CASH

MANAGEMENT
submitted to: submitted by:
Mr. Manish Kumar varun gautam
Reg. No. 10808154
Sec. RR1809A15
 WHAT IS CASH?
• In narrow sense: currency and generally accepted
equivalents of cash like cheques, drafts etc.
• In broad sense: includes near-cash assets, such as
marketable securities and time deposits in banks.
– They can be readily sold and converted into cash.
– Can serve as a reserve pool of liquidity.
– Also provide short term investment outlet for excess cash.
 Cash management
• Cash management is concerned with the managing
of:
– cash flows into and out of the firm,
– cash flows within the firm, and
– cash balances held by the firm at a point of time by
financing deficit or investing surplus cash
 Four Facets of Cash Management

• Cash planning
• Managing the cash flows
• Optimum cash level
• Investing surplus cash
 Motives for holding cash
• Transaction motive
• Precautionary motive
• Speculative motive
• compensating motive
 Transaction motive
• Holding of cash to meet routine cash requirements
to finance the transactions which a firm carries on in
the ordinary course of business.
 Precautionary motive
• The cash balances held in reserve for random and
unforeseen fluctuations in cash flows.
• A cushion to meet unexpected contingencies.
– Floods, strikes and failure of imp customers
– Unexpected slowdown in collection of accounts
receivable
– Sharp increase in cost of raw materials
– Cancellation of some order of goods

• Defensive in nature
 Speculative motive
• Is a motive for holding cash/near-cash to quickly take
advantage of opportunities typically outside the
normal course of business.
• Positive and aggressive approach
• Helps to take advantage of:
– An opportunity to purchase raw materials at reduced price
– Make purchase at favorable prices
– Delay purchase on anticipation of decline in prices
– Buying securities when interest rate is expected to decline
 Compensating motive
• Is a motive for holding cash/near-cash to
compensate banks for providing certain services or
loans.
• Clients are supposed to maintain a minimum balance
of cash at the bank which they cannot use
themselves.
 Objectives of cash management
• Meeting payments schedule
– It prevents insolvency
– relationship with bank is not constrained
– Helps in fostering good relationships
– Cash discount can be availed
– Strong credit rating
– Take advantage of business opportunities
– Can meet unanticipated cash expenditure with a minimum
of strain.
• Minimizing funds committed to cash balances
– High level of cash: large funds remain idle
– Low level of cash: failure to meet payment schedule
Managing Cash Collections and
Disbursements

• Accelerating Cash Collections

• Controlling Disbursements
Accelerating Cash Collections

1. Decentralised Collections

 number of collection centres

 Collection centres will collect cheques from customers and
deposit in their local bank accounts
 They will deposit the funds to a central bank
 Accelerating Cash Collections
Contd…….
2. Lock-box System
– Collection centers are established considering the customer locations
and volume of remittances
– At each centre the firm hires a post office box
– Remittances are directly picked from the bank whom the firm gives
the authority

Advantages of lock-box system are

– cheques are deposited immediately upon receipt of remittances
– Eliminates the period between the time cheques are received by the
firm and the time they are deposited in the bank for collection
 Controlling Disbursements

It means delay the payments as much as possible. Can help

the firm in conserving cash and reducing the financial
requirements.

Disbursement or Payment Float

 The size of the minimum cash balance depends on:

• How quickly and cheaply a organization can raise cash when

needed.

• How accurately managers can predict cash requirements.

Cash budget helps in this .

• How much precautionary cash the managers need for

emergencies.
 The organization’s maximum cash balance depends on:

• Availability of (short-term) investment opportunities

– e.g. money market funds, CDs, commercial paper

• Expected return on investment opportunities.

– e.g. If expected returns are high, organizations should be
quick to invest excess cash

• Transaction cost of withdrawing cash and making an

investment

• Demand for Cash for daily transactions

 Temporary Issues Related to Cash
Management
• 1. Wockhardt Pharmaceuticals:

 
• Currently using Deutsche Banks DB-Direct (using thin client version).
• They issue around 600 cheques a week totaling Rs.10 crores.
• They currently use company cheques and their account gets debited when the cheques hit the
counter. This service is available at non-DB locations also.
• The cheques are payable at par at correspondent locations and this is known as “back ended
funding”.
• The Deutsche Bank product has a multi-currency module.
• The cutoff time for LCY DD is 11a.m.
• Customers like the fact that after a transaction is initiated a reference is sent back to the customer.
• DB does not have multiple delivery modes. Only option is mail back to customer.
• DB has an in-house technical team that assists with building the interface, which aids in the
reconciliation process.
• DB has correspondent bank relationships with Vijaya and State Bank of Patiala.
 
