Professional Documents
Culture Documents
Precautionary
synchronization of cash flows Cost associated with the shortfall of cash (Transaction & borrowing cost, Loss of
trade discount, Cost of fall in firms credit rating, Penalty rates of banks when compensatory balance is not maintained)
CASH BUDGET
A
management tool that throws light on the net cash position of a firm
the CASH CYCLE and maximize the CASH TURNOVER of the firm
Stretching accounts payable: Pay accounts payable as late as possible without damaging the firms credit standing Efficient inventory-production management: causes a decline in the operating cash requirements and hence a saving in operating cost
collection of accounts receivable: collect accounts receivable as quickly as possible without losing future sales because of high-pressure collection techniques. Average collection period can be reduced by changes in:
Decentralized collections:
Concentration Banking: A system of decentralized billing and multiple collection points Drop Box System: At various prominent locations, box opened & cheques deposited into bank account by firms employee Lock Box System: Hiring of a post office box, box opened & cheques deposited into bank account by banks employee
Slowing Disbursements:
Avoidance of early payments: If the firm pays its accounts payable before the due date it has no special advantage Centralized disbursements: Delays payment: It involves transit time Avoids holding of minimum balance at branches, if payment is decentralized
Slowing Disbursements:
Playing the float: Although a cheque has been issued, cash would be required later when the cheque is presented for encashment. Firms resort to CHEQUE KITING (arrange for funds in the account after the cheque has been issued) Paying from a distant bank Cheque encashment analysis
FACTORS TO BE CONSIDERED:
Security & safety Liquidity & marketability Yield & impact of taxes Maturity period should match the funds requirement of the firm
Commercial Papers (short-term unsecured promissory note sold by large corporate firms to raise cash. Can be purchased at a discount or can carry interest. Can be made payable to the order of the investor. No secondary market exists)