Cash Management

CASH
MANAGEMENT

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In a business anything done financially affects cash eventually. Cash is to a

business is what blood is to a living body. A business cannot operate without its life-
blood cash, and without cash management, there may remain no cash to operate.
Cash movement in a business is two-way traffic. It keeps on moving in and out of
business. The inflow and outflow of cash never coincides. Important aspect which is
unique to cash management is time dimension associated with the movement of cash.
Due to non-synchronicity of cash inflow and outflow, the inflow may be more than the
outflow or the outflow may be more than the inflow at a particular point of time. This
needs regulation. Left to itself cash flow is apt to follow monsoonic pattern, and
showers of cash may be heavy, scanty or just normal. Hence there is a dire need to
control its movement through skillful cash management. The primary aim of cash
management is to ensure that there should be enough cash availability when the needs
arises, not too much, but never too little.

Cash management aims at evolving strategies for dealing with various facets of
cash management. These facets includes the following:
Optimum Utilisation of Operating Cash
Implementation of a sound cash management programme is based on rapid
generation, efficient utilisation and effective conversation of its cash resources. Cash
flow is a circle. The quantum and speed of the flow can be regulated through prudent
financial planning facilitating the running of business with the minimum cash balance.
This can be achieved by making a proper analysis of operative cash flow cycle
alongwith efficient management of working capital.

Cash Forecasting

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Cash forecasting is backbone of cash planning. It forewarns a business

regarding expected cash problems, which it may encounter, thus assisting it to regulate
further cash flow movements. Lack of cash planning results in spasmodic cash flows.
Cash Management Techniques:
Every business is interested in accelerating its cash collections and decelerating
cash payments so as to exploit its scarce cash resources to the maximum. There are
techniques in the cash management which a business to achieve this objective.

Liquidity Analysis:
The importance of liquidity in a business cannot be over emphasized. If one
does the autopsies of the businesses that failed, he would find that the major reason
for the failure was their unability to remain liquid. Liquidity has an intimate relationship
with efficient utilisation of cash. It helps in the attainment of optimum level of liquidity.

Profitable Deployment of Surplus Funds

Due to non-synchronization of ash inflows and cash outflows the surplus cash
may arise at certain points of time. If this cash surplus is deployed judiciously cash
management will itself become a profit centre. However, much depends on the
quantum of cash surplus and acceptability of market for its short-term investments.

Economical Borrowings
Another product of non-synchronisation of cash inflows and cash outflows is
emergence of deficits at various points of time. A business has to raise funds to the
extent and for the period of deficits. Raising of funds at minimum cost is one of the
important facets of cash management.

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TABLE OF CONTENTS

Sr. No. Topics Page No.

1. Introduction 1
2. Motives for Holding Cash 2-3
 Transaction
 Precautionary
 Speculative
 Compensating
3. Factors Determining Cash Balance 4-7
 Internal
 External
4. Cash Flow Cycle 8 – 13
 Time Factor in Cash Flow
 Surpluses and Deficits in the cash flows
5. Cash Budget– Genesis Of Forecasting 14 – 17
 Cash forecasting
 Time Horizon
 Methods of cash forecasting
6. Cash Management Techniques 18 - 29
 Parties to Cash Management Techniques
 Float
 Accelerating collections
 Decelerating Disbursements
7. Profitable Deployment of Surplus Funds 30 – 37
 Cash Movement Statement
 Selection of an Investment Option
 Types Of Investments
8. Economical Borrowings 38 – 44
 Short-Term Financing
 Medium-Term Financing
 Long Term Financing
9. Case Study: ICICI Bank 45 – 53
10. Conclusion 54

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INTRODUCTION:

Cash management stands for planning, monitoring and managing high liquidity
assets. It is a group of products and services, performance of which is focused on
control of cash and money at the bank, receivables and liabilities as well as short-term
borrowing and investing.

Cash is the life blood of a business firm, it is needed to acquire supplies,

resources, equipment, and other assets used in generating the products and services
provided by the firm. It is also needed to pay wages and salaries to workers and
managers, taxes to governments, interest and principal to creditors, and dividends to
shareholders. More fundamentally, the cash is the medium of exchange which allows
management to carry out the activities of the business firm from day to day. As long as
the firm has the cash to meet these obligations, financial failure is impossible. Without
cash, or at least access to it, bankruptcy becomes a grim possibility. Such is the view
of modern corporate cash management.

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MOTIVES FOR HOLDING CASH:

It is understood that for a business, cash is an important and crucial asset. But it
is also a fact that cash by itself is a zero earning asset. Cash-in-till or even cash in
current account of a bank does not earn any revenue. It rather depreciates with
inflation in the economy. Nonetheless, every business holds cash. The motives which
prompt a business to keep ready cash in its hands are as follows:
1) Transaction Motive:
One very important reason for holding cash in the form of non-interest-bearing
currency and deposits is transaction demand. Since debts are settled via the exchange
of cash, the firm must hold some cash in the bank to pay suppliers and some currency
to make change if it makes sales for cash. The transactions occasion both inflows and
outflows of cash. Outflows of cash are on account of purchases, wages, other cash
expenses and inflows are through cash sales and collection from the customers.
Inflows and outflows of cash never synchronise. At times, the receipts are more than
payments and at other times payments exceed receipts. A business has to maintain
enough cash to meet its requirements. The cardinal principle is to keep just the right
amount, not too much but never too little.
The transaction motive covers cash requirements for normal routine functions.
The requirements for this purpose are substantially certain and can be predicted with
good degree of accuracy.

2) Precautionary motive:
The business during its currency engrossed with various contingencies and
emergencies. It has to protect itself for such contingencies by holding additional cash in
the hand. This is known as precautionary motive. Such cash balance provides a
cushion or buffer to meet unexpected cash demands. Some of the events warranting
additional cash can owing to cancellation of an order, lock out, strikes, levy of duty or
cess on raw-materials etc. the volume of cash required for this purpose depends on
number of factors, e.g., the nature of the business, the accuracy with which cash needs

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of the business can be predicted – greater the accuracy lesser the „cash balance‟
required for this purpose. Another important factor is this regard is accessibility to the
Credit market. In case a business can raise required funds from the market at short
notice it needs only to retain a moderate balance for precautionary purpose.
Precautionary cash balance provides cushion generally to meet non-routine
demands. The requirement remains uncertain making it predictably somewhat difficult.

3) Speculative Motive:
As the name suggests, in this case motive is to encash the opportunities which
may unexpectedly surface in future. Cash, therefore, is retained in addition to
transactions and precautionary motives for speculative purposes also. The speculative
motive for holding cash can well be explained by an example. A common item for
speculation is security prices. Suppose the present rate of long term interest is 10%. A
Rs. 100 bond which carries 12% rate of interest is then worth Rs. 120. If it is expected
that rate of interest is likely to fall (increasing the price of bond), the business will like to
buy such securities out of the funds earmarked for speculative purposes. Similarly a
business may speculate in material prices also. It may delay the purchase of the raw
materials if it expects that raw material prices are likely to fall and make purchases in
future when prices actually fall. Keynes has aptly defined the speculative motive as “the
desire of earning profit by knowing better than the market what the future will bring
forth.”
The speculative motive covers events which are most uncertain, unforseen and
unpredictable to forecast.

4) Compensating Motive:
Business of today predominantly depend on the commercial banks for the
financial support. For some of the services the bank charges a commission or service
charges but for some others it insists that a predetermined minimum balance be kept
with the bank which should not be withdrawn in the ordinary course of business. For

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instance, if the bank issues a bank guarantee, in addition, it may ask for retention of
some minimum balance too. Such balance is known as Compensating Balance.
FACTORS DETERMINING THE CASH BALANCE:
The cash flow in a business is influenced by a number of factors. These can be
classified into two categories-internal and external. Internal factors are those factors
which are internal to the business, and by and large arise as a result of management
decisions. These are under the direct control of management. External factors, on the
other hand, are such environmental factors which are not under the direct control of the
management. Such factors affect the economy as a whole and their ramifications are
felt by an individual business as well. It is a case of macro affecting micro. Another kind
of external factors are the factors which affect the concerned industry as a whole and
not the whole economy. These too, exercise influence on the availability of cash in a
business.

Internal Factors:
Internal factors are products of management policies followed either consciously
and positively, or unconsciously by default, or combination of both. These are unique to
the concerned business and are under its direct control. Following are some of the
avenues from where these factors emanate and affect the cash in a business.

