Record to Report (R2R)

UNIT 7 CASH FLOW MANAGEMENT

Structure
7.0 Objective
7.1 Introduction
7.2 Motives for Holding Cash
7.3 Management Cash Collection and Disbursement
7.4 Methods of Cash Forecasting
7.5 Sources of Uncertainty in Cash Forecasting
7.6 Cash Management Models
7.7 Management of Cash Flows
7.7.1 Methods of Accelerating Cash Inflows
7.7.2 Methods of Slowing Cash Outflows

7.8 Factors Determining Cash Flow

7.9 Cash Management in BPO Industry
7.10 Let Us Sum Up
7.11 Key Words
7.12 Answers to Check Your Progress
7.13 Terminal Questions/Exercises
7.14 Some Useful Books

7.0 OBJECTIVES
After studying this Unit, learner should be able to:
x explain the reasons for holding cash;
x describe the objectives of cash management;
x point out uncertainty affecting cash balance of a firm;
x use quantitative models viz. Miller-Orr Model and Baumol Model to decide
the optimal level of cash balance; and
x focus on factors affecting cash flow.

7.1 INTRODUCTION
Cash flow management is a very important area and is very critical for survival of
an organisation. It entails management of cash for day to day activities, as well as
maintaining cash for meeting the desired medium/long term objectives of the
organisation. Objectives of cash flow management are to reduce the liquidity risks,
make cash available for day to day activities, minimise the cash, invest surplus
124 cash in the best possible manner and maintain optimum cash balance in the system
at all times. For this, various tools and techniques are used which include cash Cash Flow Management
forecasting, managing cash collection, disbursement and optimum cash balance.
Corporate cash management is perhaps the most critical aspect of working capital
management as expressed in an old saying. The thing is finest when the need is
urgent. Cash is the most liquid asset that a business owns. Cash in business
enterprise may be compared to the blood of the human body; blood gives life and
strength to the human body, and cash imparts strength-profits and solvency to the
business organisation.
Efficient cash management requires proper cash planning, management of receipts
and disbursement and an efficient control and review mechanism. In this unit, we
intend to discuss some details regarding cash forecasting under uncertainty and
decision-making models regarding the temporary investment of cash. We will
also briefly review current practices of management of cash.

7.2 MOTIVES FOR HOLDING CASH

x The transactions motive
x The precautionary motive
x The speculative motive
x The compensating motive
The Transaction Motive: A firm needs cash for making transactions in the day
to day operation. For example, cash payments have to be made for purchases,
wages, operating expenses, financial charges and so on. Similarly, there is a regular
inflow of cash to the firm from sales, returns on investments etc. Thus, the
transaction motive mainly refers to holding cash to meet anticipated payments
whose timing is not perfectly matched with cash receipts.
The Precautionary Motive: A firm is required to keep cash for meeting various
A future event or
contingencies in future. It provides a cushion to withstand some unseen circumstance which is
emergencies. The more unpredictable are the cash flows, the larger is the need for possible but cannot be
such balances. Precautionary balance should, thus, be held more in marketable predicted.
securities and relatively less in cash.
The Speculative Motive: The speculative motive relates to holding of cash
investing in profitable opportunities as and when they arise. Here, firms aim to
exploit profitable opportunities and will hold cash in reserves to do so.
The Compensating Motive: Compensating balances are also required by some
loan agreements between a bank and its customers. Of the four primary motives
of holding cash balances, the two most important are transactions and precautionary
motives.

