allowed to the company by
their suppliers is at the average of 60 days which is very low as compared to the
debtors collection period.
7) For effective cash management it is necessary that the payment period be greater than
the collection period but by comparing table 1&2 it can be understood that in this
scenario it is quite the opposite
8) From table 4 we can understand that the cash cycle is very long i.e., an average of 96
days. The shorter the cash cycle the better it is for the organisation but from table 4 it
can be understood that the organisation needs to hold cash for an average of 96 days
9) It is also understood that the company is losing a lot of what can be earned by opting
for a “sweep in sweep out” facility over other short term investment options
10) It can also be noted that though the credit policy of the firm allows 90 days to the
customers to pay their bills there are certain bills outsanding for a period of more than
6 months and also the average collection period is 15 days more than the time allowed
by the policy
Page 67

7. Recommendations
Page 68

Recommendations
1) Considering finding’s 1 and 2 it can be suggested that the organisation should
reduce the time allowed by them for payment to their debtors. For effective
cash management the company has to have speedy recovery of debts so that it
can utilise the cash to make the best use of it and reduce its cash cycle. The
company can do so by providing certain incentives to their debtors such as
cash discounts, special discounts, etc
2) From finding 3 we can suggest the organisation to ask their suppliers for more
time to pay their dues. The organisation can enter into some kind of a
arrangement with their suppliers to have a longer period to pay their bills.
3) The essence of effective cash management is speedy recovery of debts and
deferred payment to creditors, which, we can understand from finding 4 is not
happening in the organisation. Hence the organisation should alter their credit
policy allowing lesser days to their customers for payment and also enter into
certain agreements with their suppliers allowing them more time tom settle
their bills
4) Keeping in mind finding 6 it can be understood that the company needs to
invest its surplus funds in short term investment such as term deposits, mutual
funds, etc. Because, otherwise the organisation is losing a lot of money that it
can earn in the form of return on such investments
Page 69

8.Conclusion
Page 70

Conclusion:
The study at Flowserve Microfinish Pumps Pvt Ltd has shown various factors that
make the organisation a successful one. The organisation has achieved a high turnover due to
its disciplined practices and ensuring the best quality being delivered to its customers.
However, there is always scope for improvement
The study on the cash management in Flowserve Microfinish pumps Pvt. Ltd. shows
that there is scope for improvement and that the company needs to make changes in its credit
policy and its cash management policies
It is suggested that the organisation accept the recommendations mentioned above as

there is a serious deal of loss of opportunity cost
Page 71

9. Annexure/ Bibliography
Page 72

Extract from the balance sheet
Particulars 2012-13 2013-14 2014-15 2015-16

Debtors 81476000 69465000 43557000 5094000
Creditors 19483000 17854000 10173000 3894000
Inventory 31327000 28115000 19099000 17567000
Cash in hand
and at bank
Extract from the profit and loss account
Particulars 2013-14 2014-15 2015-16
Revenue from 270225000 195199000 92385000

operation
Purchases 111178000 89505000 41386000
Note:
All the values have been rounded off to the nearest 1000 value
Page 73

1) Books
Financial Management 7th edition by Prasanna Chandra
2) Company’s balance sheet

3) Website
(a) https://www.indianpumpsandvalves.com/pumps
(b)http://www.microfinishgroup.com/
(c) http://www.accountingnotes.net/financial-management/
cash-management-models/top-2-cash-management-models-
with-diagram/11114
(d)http://www.accountingnotes.net/working-capital/cash-
management-and-working-capital/7062
Page 74

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1.

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Cash management plays a very important role in the smooth running of an

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

B. Project title: An analysis on cash management in Flowserve Microfinish

C. Need for study

D. Objectives of the study:

 Books of accounts of the company

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Pumps are used in industries such as

Valves are used in industries such as

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Growth and development of industry

Why Make in India?

 India offers A ready export market in 100-plus countries

 Healthy domestic market for pumps in India – US$ 1.2 billion-plus

 Above-average growth is projected at a CAGR of 10% from FY 2014 to 2017

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

 Indian companies are increasingly looking for international partnerships via

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Flowserve Microfinish is basically a joint venture of Flowserve USA and Microfinish

Quality and standardization have become a watch word in Indian engineering

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

The Flowserve Corporation is an American multinational corporation and one of the

Microfinish Valves Pvt. Ltd. was established in 1971 to manufacture ball valves,

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Industrial technology is progressing at a remarkable rate, so we have established a

The guiding principles of Microfinish are:

 Personal commitment to our customers

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

About the company and history:

As mentioned earlier, Flowserve Micro finish [FMVPL &amp; FMPPL] was

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Mission, Vision and Quality Policy

Complete solution provider in the flow control business

Vision is to manufacture quality valve products for the process industry

 Continual improvement of quality management system

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

Quality assurance Activities

 Documented quality systems

Quality Control Activities

 Raw material, semi finished, and bought out component inspection

 Final product inspection and performance testing

Environmental, occupational, health and safety policy

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

1) Following the safety rules.

2) Providing adequate lighting facilities.

3) Ensuring the proper air circulation.

4) Maintaining cleanliness at all the areas.

Flowserve Microfinish Pvt Ltd Hubli At a glance

Name &amp; Address Of The Flowserve Micro finish Group Of Companies

Industry pvt. Ltd.,

Date Of Commencement 1 st June 1998

Applicable Act 1) Factory Act:

Certificates ISO 9001, ISO 2008 and PED97/ 23 / EC.

KLE’S INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, HUBLI

As mentioned earlier, Flowserve Micro finish [FMVPL & FMPPL] was

Name & Address Of The Flowserve Micro finish Group Of Companies

6. Company has an out Bond logistic Management & documentation.