(a) Operating Policies: these refer to all types of decision which make the business
operative. Every business desires to operate at its optimum level. for this it has to gear
up all of its segments to the utmost efficiency. On the production front decisions are
taken to determine utilisable level of capacity based on the break-even analysis, make
or buy decisions considering its own production line, pricing policy, etc. Which have
direct bearing on cash flow. Also, a business has to decide about salary structure
which constitute a substantial part of administrative expenses. For selling of the
products an important decision is whether to have its own dedicated outlets or selling
should be done by giving franchise to other parties. Both the alternatives shall require
cash but the magnitude in the case of former will be substantially more than the latter.

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Another important decision is regarding fund allocation for research and development.
All these decisions have a direct bearing on cash in business.

(b) Fixed Assets: Fixed Assets are the long lived properties of a business which it
owns and uses as an aid to generate profits. These are not bought and sold in the
normal course of business. So far as cash is concerned investment in fixed assets
embodies two important features. First, it requires cash outlay of high order and
secondly, the cash is „sunk‟ for a longer period whenever these are purchased.
Business policies towards automation, expansion, technological development,
competition in the market etc. are some of the important factors which influence its
policy towards investments in the fixed assets which, in turn, affect the requirements of
cash in the business.

(c) Management of Receivables: in the modern competitive business environment

there is no escape from selling goods on credit. Such a course entitles the customer to
use immediately the goods sold against deferred payments. In a way, a customer‟s
business is financed through the cash resources of the seller. The credit policy followed
by the business has a direct bearing on the cash in business. The cash remains
„blocked‟ to the extent and period of credit allowed. Also terms of credit like cash
discount will affect the flow of cash from debtors. Weak credit control increases the
possibilities of bad debts which result in depletion of cash.

(d) Inventory: Inventory refers to stocks held by a business. Funds are normally tied
up in three kinds of inventory – raw materials, work in process (semi-finished goods )
and finished goods. Investment in inventory has great impact on business cash. In
addition to cost of goods lying in stock, cash is required to meet carrying cost of
inventory, e.g. interest, godown rent, insurance, etc. A business endeavours to strike a
balance between two conflicting aims- one of minimising inventory and second
ensuring that enough quantity is always available to meet the demand as and when it
arises. This is done by efficiently organising the production and sales operations.

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Business is also guided by basic parameters of material management like minimum

and maximum level of stock, re-ordering level of quantity, stock-velocity ratio etc. at
times management ignores all these parameters and buys heavy inventory when it
expects substantial price rise in the near future. Obviously, it affects business cash
adversely.

(e) Payment Policies: It refers to policies concerning the payments to be released to

creditors and suppliers. A business‟s efficiency to exploit this element of OPM (Other
Peoples Money) has an important effect on cash. “Pay only when due‟ is the guiding
rule. Extracting maximum credit from suppliers, utilising cash discount offered by them
are some of the ingredients of prudent purchase management policies resulting in
decelerating of cash outflow.

External Factors:
External factors cover all determinants relevant to the overall economy and/or a
particular industry.

(a) Monetary and fiscal factors: these factors relate to the money supply in the
economy. During periods of inflation, the economy is flushed with money, price rise has
a cascading effect on the output and the business has cash in abundance. On the
other hand, during recessionary conditions demand for goods contracts and economy
faces cash drought. The result is an epidemic of bankruptcy of the cash starved
businesses. The fiscal factors too, have a direct bearing on the cash availability in a
business. Tax is an important fiscal factor which determines the size of disposable
cash in the hands of business. For instance, corporate tax is a charge against profit
and has a direct in reducing the amount of cash in a business to that extent. Higher the
tax rate lower the cash volume. Indirect tax also has its toll. An increase in excise or
custom duty on the raw materials consumed by a business shall increase the cash
outflow of the business.

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(b) Special Factors Relevant to an Industry: In addition to monetary and fiscal

factors, there may be some special factors unique to a particular industry as well.
These also influence the cash flow of a business. Some examples are given below:

(1) Some retailers have the advantage of having favourable cashflow position because
sale proceeds are collected in cash over the counter whereas payments to the
suppliers on account of cost of the products sold is made much later. Contrary to it,
in some retail businesses cash is collected from innumerable small customers over
a period of time for the sale of merchandise which have been purchased by
depositing money in advance.
(2) Some industries warrant blocking of funds for a considerable period of time in the
inventories before it could mature in sale, for instance tea, tobacco, wine distilling
etc.
(3) Consultancy and professional firms because of their relatively low overhead cost
and receipt of good part of funds before the initiation of activity normally do not face
cash crunch.

The supreme art of handling these factors is to control internal factors and manage
external factors. The only way this can be done is by implementing an efficient and
effective cash management programme in the business.

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1. CASH FLOW CYCLE

Cash is the life blood of a business. No business can exist without cash just as
no human can live without blood. Stretching this analogy a bit further, in a going
concern cash is apt to take a circulatory route like that of blood in the body. Blood
affects each and every part of the human body, cash affects each and every part of the
business activity. A man can live better if he keeps his blood pressure under proper
control; a business can do better if it keeps its cash flow cycle duly regulated.

Cash is required to meet short term and long term requirements of a business.
Accordingly, there are short and long term cash flow cycles in the operation. Short term
cash requirements covers acquisition of current assets like stock and involves a
constant process of generation and consumption of cash. Cash is consumed in
procurement of materials, and processing them for production. It is generated through
sale of such production to customers who pay cash, which again is utilised for
procurement and processing of material to be sold resulting in generation of cash, and
so the cycles goes on. Long term cash requirements are relatively for a longer duration.
Cash is utilised for purchase of fixed assets which are used in a business for much
longer period.

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Cash

Sales Purchases

Stock Labour

WIP

Cash Flow Cycle

The first trait of business cash flow is its movement which is cyclical in
character. Continuous circulatory flow of cash is the vital force of a going business
concern. This cyclical movement of cash flow is a process involving constant
conversion of cash into other elements of working capital, i.e. creditors, stock, debtors
and vice-versa. It is working capital which is involved in the day-to-day working of the
business. It covers all the routine operations generating a momentum which is
appropriately reflected in the cash flow. Sound cash management aims at ensuring
proper proportion among these elements of working capital so that flow remains co-
ordinated with the business requirements. Scarcity or surfeit in the flow at any stage
must be attended to immediately otherwise it will have a devasting effect on the
existence of the business.

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1.1. Time Factor in Cash Flow:

The orbital time of the cash flow movement can be analysed by examining the
various stages through which cash moves and measuring the stage-wise time gaps.

(a) Events affecting Cash Flow Movement: The cash flow passes through various
stages along its circulatory track. These stages are marked by events forming a chain
in a sequential order. These points merit consideration in this regard. First, events
affect both cash and non-cash activities. Secondly, events affecting cash either
concern generation of cash or consumption of cash resulting in the increase or
decrease in the cash flow, respectively. Thirdly, there is a gap between one event and
the other. This gap is the travel time of cash between the two events. The management
policies play a vital role in shortening or lengthening of this time gap.

(b) Cash Turn Over Ratio: once orbital time of cash flow is determined, one can
calculate the cash turn over ratio of the business. This ratio indicates the velocity of
cash flow cycle in a year. It can be calculated by the following formula:
CTR = D/CD
Where,
CTR = cash turnover ratio,
D = Number of Days. (Normally a year is considered as
having days)
CD = cash flow cycle days

1.2. Surpluses and Deficits in the cash flows:

The third trait of cash flow cycles emerges due to non-synchronisation of cash
inflows and cash outflow resulting in deficits and surpluses enroute the flow movement.
In the non-static business environment of today it is difficult to have a perfect
coincidence of in-flows and out-flows of cash. During certain periods, business may
encounter instances of negative cash flow, i.e., cash out-flow is more than cash in-flow

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or positive cash flow, i.e., cash in-flow is more than cash out-flow. Such periodical
deficits should not be considered as indicative of weak financial position nor the surplus
as an index of strong financial strength. However, constant deficits or surpluses should
be matters of concern. The former flashes a red signal for liquidity crisis whereas the
latter is a sign of inefficient deployment of funds.
Like any other item cash also has a cost. It can be subdivided into three groups:
cost of holding surplus cash, cost of holding less cash and procurement cost. The cost
manifestation can be in the form of direct expenditure or indirect expenditure. It can be
revenue account or capital account.