7.3 MANAGEMENT CASH COLLECTION AND

DISBURSEMENT
The cash budget explained as we have seen above throws light on the cash position
of the firm for a time horizon. Let us now try to understand the broad strategies of
cash management. 125
Record to Report (R2R) Broad cash management strategies are linked to the cash cycle of a firm. Cash
cycle of a typical manufacturing can be depicted as under:

Cash Cycle Cash

Inventory Receivable
Raw
Materials,
Expense

Finished
Goods

WIP

Cash cycle reflects the total time elapsed in the process by which the cash is used
for making payments to suppliers for raw material and expenses which results in
raw materials inventory. The inventory is then converted into work-in-progress
during the manufacturing process and is finally transformed into finished goods
inventory. The finished goods are then sold to customers to whom credit is offered.
Cash is again received on realization from customers.
This is a continuous process and the cycle repeats itself again and again. Cash
turnover means the number of times cash is used each year. Cash turnover is
calculated as
Cash Turnover = 360/Cash cycle in number of days

7.4 METHODS OF CASH FORECASTING

The short-term forecasts can be made with the help of cash flow projections. The
finance manager will take estimates of likely receipts in the near future and the
expected disbursements in that period. Though it is not possible to make exact
forecasts, even then the estimates of cash flows will enable the planners to make
arrangement for cash needs.
It may so happen that expected cash receipts may fall short or payments may
exceed estimates. A financial manager should keep in mind the sources from where
he will meet short-term needs. He should also plan for productive use of surplus
cash for short periods.
The long-term cash forecasts are also essential for proper cash planning. These
estimates may be for three, four, five or more years. Long-term forecasts indicate
companys future financial needs for working capital, capital projects, etc.
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Both short-term and long-term cash forecasts may be made with the help of Cash Flow Management
following methods:
(i) Receipts and Disbursements Method. In this method, the receipts and
payments of cash are estimated. The cash receipts may be from cash sales,
collections from debtors, sale of fixed assets, receipts of dividend or other
incomes of all the items ; it is difficult to forecast sales. The sales may be on
cash as well as credit basis. Cash sales will bring receipts at the time of sale
while credit sales will bring cash later on. The collections from debtors (credit
sales) will depend upon the credit policy of the firm. Any fluctuation in rates
will disturb the receipts of cash. Payments may be made for cash purchases,
to creditors for goods, purchase of fixed assets, for meeting operating expenses
such as wage bill, rent, rates, taxes or other usual expenses, dividend to
shareholders etc.
The receipts and disbursements are to be equalled over a short as well as long
periods. Any shortfall in receipts will have to be met from banks or other
sources. Similarly, surplus cash may be invested in risk free marketable
securities. It may be easy to make estimates for payments but cash receipts
may not be accurately made. The payments are to be made by outsiders, so
there may be some problem in finding out the exact receipts at a particular
period. Because of uncertainty, the reliability of this method may be reduced.
(ii) Adjusted Net Income Method. This method may also be known as sources
and uses approach. It generally has three sections: sources of cash, uses of
cash and adjusted cash balance. The adjusted net income method helps in
projecting the company’s need for cash at some future date and to see whether
the company will be able to generate sufficient cash. If not, then it will have
to decide about borrowing or issuing shares, etc. In preparing its statement
the items like net income, depreciation, dividends, taxes, etc. can easily be
determined from Company’s annual operating budget. The estimation of
working capital movement becomes difficult because items like receivables
and inventories are influenced by factors such as fluctuations in raw material
costs, changing demand for company’s products and likely delays in
collections. This method helps in keeping a control on working capital and
anticipating financial requirements.