 2. Infrastructure Leasing Finance Company (Finance):
 
• Citibank does collections while HDFC/State Bank of India handles the dividend
warrants.
• They maintain a lot of surplus cash in their main operating account, as they do not
know when the cheques that they have issued will hit the counter. This is in the case
when they issue dividend warrants.
• They would like to get interest on the surplus funds lying in the account.
• They use ECS to make payments. HDFC currently has 41 branches and they have access
to another 60 locations via Vijaya Bank.
• Salary payments are done via HSBC. However they are facing problems due to the lack
of locations and their staff does not always have access to a branch.
• They issue around 70000 warrants in April and another 30000 in June.
• Interest warrants are issued once a year whilst the dividend warrants are paid out
around 3-4 times a year.
• The customer would like time bound reconciliation so that they know when the
cheques are presented and which cheques are outstanding.
• HDFC do the reconciliation via a floppy, which enables the customer to get a knock off
and tell them which transactions are outstanding and what has been presented. They
also know when they are going to get the reconciliation diskette.
 
. Wyeth Lederie Ltd
(Pharmaceutical):
• They are currently looking for a complete cash management RFP and the 3 banks that have been singled out
include HDFC/HSBC and Citibank.
• Main issues are availability of time critical data, ease of reconciliation and cost-effectiveness of solution.
• Will be ready to transact over the Internet in 2001. Would like to start using thick client and shift later.
• Issue around 1100 cheques a month and would like the ability to make cheques payable at par in 8 locations
across India.
• Main cities of interest are Baroda/Surat/Indore. The number of cheques issued out of these cities is around 5-7
on a weekly basis.
• Citibank has made an offer of “free of charge” cheques and local currency demand drafts to get issued out of Citi
and non-Citi locations.
• Mentioned that other banks in the running are not offering company cheques rather are only offering cashier
orders.
• Need a lot of flexibility, as there are only 2 authorizers in the organization. Do not need a verifier feature.
• Do not wish to set up limits at their end
• Would not want authorizer to make amendments.
• Have JD Edwards account payable system.
• Payment fields to be included in the payment advice include the following: -
• Purchase number
• Paid date
• Invoice number
• Invoice amount
 Contd………
• Remarks
• They have their finance operations centralized out of the Bombay office even though they
have individual depots making emergency payments.
• Need payable at par cheques because currently they have to change the stationery based on
the correspondent bank and the location that they have make the payment out to.
• Would like to make amendments in the A/P rather than the FES, as that would complicate
the reconciliation process.
• Would like reconciliation to be done on a cheque-by-cheque level. Would like cheque level
details.
• Would like sequential authorization.
 4. ACC (Cement):
 
• Would like to outsource but are awaiting the installation of an ERP. Given it is a very large
corporate there are a lot of stages of approval and the treasury department cannot expedite
the process unless proper infrastructure is in place.
• There is some resistance from senior management because there will be redundancy, which
cannot be accounted for, and there will be issues with unions. Also the treasury manager
feels that the savings achieved by outsourcing are intangible and it is difficult to get senior
management buy-in.
• Suggested that we do a consultative approach and assist them in calculating what the cost
savings will be so that they can make a presentation to senior management.
• Currently use continuous stationery to print cheques. This is very cumbersome.
• Main problems currently being faced are lack of MIS and reconciliation is a problem.
• Customer spends around 8-12 hours’ daily preparing/printing cheques and would like to

expedite the process .

 New initiatives
 
HSBC would like to set up an “excellence center” in India and would be happy to liase with the
vendor to ensure deliverables and quality of output.
Centralized BOS engine conceptually is a very good one but there will be huge cost implications
as bandwidth is very expensive in India. The reason that the centralized database would cost a
lot is because the cheque images along with the signatures have to travel from the server to
the branch of transaction to get printed in the location of choice. In order to get away from
this, signatures can be stored at local sites. But in order to have remote printing, you need
intelligence checking for signatures for which you would need to attach servers to the printers.
This again has cost implications.
Inter-city transmission is expected to be enhanced in 2001 making remote printing a
technological possibility though business would need to think through the product offering due
to cost implications.
Firewalls and PSDN are in place by 2001 providing flexibility to customers in terms of using
both the Internet and the modem.
There is no need to auto mailers in India and it is cheaper to do things manually. The main
problem of using the auto-mailer is that the nearest repair center is Singapore making it very
expensive to maintain.
 

 
Local clearing at non-branch locations

Day 0 Day 0

Local clearing site

RBI/SBI
Courier picks up Courier deposits
cheques at location cheques at
designated Corbank
branch

Day 1/3 Day 1/3

Customers
Funds transfer to Concentration A/C
our Control credited
Account
Thank You