Cost of Cash Surpluses :

The obvious question can be that if excess cash results in cost then why business
allows the cash to be piled up? The excessive surplus cash may arise due to a number
of factors that may be fallout of occasional, seasonal or cyclical occurences.
First of all, let us consider occasional cash surplus, which can be routine or
exceptional. Internals factors are responsible for such a surplus. Normal mismatching
of receipts and disbursements of cash may result in excessive cash at particular times.
Also, in certain cases which are exceptional in nature, business may find itself flushed
with surplus cash for a short period of time, e.g. after the issue of shares/debentures
for a particular project, huge funds may become available to the business for parking in
short term marketable securities.
External factors influenced by seasonal and cyclical forces are also instrumental in
creating cash surpluses in the business. A business engaged in seasonal business
activity will find excessive cash during the season, e.g. a woollen garment
manufacturer may find excess cash during winter season. Similarly, idle cash may
become available due to cyclical pattern in the economy too. During recession there
may be idle cash waiting for consumption in business operations.
Surplus cash if deployed judiciously can bring extra revenue to the business. Non-
deployed of such cash will result in missed opportunity cost known as “Cost of
Surplus”. Such surplus cash results in loss of revenue in the form of interests which

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would have been earned through its investment. Hence, the missed opportunity costs.
This is a direct cost of holding fallow cash, and the quantum of cost is dependent on
the prevalent rate of interest in the market. Higher the interest rate more the cost.
Surplus cash entails indirect cost as well. This is on capital account. Cash depreciates
by losing its purchasing power in the present era of inflation. Barren cash remaining
idle loses its own value as time passes.

Cost of Cash Deficit:

Non-synchronisation of cash receipts and cash payments result in cash deficits at
particular points of time. Some of these points would have been pin-pointed by cash
budget. The costs associated with the cash deficit may be direct or indirect.
The business may have to borrow funds to meet the deficit. All costs associated
with the arrangement of such loans are attributable to cost of deficits which would
include interest on loans, negotiation charges, stamp duty and other costs involved in
borrowing cash for the business. Another example of cost of cash deficit is the
conversion cost. Even if the firm is not required to borrow funds and intends to use the
funds temporarily parked by it in marketable securities, it may incur some expenditure
by way of brokerage while converting these securities in cash.
The indirect cost associated with cost of cash deficit is in the form of deterioration
in the credit rating of a business. Though it looks subjective, it is very important from
the point of view of practical aspect of the business operations. Frequent or persistent
cash deficits may lead to loss of credibility. Once it happens, the bank may offer loan
on less favourable terms, supplier may withdraw credit facilities and insist on cash
payments as a result of which the business may have to incur additional costs.

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Procurement Cost:

In addition to the above referred cost of deficit and cost of surplus, there is one
more cost known as “Procurement Cost”. This is the cost associated with operating the
cash management programme. According to Bolten: “there are clerks and book
keepers who run the daily routine. There is the overhead of an office. All these costs
must also be considered.” These are fixed costs and remain constant whether there is
surplus or deficit cash in the business.

Investments

Purchas Lab. &

Equity e O/h.

Cash
WIP

Loans
Sales Stock

Fixed
Assets

SHORT-TERM AND LONG-TERM CASH FLOW CYCLES

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2. CASH BUDGET – GENESIS OF FORECASTING

A cash budget is a summary statement presented in an orderly format

containing forecasted figures of receipts and disbursements of cash over a given
period of time. Cash budget like any other budget is concerned with future events,
events which can be approximated or “best guessed” taking into consideration past
results, present strengths and future trends. It is the technique of forecasting which
generates raw material for budgeting and provides the best approximation.

Forecasting has acquired an enviable position in the concept of strategic

management necessary to run a modern business. Gone are the days when first the
demand in the market emerged and then the production was oriented to meet the
demand. In the present day a successful business has to forecast demand of the
product and gear up its production to meet the anticipated demand. Anticipation is the
key to forecasting.

A business cannot remain content with a position of status quo. It has to opt for
an aggressive attitude towards its development, otherwise its competitors are likely to
outmarket it. For its growth and development; it has to look into the future. A dynamic
business has to be farsighted. The blueprint for this foresight is provided by a „plan.‟

A business plan encompasses all actions for measuring benefits from the
existing opportunities, mobilising resources for enhancing capabilities and ensuring
adequacy of finance so that business achieves its objectives of maximising return from
the investment.

2.1. Cash forecasting:

Forecasting thus is a planning tool. It is used for projecting future operational

results of all the activities of a business – marketing, production, personnel, finance etc.

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all these activities have a chainlink-effect. A successful business has to anticipate the
demand of the product by making a sales forecast. As a second step, production
forecasts are made by estimating the requirements of material, men and machinery.
And finally, the requirements for finance are assessed to execute all these activities
which lead us to make cash forecasting because in a business anything done or to be
done financially affects the cash eventually. However, there is one major difference
between business forecasting covering other functional activities and cash forecasting.
All other forecasts are on accrual basis whereas cash forecasts are on cash basis.
Cash forecasting is very important in the realm of overall business forecasting. It
is concerned with every segment of business environment, be it permanent or
temporary, capital or revenue, income or expense.

2.2. Time Horizon:

The variables are forecasted for a predetermined period of time. This in

business parlance is known as “time horizon.” It refers to the time span for which the
forecasting is made. There cannot be rigid rules to determine length of a time horizon.
Conventionally, accounts of a business are prepared for a period of twelve months;
forecasts are also made for twelve months so as to have an equitable ground for
comparison of the forecasts with the accounting results. Cash forecast is prepared for
identical period of twelve months too. To synchronise with the period of other forecasts.
However, cash being very important and volatile warrants close scrutiny of its
movement. The time horizon of twelve months of cash forecasting, therefore is
subdivided into months or weeks. This enables better forecast and control of cash flow
in a business. Forecasts having time horizon of twelve months or less are known as
short term forecasts. But a business needs forecasts for longer time frame as well.
The time horizon of long-term forecasts largely depends upon the corporate plan
constructed by the business. Some important factors which are taken into
consideration for determining the forecasts period of long-term forecasts are as follows:

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Nature of business of some enterprises requires longer time frame to develop a

meaningful plan.
The business which is dealing in items sensitive to quick obsolescence will have
a shorter time horizon. Conversely, if a product has a longer life, forecasting
shall have to be done for a longer period. Accordingly, time horizon shall be
fixed for a longer duration.
Capital intensive units will have a time horizon of longer duration.

2.3. Methods of cash forecasting:

Primarily, there are two methods for making cash forecasts:
Receipts and Disbursements method;
Net Adjusted Income method.
Though both the methods can be used for estimating short-term and long term
cash requirements of a business but normally due to basic differences in the approach
followed under each method, the Receipts and Disbursements method is used for
short term cash forecasts, and Net adjusted Income method is deployed for drawing
long term cash forecasts.

Receipts and Disbursements Method:

The method aims at cash forecasting as an abbreviated version of Cash Book of a
future period. Under this method the individual items which involve movement of cash
during the forecast period, normally upto one year, estimates are made for all items of
receipts and payments having some significant value. Such forecasts are fairly
accurate.

Net Adjusted Income Method:

Net Adjusted Income method is deployed where estimates for a longer period are
required. Obviously, it may not be easy to estimate each and every item of income and
expenditure for a longer period say five years, as meticulously as in the case of short-
term forecasting. This method involves culling out of information pertinent to movement
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of cash from the already prepared accounting statements like forecasted profit and loss
account and balance sheet to make future projections of cash requirements. Then, true
to its name the method makes necessary adjustments in the accounting figures
appearing in such forecasted profit and loss account and balance sheet which have
been prepared on accrual basis. The „adjustment‟ is effected to convert accrual based
figures to cash based figures. The statement so prepared is known as Forecasted
Cash Flow Statement.

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3. CASH MANAGEMENT TECHNIQUES

Cash management techniques aim at acceleration of cash inflows and
deceleration of cash outflows. This is done through speedy collection of account
receivables and by delaying disbursements of account payables. Cash flow cycle is a
constant process of generation-consumption-generation of cash. Generation of cash
can be increased by speedy collections. Consumption can be effectively optimised by
slowing disbursements.

3.1. Parties to Cash Management Techniques:

The techniques require active participation by the three parties-business, bank
and customer/supplier. The business has to gear up and infuse necessary motivation in
its personnel to accelerate collections and slow the disbursements. All the techniques
do not have universal application. A business will have to make choice for one which is
most suitable for its requirements. A combination of techniques can also be adopted
and a model can be tailored befitting to the needs of the business.
The second party is the bank. Most of the techniques require a fully developed
automated banking infrastructure. Banks, as a matter of fact, play a commanding role
in the contemporary cash management strategies and many steps involved in these
techniques are under the control of the banks. The developed countries have very
advance banking systems. Many of the techniques which are applicable in these
countries are not prevalent in developing countries. The developing countries have,
however, developed some substitute indigenous models.
The third party involved in the cash management strategies is the customers or
the suppliers. These techniques solicit active participation of suppliers/Customers. they
are at the end of the channel and unless they cooperate these techniques cannot be
made effective.