7.5 SOURCES OF UNCERTAINTY IN CASH

FORECASTING
Accurate cash flow forecasting hinges on the forecaster’s ability to reduce the
amount of observed error between forecast values and actual values that has
occurred. Given the short-run nature of the cash forecast, with most things occurring
in the near future, one would tend to think that most financial transactions could
be forecast very accurately. This is far from true.
In practice, few firms, if any, are able to forecast their inflows and outflows
accurately. Sales forecasts are notoriously unreliable, for actual sales depend in
part upon factors that lie outside the control of the firm. Changes in the marketing
of competitive products, as well as changes in general economic conditions, can
lead to large forecasting errors. We may further note that any errors in sales forecasts
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 Record to Report (R2R) have multiple impacts on the firm’s cash flows; they impact on receivable levels
(and therefore collections) and on production expenses (and therefore
disbursements).
The firm is also faced with Collection rate uncertainty. The firm may historically
have collected an average of a certain percent of its outstanding receivables from
a particular period in another particular period, but this average contains
The action of estimating or considerable variability. Further, changing market and economic conditions may
concluding something by make extrapolation of past historic data into future periods a futile exercise.
assuming that existing trends
will continue or a current There is still another source of uncertainty- production cost uncertainty. The
method will remain applicable. price of materials may change; production problems may arise that lead to increased
labour costs; and errors in the sales estimates themselves would necessarily lead
to forecasting errors in purchases- hence the volume of payables.
Capital outflow uncertainty is one of the biggest sources of surprises in cash
flow forecasting. This is the uncertainty regarding the timing of cash disbursements
related to the firm’s major capital expenditure and construction programmes. For
instance, construction firms are notorious for filing late progress reports and then
expecting immediate payment. While only a small percent of the firm’s total bills
are from capital construction programmes, the amount involved is usually very
large. One unexpected item of this sort can impair a carefully drawn cash flow
forecast. An efficient way to deal with above uncertainties is to apply simulation
analysis of the cash forecast. We will now briefly outline this method.

7.6 CASH MANAGEMENT MODELS

A number of mathematical models have also been developed to determine the
optimal cash balance such as (a) Operating Cycle Model; (b) Inventory Model;
(c) Stochastic Model; and (d) Probability Model. However the Inventory Model
as developed by William J. Baumol and the Stochastic Model of M. H. Miller and
Daniel Orr are mainly used to determine the optimum balance of cash.
William J. Baumol
William J. Baumol developed a model which is usually used in inventory
management but has its application in determining the optimal cash balance also.
Baumol found similarities between inventory management and cash management.
As Economic Order Quantity (EOQ) in inventory management involves trade off
between carrying costs and ordering cost, the optimal cash balance is the trade off
between opportunity cost or cost of borrowing or holding cash and the transaction
cost (i.e., the cost of converting marketable securities into cash etc.) The optimal
cash balance is reached at a point where the total cost is the minimum. The graph
below shows the optimum cash balance.
Costs

Total Costs
Opportunity/Holding Cost

Transaction Cost
Optimum Cash Balance Cash Balance
128 (Baumol Model: Trade off Between Holding Cost and Transaction Cost)
The Baumol model is based upon the following assumptions: Cash Flow Management

(a) The cash needs of the firm are known with certainty.
(b) The cash disbursements (usage) of the firm occur uniformly over a period of
time and is known with certainty.
(c) The opportunity cost of holding cash is known and it remains constant.
(d) The transaction cost of converting securities into cash is known and remains
constant.
The Baumol model can also be represented algebrically:

—
2A x F
C =
O

Where, C = Optimum balance

A = Annual (or monthly) cash disbursements
F = Fixed cost per transaction
O = Opportunity cost of holding cash.
Illustration 1 The annual cash requirement of A Ltd. is Rs. 10 lakhs. The company
has marketable securities in lot sizes of Rs. 50,000, Rs. 1,00,000, Rs. 2,00,000,
Rs. 2,50,000 and Rs. 5,00,000. Cost of conversion of marketable securities per
lot is Rs. l,000. The Company can earn 5% annual yield on its securities. You are
required to prepare a table indicating which lot size will have to be sold by the
company. Also show that the economic lot size that can be obtained by the Baumol
Model.
Solution:
Table Indicating Lot Size
(a) Annual requirement of cash 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
(Rs.)
(b) Lot size of securities (Rs.) 50,000 1,00,000 2,00,000 2,50,000 5,00,000
(c) Number of lot sizes [ayb] 20 10 5 4 2
(d) Average holding of cash 25,000 50,000 1,00,000 1,25,000 2,50,000
(e) Opportunity holding cost of 1,250 2,500 5,000 6,250 12,500
cash (Rs.) [d x 5/100]
(f) Fixed conversion cost per 1,000 1,000 1,000 1,000 1,000
transaction (Rs.)
(g) Total conversion cost 20,000 10,000 5,000 4,000 2,000
[c x f]
(h) Total cost (Rs.) [e+g] 21,250 12,500 10,000 10,250 14,500