3.2. Float:
A business at times deals with two balances associated with its bank account.
One, the balance appearing in its own books of accounts and the other the actual cash

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balance as displayed in the books of the bank. The reasons for the difference in these
two balances can be many. The two most prominent reasons are:
Cheques presented by the business but not yet collected;
Cheques issued by the business but not yet presented,
The sum total of these two is known as „Float‟. The former is known as collection
float and the latter as Disbursement Float.

3.2.1. Collection Float:

The collection float is represented by the aggregate of the amounts of the
cheques which have been deposited in the bank but are in the process of collection by
the bank. As soon as the cheques are deposited in the bank, the amounts are debited
to the bank account appearing in the books of the business. But the bank accords the
credit to its customer when it realises the amounts from the banks of the customers.
The time lag in the two results in the difference of balances known as Collection Float.
As a matter of fact collection float is part of overall “Deposit Float”, which
additionally covers mailing float and processing float. Mailing float accrues due to time
lag involved in the issue of cheques by customers and their receipts by the recipients.
Processing float is on account of time taken by the business for processing the
cheques for presentation to the bank.
Close monitoring of all the three is important for speedy collection of
receivables.

3.2.2. Disbursement Float:

Disbursement float is sum total of all cheques which have been issued to
suppliers but are in the process of being presented to the bank for payments. The bank
account in the books of the business is credited as soon as cheques are drawn on it
and sent to suppliers but the bank would debit the account of its customer only on the
receipts of the cheques from the bankers of suppliers. The difference between the two
balances is known as Disbursement Float. The disbursement float is used as an item
for delaying payments by adopting the technique of „riding the float‟.

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Cash management techniques fall into two functional areas: accelerating

collections and decelerating disbursements. In both the areas efforts are made to
exploit their respective floats to the maximum. Collection float assists in quickening the
pace of cash inflow and disbursement float helps the business in delaying the cash
outflow.

3.3. Accelerating collections:

Credit to customers is unavoidable. No business can function without it. The
business can adopt such which will ensure early retrieval of cash from customers. As
discount is one factor which can accelerate the collection but there are other cash
management techniques which accelerate the speedy collection of receivables.

(1) Concentration Banking:

When the customers are scattered over a large area, considerable time will be
consumed in raising bills and processing Cheques. To avoid this and reduce the
deposit float, the system of concentration banking is adopted.
Under this system cash collection is centralized by the receipts from
decentralised cash collection centres. Normally, local sales offices are saddled with the
additional responsibility of collecting receipts from customers located in the
geographical areas falling under their purviews. Cheques so collected are deposited in
the local bank accounts serving the concerned sales offices. The local banks are
instructed to keep a predetermined limited amount with them and transfer the balance
to a central or ‟Concentration Bank‟ account on daily basis. All the disbursements are
effected through this central bank account.

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Customer Customer Customer Customer

Collection Collection
Of Cheques Of Cheques
Sales Sales
Office Office

Local Local
Deposit of Bank Bank
Cheques Deposit of
Cheques

Cust Transfer
omer Cust
Of Funds omer

Sales Local Sales Local

Office Bank Concentration Bank Office Bank

Cust Cust
omer omer

Payments Payment Wages and Short term

to Suppliers of Loans Salaries Investment

Creditors Borrowers Workers Bankers

The important advantage of concentration banking is drastic reduction of mailing time

due to close proximity of customers with sales/collection centre and that of
sales/collection centre with the bank. The savings is affected in the following deposit
float:

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Time involved in sending a bill to the customer

Time involved in dispatch of a Cheque from the customer to sales/collection centre
Time involved in sending the Cheque to bank
Time involved in processing the Cheque as the Cheque belongs to local clearing.

Concentration Banking for its operation involves a number of units of banks

which naturally add to its costs. The system, therefore, should be introduced after
making proper cost-benefit analysis. It is useful for a large business having large
number of customers spread over a large geographical area.

Another prerequisite for concentration banking is the availability of sophisticated

fund mobilisation techniques like Deposit Transfer Cheques.

(2) Lock Box System:

„Lock Box System‟ is the oldest technique for speedy collection of receivables.
Till date, it is the most commonly adopted technique of cash collection in developed
countries. Under this system, a business hires special post office boxes in the area
having maximum concentration of its customers. The post office boxes are special in
the sense that these are hired by the business but operated by bank. The customers
are advised to remit the remittance to the post office boxes. The local banks at the
respective places are authorised to open the post office boxes, collect the cheques and
process them for realisation. This way the business associated internal Cheque
processing time is completely eliminated.
While processing the cheques for collection the bank sends the statement
detailing amounts received by the business along with original envelops and invoices.
This serves as a proof as well as record for according necessary accounting treatment
to the receivables. This way, both the collection process and accounting process
functions simultaneously.

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Advantages:

(1) Reduction in the mail processing time:

The lock box system follows the basic principles of concentration banking –
collections through decentralized units. But it is superior to concentration banking in
one way that it has the minimum mail processing time. The customers are required to
send remittances directly to post office box which are handled by the bank. This
reduces the business associated mail processing time.

(2) Reduction in the cheques collection time:

The bank itself initiates the Cheque collection process. As a result, the time
involved in the presentation of cheques by the business to bank is completely
eliminated. Besides, the bank empties the post office box a number of times a day
quickening the pace of cheques collection.

(3) Reduction in receivable processing costs:

A business has to engage dedicated staff to handle manual opening, sorting and
making necessary endorsements in the records. The cost on this account is
substantially reduced when the bank handles these activities because the bank
specializes in high volume lock box processing and enjoys the economy of scale.

(4) Constant updating of records:

Every customer has a credit limit. Accelerated realization of customers
remittances and almost simultaneous credit to their account, under this system, enable
the customer to make optimum use of credit limit. Ultimately it is the business which is
benefited by increased sales.

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Custo Custo Custo Custo Custo Custo

mers mers mers mers mers mers

Deposits of Deposits of Deposits of

Cheques Cheques Cheques

Post Office Box Post Office Box Post Office Box

No. 1 No. 1 No. 1

Collection of Cheques

Local Bank

Statement of
Despatch of Cheque for
Cheques received Clearing

Client
Clearing
House

Credit to clients
account
Clients Account

Lock Box System

Bank charges fees for its services. The business must weigh the gains from lock
box system with costs charged by the bank. Gains must include all types of savings –
in opportunity costs, clerical costs and the likes. Should it find gains more than costs,
only then the system should be introduced.

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Limitations:
In this system the remittances are directly handled by the banks. The business
cannot verify the amount till it is notified by bank and/or Cheque is realised. It thus can
take up the matter with the customer much later incurring additional time and expense.
Besides this, some times too much efficiency in the realisation of cheques becomes an
irritant factor for customers who loses otherwise due float to them. A successful
business cannot annoy its customers. Finally, lock box system, too, because of the
heavy magnitude of operation is suitable for a large organisation having battery of
customers spawned over a vast geographical area.

(1) Pre-Authorised Cheques:

Pre-authorised cheques (PAC) are also an important method of accelerating the
cash collection. In this system an arrangement is entered into among the parties
involving the business, its customers and the banker. The arrangement authorities the
business company to raise a demand for a predetermined amount on a predetermined
date on the bank of the customer. The bank accepts the demand as if it is a mandate
from the customer himself. The demand deposit instrument so raised is known as PAC.
Some times the business company authorises its banks to do this job. Complete details
of customers‟ alongwith their banks and account numbers are supplied to the bank.
The bank raises the PAC on the specified dates on the bank of the customers and
credits the amount to the business company on the realisation of demand deposits.
The system of PAC is normally applied where the payments to be received are
repetitive in nature and amount is fixed one. Examples are, insurance payments, rent
payments, payments on account of loan installments where monthly equated
installments are determined in advance. However, some times in order to overcome
the limitations of variability eleven installments are paid for a fixed amount and the
balance amount is adjusted in the twelfth installment.