The above table clearly indicates that the total cost is minimum at Rs. 10,000
when the lot size of securities is Rs. 2,00,000 and thus it is economic lot size of
selling securities.
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Record to Report (R2R) Calculation of Economic Lot Size (Baumol Model)

2A x F
C =
O

Where, C = Optimum cash balance or lot size

A = Annual requirements of cash (Rs. 10,00,000)
F= Fixed conversion cost per transaction (Rs. 1,000)
O= Opportunity cost of holding cash (5% or o.05)

2 x 10,00,000 x 1,000
C= = Rs. 2,00,000
0.05

Miller and Orr Model

Baumol’s model is based on the basic assumption that the size and timing of cash
flows are known with certainty. This usually does not happen in practice. The
cash flows of a firm are neither uniform nor certain. The Miller and Orr model
overcomes the shortcomings of Baumol model. M.H. Miller and Daniel Orr (A
Model of the Demand for Money) expanded on the Baumol model and developed
Stochastic Model for firms with uncertain cash inflows and cash outflows. The
Miller and Orr (MO) model provides two control limits, the upper control limit
and the lower control limit alongwith a return point as shown in the graph below.
When the cash balance touches the upper control limit (h), markable securities

Cash

Upper control limit: buy securities

h Curve representing cash Purchase of marketable
balance securities

Return Point
z

Sale of marketable securities

o
Time Lower Control Limit: Sell securities
(Miller-Orr Cash Management Model)

are purchased to the extent of hz to return back to the normal cash balance of z. In
the same manner when the cash balance touches lower control limit (o), the firm
will sell the marketable securities to the extent of oz to again return to the normal
cash balance. The spread between the upper and lower cash balance limits (called
z) can be computed using Miller-Orr model as below:

Spread(Z)
and, Return Point = Lower Limit +
3

130 V)2
Variance of Cash Flows = (Standard deviation)2 or (V
Illustration 2 A Company has a policy of maintaining a minimum cash balance Cash Flow Management
of Rs. 1,00,000. The standard deviation in daily cash balances is Rs. 10,000. The
interest rate on a daily basis is 0.01%. The transaction cost for each sale or purchase
of securities is Rs. 50. Compute the upper control limit and the return point as per
the Miller-Orr model.
Spread between the upper and lower cash baIace (Z)

1
ª 3 50 u (10000)2 º 3
3« u »¼
¬4 .0001

= Rs. 1.00415
Thus, the upper control limit of cash balance is
Rs. 100000+100415= Rs. 200415 and the return point is:
Spread
Lower Limit +
3
= Rs. 1,00,000 + 100415/3
= Rs. 133472

7.7 MANAGEMENT OF CASH FLOWS

After estimating the cash flows, efforts should be made to adhere to the estimates
of receipts and payments of cash. Cash management will be successful only if
cash collections are accelerated and cash disbursements, as far as possible, are
delayed. The following methods of cash management will help:
7.7.1 Methods of Accelerating Cash Inflows
1. Prompt Payment by Customers: In order to accelerate cash inflows, the
collections from customers should be prompt. This will be possible by prompt
billing. The customers should promptly be informed about the amount payable
and the time by which it should be paid, It will be better if self addressed
envelope is sent alongwith the bill and quick reply is requested. Another method
for prompting customers to pay earlier is to allow them a cash discount. The
availability of discount is a good saving for the customer and in an anxiety to
earn it they make quick payments.
2. Quick Conversion of Payment into Cash: Cash inflows can be accelerated
by improving the cash collecting process. Once the customer writes a cheque
in favour of the concern the collection can be quickened by its early collection.
There is a time gap between the cheque sent by the customer and the amount
collected against it.
This is due to many factors, (i) mailing time, i.e. time taken by post office for
transfering cheque from customer to the firm (ii) time taken in processing the
131
Record to Report (R2R) cheque within the organisation and sending it bank for collection, (iii) collection
time within the bank, ie. time taken by the bank in collecting the payment
from the customer’s bank, called bank float.
3. Decentralised Collections: A big firm operating over wide geographical area
can accelerate collections by using the system of decentralised collections. A
number of collecting centres are opened in diferent areas instead of collecting
receipts at one place. The idea of opening different collecting centres is to
reduce the mailing time from customers dispatch of cheque and its receipt in
the firm and then reducing the time in collecting these cheques. On the receipt
of the cheque it is immediately sent for collection.
4. Lock Box System: Lock box system is another technique of reducing mailing,
processing and collecting time. Under this system the firm selects some
collecting centres at different placs. The places are selected on the basis of
number of consumers and the remittances to be received from a particular
place. The firm hires a Post Box in a post office and the parties are asked to
send the cheques on that post box number. A local bank is authorized to operate
the post box. The bank will collect the post a number of times in a day and
start the collection process of cheques. The amount so collected is credited to
the firm’s account. The bank will prepare a detailed account of cheques received
which will be used by the firm for processing purpose. This system of collecting
cheques expedites the collection process and avoids delays due to mailing and
processing time at the accounting department.
7.7.2 Methods of Slowing Cash Outflows
A Company can keep cash by effectively controlling disbursements. The objective
of controlling cash outflows is to slow down the payments as far as possible.
Following methods can be used to delay disbursements:
1. Paying on Last Date: The disbursements can be delayed on making payments
on the last due date only. If the credit is for 10 days then payment should be
made on 10th day only. It can help in using the money for short periods and
the firm can make use of cash discount also.
2. Payments through Drafts. A company can delay payments by issuing drafts
to the suppliers instead of giving cheques. When a cheque is issued then the
company will have to keep a balance in its account so that the cheque is paid
whenever it comes. On the other hand a draft is payable only on presentation
to the issuer. The receiver will give the draft to its bank for presenting it to the
buyer’s bank. It takes a number of days before it is actually paid in the bank.
The company can make use of this float if it is able to estimate it correctly.
3. Adjusting Payroll Funds: Some economy can be exercised on payroll funds
also. It can be done by reducing the frequency of payments, if the payments
are made weekly then this period can be extended to a month. Secondly, finance
manager can plan the issuing of salary cheques and their disbursements. If the
cheques are issued on Saturday then only a few cheques may be presented for
payment, even on Monday all cheques may not be presented. On the basis of
his past experience, the Finance Manager can deposit the money in bank
because it may be clear to him about the average time taken by employees in
encashing their pay cheques.
132
4. Centralisation of Payments. The payments should he centralised and Cash Flow Management
payments should be made through drafts or cheques. When cheques are issued
from the main office then it will take time for the cheques to be cleared through
post. The benefit of cheque collecting time is availed.
5. Interbank Transfer. An efficient use of cash is also possible by inter-bank
transfers. If the company has accounts with more than one bank then amounts
can be transferred to the bank where disbursements are to be made. It will help
in avoiding excess amount in one bank.
6. Making use of Float. Float is a difference between the balance shown in
company’s cash book (Bank column) and balance in pass book of the bank.
Whenever a cheque is issued, the balance at bank in cash book is reduced. The
party to whom the cheque is issued may not present it for payment immediately.
If the party is at some other station then cheque will come through post and it
may take a number of days before it is presented. Until the time, the cheques
are not presented to bank for payment there will be a balance in the bank. The
company can make use of this float if it is able to estimate it correctly.