(2) Pre-Authorised Debits:

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Pre-Authorised Debits or PADS are one of the latest techniques for accelerated
cash inflows. It is an automated system and warrants a good deal of automated
infrastructure for its operations. Under this system, on a pre-determined date, the bank
of the Business Company automatically debits the bank of the customer with the due
amount. The bank has already been authorised by the customer to honor such debits.
There is no movement of any document, script or Cheque, merely a computer entry is
highwayed. This paperless system is better than pre-authorised Cheque system in the
sense that even the use of the demand deposit instrument is eliminated. This results in
the reduction of cost of printing demand deposit notes, bankers charges etc:
The advantage of this method is identical to the advantages of the PAC system,
elimination of postal float, processing float and resultant savings in costs. Also, costs
associated with forgotten remittance and delayed payments are reduced.
However the customer objects to this approach because of its harsh, machine operated
approach under which they do not buy any float due to the automatic transfer of funds.
Exposure to computer error is also considered as a weak point

(3) Pay Order by Bank:

This is a popular technique in developed countries like India. In this, instead of
cash, the customer insists on payment by pay order by a bank. A pay order is a
banker's Cheque. In order to facilitate earlier clearing, a bank draws on another bank
on the different city, a pay order for the desired amount. Procedurally, it is presented
ion the same way as a Cheque and credit accorded through local clearance of the city.
The bank charges for the issue of the pay order become an additional cost to be borne
either by the customer or the business.

(4) Post-dated Cheque:

This is an indigenous version of a pre-authorised Cheque. If the payments to be
released have a definite amount and a definite periodicity, the payer sends a post
dated Cheque to the payee. The relevant cheques are deposited at the scheduled time.

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It has the benefit of reducing the postal float tremendously since this float is involved
only once.

3.4. Decelerating Disbursements:

Techniques involved in slowing release of payments to suppliers is as effective

an instrument of cash control as methods involved in accelerating collection of
receivables. Both the techniques are concerned with the reduction of cash
requirements for business. They constitute two sides of the same coin. There are also
several techniques for slowing the payment of payables.

(1) Not sooner than due:

Trade credit is interest free financial accommodation provided by the supplier.
Business must acquire the maximum benefit out of it. If the supplier has agreed to the
terms of "2/20 net 40 days", it will be uneconomical to release the payment after 15 days.
The business will be incurring an opportunity cost for 5 days. Considering the amount
involved as Rs. 50 lakhs and the rate of interest as 10%, the opportunity cost in this case
will be Rs. 6,849/-. However the payment should not be delayed beyond the period of
discount as it will stand to loose the amount of discount resulting in more cash outflows
and costs. And if the payment is delayed beyond the credit period, the business id likely
to lose its credibility also.

(2) Centralization of disbursements:

The basic objective of conservation of cash resources is to optimize its utilization.
This can well be achieved by concentrating the entire funds of the business at one place
and making centralized disbursements therefrom. We have already seen the advantages
of pooling of cash resources at one place under concentration banking from where the
payments can be made to all the suppliers of the business. Centralised disbursement as
a matter of fact, is second leg of concentration banking functioning under the overall
system of cash control.

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All payments, under this system, are released from the centralized disbursement
account, normally operated at corporate office. The business thus achieves its objective
of slowing of disbursements. With the customers scattered in far-off places, issue of
cheques from corporate office will consume more postal time. Secondly, the funds can
be released as per decided priorities. This covers decisions with regard to availing cash
discount, getting benefits of lower prices or adhering to disbursement schedules chalked
out earlier. Lastly, centralized disbursement enhances the investment value of cash
reservoir available with the business. Under the decentralized payment system, the
requirements of minimum balances at various places shall deprive the business to
maximize its return from short-term investments. It will increase clerical costs also.

All this has made the centralized disbursement as most effective instrument for the
control of cash outflow.

(3) Payment through draft:

This is yet another technique prevalent in advanced techniques, particularly in
U.S.A. it is used for slowing disbursements. Draft is a chequelike instrument but unlike
the Cheque it is drawn on the issuer instead of on a bank. Procedurally, a draft is
presented to bank for collection like a Cheque. The bank does not debit the account of
the business on its presentation. Rather it sends it to issuer for confirmation. The
business gets additional time for transferring the funds so that the draft is honoured. This
results in lengthening of the float and also enables the business to keep a nominal
amount in the bank till the time a draft is presented. Banks are not very enthusiastic
about this practice. They have to handle draft-processing and cooperate till the
arrangement of funds are made by the business. They normally insist on retaining some
respectable balance with them.

(4) Special disbursement account:

This is a dedicated account meant for disbursements only. Under this system, one
central account is operated for the purpose of catering to the requirements of a number

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of special disbursement accounts. As and when the need arises, specific amount is
transferred from central account to special disbursement account. If the central account
and special disbursement account are in the same bank, then the disbursement will have
zero balance at the end of the day. It is also known as "Zero Balance Account". If the
disbursement accounts are spread over a large area, there may be overdraft for one day
in special disbursement accounts. Some of the benefits under this system are:
It is excellent blending and centralized pooling of cash and centralized
disbursements.
Dealing with only the centralized cash account is easy and convenient.
Disbursements being decentralized, good deal of autonomy at the unit level is
ensured.
There is no requirement to maintain minimum cash at various scattered bank
accounts.
It achieves the objective of lengthening of float.

While dealing with cash management techniques a cautious approach is

recommended. Some of the techniques extract speedy collections from the customers
while some others slow payments to suppliers. Abrasive application of these techniques
may antagonize the parties if they are deprived from enjoying float, which they are
otherwise entitled to. It may be a wrong policy to follow. No business can flourish with
disgruntled business associates. It is, therefore, imperative that these techniques should
be deployed truthfully and tactfully.

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4. PROFITABLE DEPLOYMENT OF SURPLUS FUNDS

Cash surplus like cash deficit is a product of non-synchronicity of inflows and

outflows. There are always recurring instances where requirements are more than the
funds available and conversely where funds available are more than the immediate
needs. In the former case, the business examines the ideal sources for raising
additional funds, and in the latter case, it looks forward for the ideal slots for investing
idle funds.
There are many reasons for cash being surplus in the business. First, the cash
flow movement is unpredictable. A spurt in sales can bring influx of cash. Secondly, a
seasonal business may find itself flushed with cash during the season. Thirdly, there
can be a situation when a business is required to liquidate its long – term liability in
necessitating a large amount of cash. For Eg., redemption of debentures. It then needs
accumulation of cash over a period of time. During the process of such accumulation it
can be invested for short term till the time the amount is released to the debenture –
holders.

4.1. CASH MOVEMENT STATEMENT:

It is known that cash budget points out times of deficits and surpluses occurring
on certain prefixed dates generally on monthly basis. The balance so revealed may
not provide the desired details for implementing an effective schedule of investment.
This can be done by preparing a detailed cash movement statement. Such a statement
helps the business to overcome limitations associated with a cash budget drawn on
monthly basis. This facilitates the way for profitable short – term investment.
The basic technique for the construction of detailed cash movement statement is
identical to the preparation of cash budget. The data of course is reflected in more
detailed fashion. For such statements normally weekly presentation is considered
sufficient. However, in certain cases, daily cash movement too can be projected if
heavy transactions are occurring during those particular days. During Diwali and

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Christmas time, for example, daily cash movement watch may yield better results for
taking investment decisions.

Cash Movement Statement – Part A

Cash movement statement is prepared in two parts. Part A shows the weekly
receipts, payments and surpluses and Part B displays the action plan for the
investment of the surplus. Column 1 to 9 of Cash Movement Statement Part A , detail
weekly receipts, payments and cash balances. Column 10 provides information of
surplus/deficit at the week-end. The surplus/deficit amount is determined after
providing for a prefixed amount of cash in hand known as „safety‟ or „cushion cash‟.
Finally, last column shows increase/decrease of cash during that week. Based on the
information so revealed an action plan can be chalked out for projecting investments of
next three months. Such an action plan would be fairly accurate for the immediate
period of 4-8 weeks. For an extended period, it may not be so definite.

Cash Management Statement – Part A

Period: Expected Receipts Expected Payments Date:
Basis:
Week Expecte Sales Other Total Pur Salari Other Total Expec Expected
Ending d cash cha es ted Weekly
balance ses Surpl Net
us Increases
(Defici (Decrease)
t)
1 2 3 4 5 6 7 8 9 10 11
(3+4) (6+7
+8)

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Cash Movement Statement – Part B

Cash Movement Statement – Part B is in fact an extension of Part A statement.
It projects the investment programme of the surpluses shown by Part A statement.
Columns 1 and 2 contain the details borrowed from Part A Statement. Having
displayed the weekly surpluses the strategy for their investment is drawn out.

Cash Movement Statement – Part B

Period: Surplus – Investment Deficit – Requirement Date:
Basis:
Week Weekly Amount Period No. of Amount Period No. of
Ending Increase Days Days
(Decrease)
1 2 3 4 5 6 7 8

It is pertinent to note that the above mentioned investment programme is one

such plan which can be designed in such a situation. There can be many more
versions depending upon the prevalent conditions in the money market and strategies
adopted by the business. It can decide to invest funds for longer duration in the initial
stage itself to get higher rates of interest and bank upon overdrafts as and when
required if it finds such a plan more remunerative. Alternatively, it may carve out a
modicum balance for day-to-day investment and the rest for longer duration. Whatever
be the strategy adopted, it must have the basic ingredients of a investment plan
encompassing liquidity, safety and optimum return.