7.8 FACTORS DETERMINING CASH FLOW

The Cash flow depends upon on the following factors:
Operating Decisions: Managerial decisions regarding all the attributes of profit
affect cash flow.
Capital Expenditure Decisions: The acquisition or disposal of long-lasting assets
results in depreciation charges against profits.
Inventory Decisions: Changes in the amounts tied up in stocks increase or decrease
the cash flow.
Customer Credit Policies: An increase in customer credit delays the cash inflow,
but reduction in credit accelerates it.
Supplier Credit Policies: An increase in supplier credit creates a postive cash
flow, for it decelerates the cash outflow. Reduction in supplier credit accelerates
the cash outflow.
Financial Obligations: Interest and dividend payments and other contractual
repayments have an impact on cash flow.
Investing Decisions: The utilisation of surplus funds or, conversely, the liberation
of funds, affects cash flow.
Financing Decision: The acquistion. of additional capital on a long term or short
term basis has an impact on the cash flow.

Check Your Progress A

1) Enumerate the motives for holding cash.
.....................................................................................................................
.....................................................................................................................
..................................................................................................................... 133
Record to Report (R2R) 2) What are the objectives of Cash Management?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
3) Explain the Baumol Model for determining the optimal level of cash.
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
4) State whether the following statements are True or False.
a) Cash Management is a trade-off between Cost of carrying cash and the
necessity of maintaining liquidity.
b) A large balance of Cash in hand should be kept by a firm to meet all
contingencies.
c) There is a time gap between cash inflows and cash outlows.
d) Bank float refers to the time taken by bank in collecting cheques.
e) Lock box system is a method for accelerating for outflows.
f) Baumol explains the cash holding principle under condition of certainty.
5) Fill in the blanks:
a) Size of cash holding under precautionary motive is..............................
b) The term Cash management refers to management of......................
c) Miller-Orr Model is suitable in those circumstances when the demand for
cash........................
d) The term ‘float’ refers to the time taken to collect cheques from
the.......................... after the payments fall due.
e) ............................is the most liquid asset that a business owns.

7.9 CASH MANAGEMENT IN BPO INDUSTRY

The management of cash in BPO Industry is not very much on the pattern of
concepts discussed here. The evidence suggests that the existing practices of cash
inflows and outflows predictions remain much to be desired. The gut feeling’
approach to cash flow forecasting is very much in vogue in Indian corporate sector,
though little less in BPO industry. Thus, a very few firms make use of quantitative
forecasting models. Though, sale price, production quantity. raw material cost,
power and fuel costs, and credit collection are usually considered as critical
variables for cash flow forecasting. A wide variation in practices regarding the
maintenance of minimum cash balance is observed. Some firms manage their
cash needs within the predetermined limits of bank overdraft; some keep a
minimum bank balance to meet contingencies: some determine cash levels based
134 on information about daily cash requirements of all sections or divisions or units
of the organisation; some maintain a minimum cash balance of one month’s salary Cash Flow Management
bills plus an amount to meet contingencies and so on.
The empirical evidence suggests that bank credit line remains a continuous and
most popular source of immediate short-term financing. The sale of securities as
a means to finance cash shortage is not widely practiced. The postponement of
payment to creditors is considered by many to be the last resort to tide over the
immediate financial difficulty.