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4.2. Selection of an Investment Option:

Before considering the various options available for the investment of surplus
cash, one should consider the factors which influence the selection of a particular
investment.

(1) Quantum:
Larger the amount, higher the interest. The size of cash surplus plays an
important part in the selection of the investment. Many financial institutions engaged in
financing and leasing business are ready to offer higher rates of interest if the deposit
is for a substantially large amount. Otherwise also, a business with huge cash is in a
much better bargaining position to attract higher rates of interest.

(2) Risk and Return:

Greater the risk, higher the return. Banks are bound by certain internal and
external regulations and as such offer more or less uniform rates of interest for the
deposits. But certain body corporates particularly in the unorganised sector offer widely
varied rates of returns for the deposits. These high yielding deposits are exposed to
heavy risks and a prudent cash manager always tends to shy away from such
propositions. He knows that his primary considerations is retrieval of cash when
required rather earning more yield from its short-term investment. He is prepared to
surrender return in order to purchase security.

(3) Liquidity:
The most desired feature of any short-term investment is its liquidity. All
investments are undertaken for conversion speedily into cash whenever required. The
emphasis on the liquidity becomes all the more greater if there is uncertainty regarding
period upto which surplus cash is available for investment. In such situations a
business invests in securities which are highly liquid even though the yield is
comparatively lower. However, there is one compensating factor also. Such highly

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liquid securities normally have a very active secondary market, with the result the cost
of conversion into cash is comparatively less. With the selective relaxation of controls
on the money market operations and establishment of Discount and Finance House of
India Ltd. (DFHI). Indian secondary market is poised for sustained growth enhancing
liquidity of the investments to a great extent.

(4) Volatility:
Volatility prevalent in the interest rate is another feature which influences the
short-term investments. This necessitates a careful watch on the money market. If the
interest rates are likely to rise, it is better to invest for short periods. Conversely. If there
is possibility of fall in the interest rates, investments can be made for a longer period.

4.3. Types Of Investments:

There is a wide variety of investments which are available for parking short-term
funds. Some of the most prominent among them are as follows:

(1) Term Deposits:

Term Deposits are the deposits with the banks which are repayable on a fixed
date or after the expiry of the pre-determined period. Unlike deposits in current
accounts, these are not payable on demand but after a notice or after the expiry of
stipulated period. The term of deposits including interest are governed by the rules and
regulations framed by the bank which in turn are based on directives issued by
Reserve Bank of India and ground rules/instructions issued by Indian Banks
Association from time to time.
Deposits in the banks ensure complete liquidity. The amount becomes eligible
for repayment on the prefixed date against the surrender of the deposit receipt. Amount
can even be retrieved earlier than the scheduled date, in case of emergency, if the
business is prepared to sacrifice part of interest. Another advantage is getting financing
facilities against the deposits. The business has the option of raising funds upto 75% of
the deposit amount at a rate of interest 2% higher than the rate at which the amount

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has been deposited. Even it obtain bank guarantees against these deposits without
blocking its funds for these guarantees.
Term deposit is ver useful instrument of short-term investment. It has least
chance of default with full liquidity. However, the rate of interest offered by a bank is
normally less than the other avenues available for short-term investments.

(2) Certificate of Deposits:

Certificate of Deposit is a term deposit with a bank to be paid after certain period
with guaranteed rate of interest. This deposit is evidenced by a certificate issued by a
bank and hence is popularly known as Certificate of Deposit or CD in its abbreviated
form. The rate of interest agreed to be paid by the bank is dependent on the cash
requirements of the bank and the prevalent rate of interest in market. During the
conditions of tight money, bank may offer high rates depending upon its own needs of
cash. A CD is a negotiable instrument. The holder of CD can sell the same by delivery
in the market and get payment earlier than maturity. The risk of default in the case of
CD is comparatively less as it is issued by a bank. However, in the absence of
developed secondary market of CDs in India, the holder has to reconcile for keeping
the same with himself till its maturity.

(3) Treasury Bills:

Treasury Bills are rated as an important source of short-term government
borrowings and have become an effective source of short-term investment for the
commercial enterprises. These treasury bills are issued for a period ranging from 91
days to 364 days in the minimum denomination of Rs. 25 lakhs and thereafter in the
multiples of Rs. 10 lakhs. Treasury bills do not carry any rate of interest , rather these
are issued at a discount price to be redeemed at full price at maturity. The return on
this instrument is closely related to the prevalent call money rates.
Treasury bills have all the virtues of a good short-term investment. Since issued
by the government these have zero default risk. Also these can absorb huge funds
available at the disposal of a business maturity periods of the bills are also short –

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three months to one year. And above all Treasury Bills have an excellent marketability.
These are highly liquid investment instruments since these are actively traded in a
developed secondary market. The Discount and Finance House of India Limited (DFHI)
is ever willing to purchase treasury bills at its ruling discount rates.

(4) Commercial Papers:

Commercial papers are large denominated promissory notes normally having
maturity period of one month to twelve months. These are issued by big conglomerates
or banks. A business can invest its funds by buying these papers and earning interest
thereon. Suffice here to say that for a prudent short-term investment, commercial
papers of a reputed organisation alone should be considered.

(5) Short-Term Deposits with financial Institutions:

There are a number of financial institutions established by government for
providing long-term finances to trade and industry. Some of the examples ICICI, IDBI,
IFCI. In addition to these, companies like ILFS, HDFC are also engaged in providing
funds to units in their specialised sectors of operations. At times these institutions
require funds for short-term, say, three to six months and offer good rates of interest.
They, however, insist for large amounts of investments.

(6) Inter Corporate Deposits:

Inter Corporate Deposit is also an effective instrument of short-term deposits.
These have become an active source of investment, in particular, when the stock
market passes through depressive state. Cash liquidity of the industry as a whole is
severely effected due to lower volume of transactions in the stock market. Companies
facing cash drought look forward to the companies with cash surplus to meet their
immediate requirements. An attractive rate of interest is bargained. Such investments
are unsecured, and, therefore, exposed to heavy risks, as well. However, with the
advent of credit rating agencies like CRISIL, ICRA and CARE, a business can minimise

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the risk considerably by depositing its funds in the companies enjoying maximum credit
rating.

There are many more opportunities available for the short-term investment and
with the development of the economy, these opportunities are growing day by day.
However, one has to be careful while exploring possibilities of short-term investment.
The primary motive of such investment is to ensure that cash does not remain barren
and additional yield flows into the business. That cardinal principle should be to make
investment in securities having moderate income with less risk as against high income
with heavy risk.

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5. ECONOMICAL BORROWINGS

As the cash surplus is the outcome of non-synchronisation of the cash flows, the
cash deficit is also the outcome of the same. A business has to raise funds to the
extent of deficit. The borrowings can be varied depending on the time frame and the
amount required.

5.1. Short-Term Financing:

Short-Term financing is synchronised with short-term cash deficits and normally
is provided for a few months subject to maximum for an year. It is expected that during
this period cash inflow will improve enabling the business to repay the debt so raised.
Funds raised through short-term financing are utilised primarily to meet requirements of
working capital. Short-term financing if utilised for permanent capital like procurement
of fixed assets will disturb the rhythm of short-term cash flow cycle culminating in cash
drought due to jamming of operational liquidity.

(1) Trade Credit:

Trade credit is a credit availed by a business when it purchases goods without
making payment in cash. The credit period begins on the receipt of goods and
stretches till the payment is made therefor. The business, thus, starts enjoying the
goods and at the same time conserve cash till the expiry of credit period. The cash so
conserved tantamount to short-term financing provided by supplier for the duration of
credit period.

(2) Factoring:
Specialist companies which are in the business of factoring undertake the
management of sales ledger of their business clients. Receivables are sold by the
business to a factor who takes the responsibility of recovering money from its
customers on the due dates. Factoring companies, which are normally finance houses,
charge fees for providing this service. Generally, this source of financing is costlier than

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bank borrowings. But the business gets the benefit of immediate cash because quite
often the factor provides upto 80% as advance against the factored amount. The
business also saves the cost associated with administration of debt recovery.

(3) Invoice Discounting:

Invoice discounting is a method under which a business sells the invoice raised
on its client to a specialist company at a discount. The discounter releases initial
payment upto 75% of the invoice price. Collection of debts remains with the business
which acts as an agent of the discounter. On the receipt of money from its customer
the business forwards the same discounter, generally a finance house.

(4) Bank Financing:

For the short-term financing, commercial banks are the most important source.
Traditionally, the banks provide support to their business clients at the critical times.
Being specialists in short-term lendings they have developed a number of schemes to
suit the individual needs of the borrowers. While agreeing to the short-term lending the
banks look forward to three factors: safety, liquidity and profitability.

Overdraft:
An overdraft is a credit facility provided by a bank to a customer to draw money
over and above the amount available in his account subject to a prefixed limit and
period. This is the most common credit facility which is in vogue. The overdraft facility
is provided through a current account opened with the bank. The balances in the
current account keeps on fluctuating from debit to credit. The bank honours the
demands of the borrower provided it is within the sanctioned limit. For example, if the
overdraft limit approved by the bank is Rs. 20 Lakhs and there is a credit balance of
Rs. 8 Lakhs in the account, the bank will honour the payment instructions of the
borrower for an amount of Rs. 28 lakhs. The borrower can issue cheques for
payments, the way he feels like, within the limit of Rs. 28 Lakhs. He can also deposit

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any money in the account without any fear of the amount being adjusted by the bank
against the overdraft facility.

Cash Credit:
As per banking terminology cash credit is a “drawing account”. Under the
arrangement a business is authorised to draw cash subject to the limit pre-fixed by the
bank. Cash credit is advantageous to a business. Unlike under term loan, where full
amount is made available to the borrower, in the case of cash credit, a credit limit is
put at his disposal. This gives the borrower lot more flexibility. He can avail funds to
the extent he desires. He will be charged interest only for the amounts so drawn
against the limit. The borrower is also accorded the facility of reducing the debit
balance in his account as per his convenience and save interest. He can even provide
alternative securities from time to time if so agreed with the bank. Quite often a
minimum interest clause is inserted by the bank which entitles it to charge interest on,
say one fourth of the limit even though the borrower has not withdrawn to that extent.
This way the bank gets some returns for the funds locked unnecessarily due to the
borrowers inability to draw funds to the extent of the bank estimates.

(5) Bill Financing:

Analogically, a „Bill of Exchange‟ is like a post-dated Cheque. Its is an
instrument containing an unconditional order signed by a drawer directing a certain
person to pay a certain sum of money to or to the order of a person or to the bearer of
the instrument. Thus, there are three parties in a bill of exchange-the drawer, the
drawee and the payee. Any two of the three capacities can be filled by one and the
same person. The method of operation is very simple. The drawer through the
instrument asks the drawee to pay the specified amount. The drawee accepts the
same and gets the desired credit facilities. Once accepted, it becomes a negotiable
instrument. It can be bought and sold in the market. Once sold normally at a
discounted value, the drawer gets immediate money. Thus, both drawer and drawee
derive benefits out of the arrangement.

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(6) Indigenous Money Lenders:

When there are pressing demands, the business small and local units in
particular, are tempted to raise funds from private individuals. These money lenders
operate in a highly unorganised way. The advantages of this source are simplicity and
instantaneous receipt of funds. However, the biggest demerit is the exhorbitant rate of
interest charged in such cases which act as deterrent for using this as a regular source
of short-term financing.

5.2. Medium-Term Financing:

Short-term sources outlined above cater to the funds requirements of less than a
year. These are best suited for investment in current assets. The funds are needed for
long-term as well, for procuring fixed assets like land, building and venturing for a new
project. There are requirements which lie in between these two extreme time horizons.
Certain Plant and machinery may have a commercial life of three to five years. These
requirements are funded through medium-term sources of finance.

(1) Fixed Deposits:

A company can raise funds by accepting fixed deposits from members, directors
and the general public. The acceptance of these deposits are subject to statutory
provisions of Companies Act and regulation issued by Reserve Bank of India (RBI)
from time to time. A company can accepts deposits for a period ranging from six
months to thirty six months. The maximum rate of interest is determined by RBI which
normally is in the range of 15%. The maximum amount of the deposit outstanding on
the date of acceptance from public should not exceed twenty five percent of the
aggregate of the paid-up capital and free reserves of the company. The advertisement
for acceptance of deposits should be signed by the majority of directors of the company
and filed with Registrar of Companies before issue of the advertisement.

(2) Term Loans from Commercial Banks:

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A term loan raised from bank is for a specific amount, specific period and is
subject to specific repayment terms. Such loans are provided against the security of
fixed assets like land and building, current assets like shares, debentures and even
fixed deposit receipts. Generally, the amount is provided in lumpsum by crediting loan
amount in the account of the borrower. In certain cases like agriculture sector, loan
may be provided in installments as well. Repayment of loan by borrower can also be in
lumpsum or in series of installments.
The rate of interest is normally more than the overdraft rate. But in certain
priority sectors like exports, there are provisions of providing funds on subsidised rates
of interest also.

(3) Hire Purchase:

Hire Purchase is a system of buying an asset on credit. The buyer pays
relatively small amount as initial payment and takes the possession of the equipment.
The balance amount is paid in regular periodic installments which cover both the part
payment and part interest. The ownership of the equipment is transferred only after the
payment of final installment. It is an important source of medium-term financing and the
period involved stretches from one year to five years.

(4) Leasing:
Leasing is yet another important source of medium-term financing. It is an
arrangement under which an asset is financed and owned by one party but possessed
and used by the other. The owner of the asset is known as lessor and user is called
lessee. The lease agreement details out the specific period and timing of the sequential
payments to be made by the lessee to lessor as consideration for the use of the asset.

5.3. Long Term Financing:

Long-term financing is required to cater to the needs of long-range planning.
Every business tries to expand for which it requires funds which should remain at its

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disposal for a longer period. Thus, the thrust in the case of long-term financing is on
growth and development rather than running day-to-day business.

(1) Equity Financing:

Equity financing is an important source of capital financing. It consists of shares
issued by a company, subscribers of which become shareholders and collectively own
the company. They exercise ownership through voting rights which are commensurate
with the shares held by them. They share the profits of the company by way of dividend
and also enjoy appreciation in the value of shares in case the company trades
successfully. On the other hand, if the company is not making profit, they have to bear
the loss. in the case of liquidation of company their claims rank last after claims of other
claimants ate satisfied.

(2) Preference Shares:

Preference shares like equity shares are part of the ownership fraternity. But
they carry preferential rights over the equity shares. These shares bestow to their
owners right to the first slice in respect of payment of dividend as well as repayment of
capital in the event of liquidation of the company. The right to claim dividend is
confirmed to a pre-determined rate as and when the management decides to declare
dividend.

(3) Debt Financing:

Debt financing is a composite term for those funds which are raised by a
business as “Loan-capital”. The funds are borrowed for a specific period against
payment of interest at periodic interval and repayment of principal as per agreed
schedule. These two obligations of payment of interest and repayment of principal have
potential dire consequences and may result in bankruptcy if the business fails to meet
its commitments. This makes the debt financing riskier than equity financing. Interest
has to be paid whether the company makes profit or not, the principal has to repaid

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whether company fails to generate the cash to repay. However, on the plus side, the
debt financing gives the tax benefits.

(4) Specialised Financial Institutions:

There are a number of specialised financial institutions available in India which
cater to the long-term financing requirements of businesses. These institutions have
been specifically created by Government to act as „development catalyst‟ to accelerate
overall development of the economy. The loan programmes are tailored to cater to the
specific needs of a particular sector taking into considerations heavy amount and long
periods involved in such cases. Some of the financial institutions are IFCI, ICICI, IDBI,
SIDBI, UTI etc.

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6. CASE STUDY (ICICI BANK)

GROUND REALITIES:

The ABC Ltd. is a FMCG Company. The company has presence in more than
15 cities and have its head quarter in Mumbai. The company has Depots at these
cities. And each depots has some turnover every month. The name of Cities, the
monthly turn over of the each depots and no. Of retailers in each cities are as follows:

Sr. No. Cities Monthly Turnover No. of Retailers

(Rs. In Crore)
1 Mumbai 1.5 200
2 Delhi 1.25 180
3 Calcutta 1.00 175
4 Madras 0.75 180
5 Ahmedabad 0.75 150
6 Banglore 0.70 160
7 Hyderabad 1.00 155
8 Pune 0.50 140
9 Jaipur 0.60 150
10 Indore 0.75 120
11 Cochin 0.50 130
12 Agra 0.50 120
13 Jalandhar 0.40 110
14 Jammu 0.10 115
15 Nagpur 0.10 135
16 Lucknow 0.10 140

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The requirements of the ABC Ltd. are as follows:

1. All money should be ABC Ltd. a/c at Mumbai.

2. All money should on the next day basis.
3. Details of cheques deposited at different location on daily basis:
Location
No. of cheques deposited
Cheque number
Cheque amount
Date of deposit
Clearing date
Retailer name/code
Returned cheques
 Date
 Reason
 Location
 Amount
4. Courier pick-up service at each location.
5. Monthly reports of each location about sales, collection, expenditures etc.
6. Other MIS reports

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ANALYZING PROCESS:

These are the conditions and facts of the organisation. Now, what the bank will do? I
have taken the case of ICICI Bank CMS. This is regarding how the bank makes deal
with the company.