7.10 LET US SUM UP

Cash management is important for the survival of an organisation. The objectives
of cash management are to ensure that the funds are available at the right time and
at the lowest cost, idle cash must be minimised, and enhance cash generation, etc.
The motives for holding cash are transaction motive, precautionary motive and
speculative motive. To plan and control the use of cash, cash budget is an important
tool. Cash strategies are linked to cash cycle of a firm. Cash cycle reflects the total
time taken in the process by which the cash is used for making payments to suppliers
for raw material and expenses which resulted in raw materials inventory.
By reducing cash cycle, cash balances can be mininised. The basic strategies to
effective cash management are speedy collection of accounts receivables and
stretching accounts payables. Maintenance of optimum cash balance requires
balancing of maintaining liquidity and minimum cash balance. Liquidity ratios
can be used as a tool for assessment of optimum cash balance.
Cash outflows and inflows are not synchronized. We may have excess cash or
deficit. Excess cash can be invested in marketable securities. Electronic banking
has made influence on banking transactions. It offers low cost of transaction and
convenience. However, adequate and reliable safeguards should be taken.
Firms make and use cash forecasts in order to be able to plan for expected surpluses
and deficits. A common approach to short-term forecasts is the receipts and
disbursement approach. Several techniques are available to predict the individual
items of inflows and outflows; however, a major challenge lies in estimating
collections from receivables. This can be forecast by the payment pattern approach.
Given this approach, one can improve upon the estimates of collection rates by
the application of regression analysis.
There are several sources of uncertainty in cash forecasting- sales, collection,
rates, production cost and capital outflows. Simulation analysis leads to better
estimates of required borrowings and surpluses under the condition of uncertainty.
Many firms have small surpluses available for short-term investment. In these
circumstances, firm may benefit by using optimization models that balance
investment income against transaction costs of investing. There are two basic
models; both of them assume a different time pattern of cash flows, and then
derive a strategy based on this time pattern. The Baumol and Beranek models
assume certainty, and thus require a hedging strategy outside the context of the
model, while the Miller-Orr and Stone models explicitly account for the uncertainty
of cash flows within their formulation.
In this unit, we have also briefly reviewed the cash management practices, and
mentioned the salient features of cash management in a BPO industry. 135
Record to Report (R2R)
7.11 KEY WORDS
Cash management requires proper cash planning, management of receipts and
disbursement and an efficient control and review mechanism.
The transactions motive requires a firm to hold cash to conduct its business in
the ordinary course.
The precautionary motive requires to hold cash to meet contingencies in the
future.
The speculative motive refers to holding of cash for investing in profit-making
opportunities as and when they arise.
The compensating motive to hold cash is to compensate banks for providing
certain services and loans.
Distribution is starting with data on relatively long periods and breaking it down
into smaller period.
Scheduling is starting with data on relatively short periods and aggregating into
longer periods.
Accelerating Cash Collections By speeding up the cash collections, a firm can
conserve cash and reduce its requirements. This can practically be achieved by
ensuring prompt payments by customers and by early conversion of payments
into cash.
Deposit Float is the amount of cheque sent by customer, which are not yet collected.
Postal Float: Time taken for cheque to reach firm by post.
Cash Cycle: Time taken between cash disbursement and Cash collection.
Collection Float: Time taken by banks in collecting payments for customer bank.

7.12 ANSWERS TO CHECK YOUR PROGRESS

A 4 a) True b) False c) True d) True e) False
5 a) almost fixed b) Cash and near - cash assets c) not steady
d) Debtors e) cash

7.13 TERMINAL QUESTIONS/EXERCISES

1) Name various motives of holding cash.
2) What do you understand by Cash Management? How can it be undertaken?
3) “Efficient Cash Management will aim at maximizing the cash inflows and
slowing cash outflows”. Discuss.
4) How is Miller-Orr Model different from Baumol Model? How do you determine
the upper limit, point of return and the average cash level under the Miller-Orr
Model?
136
5) Write a note on cash management in Indian business firms. Cash Flow Management

6) A firm maintaining minimum cash balance of Rs. 10,000. Standard deviation

of the daily cash flow is 2000. The annual interest rate is 10%. The Conversion
cost is Rs. 40 per transaction. Find out the upper limit, return point and average
cash balance.

7.14 SOME USEFUL BOOKS

Beehier, Paul J, 1983, Contemporaty Cash Management
Parashar, S.P. 1986, Liquidity Management, Vision, New Delhi
Slater, S.D., 1974, The Strategy of Cash: A Liquidity Approach to Maximising
the Company’s Profit
Smith J.E., 1980, Cash Flow Management.

137