The ICICI will analyses the location of the company. The ABC Ltd. have sixteen
locations in the country. This is not always possible to have the branches at each
location of the client for the banks. In this case, we are taking the assumptions as
follows:
In 10 locations of the company, the bank has its own presence.
In 2 locations of the company, the bank has tie-up with correspondent bank
And in remaining 4 locations, the bank has no presence as well as no tie-up with
any other bank.

How the bank makes allocation of the different instruments?

The bank broadly categorized the instruments into two types:

I. Local Cheque Collections (LCC)
LCC are the cheques, which are drawn and deposited at the same location. Eg.
A Cheque drawn at Jaipur and deposited at Jaipur only.

The LCC is again categorised into two types:

1) LCC BRN:
A local Cheque which is drawn and deposited at the same location where the
bank has its own presence.

2) LCC COR:

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A local Cheque which is drawn and deposited at the same location where the
bank doesn‟t have its own presence but has tie up with correspondent Bank.

II. Upcountry Cheque Collections (UCC)

The UCC are the cheques, which are drawn and deposited at different locations.
Eg. A Cheque drawn at Jaipur and deposited at Delhi.

The UCC is again categorised into two types:

1) UCC BRN:
A upcountry Cheque which is drawn at one location and deposited at another
location where the bank has its own presence.

2) UCC COR:
A upcountry Cheque which is drawn at one location and deposited at another
location where the bank has tie-up with correspondent Bank.

3) UCC ONW:
A upcountry Cheque which is drawn at one location and deposited at another
location where the bank neither have its own presence nor have tie-up with
correspondent bank.

PRICING:

Pricing is competitive; varies from centre to center. It also varies from

instruments to instruments.

Special pricing can be worked out taking into account the volume of funds & the
centres. The pricing part of the CMS is very complex. Normally, the ICICI bank takes
into account the following factors while going for pricing:

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1) Bank In Funds/ Out of Funds & Correspondent Bank Charges:

When Cheque is deposited in the bank it passes through the clearing house. In
India, clearing is done through RBI,SBI and PSU banks. The RBI has presence in 15
cities in India while SBI has 938 locations in India including its associates. other cities
where clearing house is not there, the clearing is done through Correspondent Bank,
mostly these are PSU Banks or Co-operative Banks.
Suppose I deposit the Cheque on day 0, then the time taken by the clearing
houses to debit the bank account would be different. The ICICI has to debit its
customer‟s account on the next day basis irrespective of days to clear.

Day when the Clearing Bank Days for Bank In Fund/Out

Cheque will be which bank is of Fund
credited out fund
Day1 RBI 0 Not out of funds
Day2 SBI 1 1 Day out of funds
Day3 Correspondent Bank 1 1 Day out of funds

In this case, the bank charges interest on the money which it gives in form of
“Credit Against Uncleared Cheque”, to the company. When it comes to the
Correspondent bank, the bank has to pay extra charges to these banks.

2) Overheads:
The bank takes into account the o/hs charges, which it occurs in the process.
The o/hs charges includes salary, administration charges, maintenance etc.

3) Margin:
After including the transaction and other o/hs charges, the bank gets the cost of
transaction. On this the bank adds its margin for being in the business.

The pricing of ICICI Bank, in general, is as follows: (RS./Rs.1000)

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LCC = Bank in Fund/Out of Fund (0.27-0.38) + Correspondent Bank

Charges (0.25-0.50) + O/hs. (0.10-0.50) + Margin (Depends on Clients)

UCC = Bank in Fund/Out of Fund (0.38-1.00) + Correspondent Bank

Charges (2.00) + O/hs. (0.50-1.00) + Margin (Depends on Clients)

In pricing, other elements like courier charges, return cheques etc. also
considered. Pricing in CMS in generally negotiable between the company and the
Bank.

Features of ICICI Bank CMS:

Exclusive CMP desks with infrastructure
Debit Transfers
Courier pick-up at branches
No collection a/cs needed at branches
Customised Reports
Transmission of data through Internal LAN system
Direct credit to accounts

Benefits to Customers:
Centralised Control of cash
Cost reduction
Enhanced Liquidity
Interchange of Information between treasury & operating units
Reduced excess cash balance
Cash forecasting & scheduling

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Effective control over disbursements

Timely & effective investments

7. How to Improve Cash Management Practice in India?

There are, of course, many ways to improve and re-engineer the processes.
However, depending on budgets and also to minimise disturbances to the business,
the following are the suggested simple and initial steps. Note that the larger the
corporation, the more involved the process will be.

(1) Commit to change:

Recognize the need for improvement and commit to change (this commitment
must come from top management and cannot be just lip service).

(2) Establish a credible project team:

The project team must have a credible and strong project leader and be
sponsored by the decision maker(s).

(3) Study the existing internal financial transaction processes:

This is straightforward and a simple overview. Ask questions such as: Is
electronic banking used? To what degree? How are revenues collected and how are
payments made? How many staff are dedicated to these functions? What is the
decision-making and authorisation chain? What information is available from internal
management information systems?

(4) Review services available in the marketplace:

Review existing service providers and other service providers, making initial
presentations and discussions with banks and providers. Quickly shortlist potential
providers for further in-depth discussions and presentations. Develop a good idea of
what solutions, services and products are on offer.
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(5) Establish high-level, practical goals and objectives:

There must be a true desire and commitment to improve and make changes for
the better; however, the process should be evolutionary and practical. Take care to
ensure goals are not artificially set for easy attainment nor established for ideal
perfection so to be unreachable or unrealistic. The goals should be at a higher level
than where the company is now and the initial level of improvement. For example, a
goal may be to achieve costs savings and efficiency gains on the process of collecting
revenues and reconciling with the accounts receivable system.

(6) Establish and commit to specific initiatives, sequence and timeframe:

Action points, initiatives and a realistic time frame must be decided for achieving
each initiative. Communicate these to the providers. For example, an initiative may
include automating and outsourcing vendor payments.

(7) Obtain simple written proposals from the shortlisted potential providers:
Have providers present proposals and be prepared to ask questions and probe
exactly what is being offered and whether the proposed solution, services and products
meet your objectives. Look for comprehensive, well thought-out and realistic solutions.

(8) Decide on the solution and decide on a provider(s):

It is not necessary to have only one provider of services. For example, there
could be a domestic collection bank and a regional account management bank.
Document all goals and services as well as pricing and the period the pricing covers,
such as one-year or two-year, and the start dates.

(9) Review the internal project team and add actual users to help implement the
proposed changes:
This process is to help obtain commitment from the bottom up and to gain the
buy in of internal users. The bank provider(s) should also have a parallel team to work

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with your implementation or project team. Also, a mutually designed and agreed
schedule and action plan should be established.

(10) Review, establish and commit to a process for ongoing improvement:

Services should be reviewed once implemented to ensure that the high-level
goals and objectives are obtained. There should also be an ongoing emphasis on
improvement, and a culture for empowering staff to recommend and look for ways and
means to improve cash management services and processes. This needs to be
encouraged, especially with the new developments in technology afforded by the
Internet. Management and users must commit to the discipline of cash management.

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CONCLUSION

cash management is more than just a product or service, it is about practicing a

discipline for managing cash flow and implementing long-term solutions that are flexible
and can change with the business environment. This means that solutions need to be
reviewed constantly and that the higher-level objectives for cash management should
stand the test of time.

Objectives should include improving revenues, maximising profits, minimising

costs and establishing efficient management systems to assist not hinder growth.
Initiatives should be practical and there should be buy-in from all concerned groups.
Most importantly, Indian corporations must recognise that the business landscape will
continue to change, and that with e-commerce and the Internet, competition will be
intensive and business cycles will occur more quickly. Cash management will also
develop with the Internet and "go the way of the web". Within this environment the only
constant is to adhere to a discipline of strong cash management.

The cash management scenario in India is evolving rapidly. The proposed

introduction of more efficient payment systems and the availability of the latest
technology will transform the Indian payments environment to a large extent and
enable banks to offer superior products to their customers.