18)

OF CASH
MANAGEMENT

OF CASH MANAGEMENT
MEANING
18.1
tis the process of planning,1
Cash
manageinent ,monitoring,
andcontrolling business
and outflows. It ensures enough
inflows cash is available
cash to meet daily
avoid shortages, and handle
expenses, unexpected needs. Effective cash
helps businesses save on
management borrowing costs, maintain
and make productive use of extra smooth
cash.
operations,

cash management ensures there

Proper is always enough money to cover
pay bills, and optimize the use of
expenses, available funds. This
businesses
maintain stability, improve approach helps
productivity, and achieve their financial
goals.

182 OBJECTIVES OF CASH MANAGEMENT

1 Maintain Liquidity: Liquidity
means having enough cash to
to-day expenses like pay for day
salaries, bills, andraw
materials. Proper cash
ensures that the
business has adequate management
funds to meet their
time. obligations on

2. EfficientCollections: Speeding up the

process of receiving
customers improves cash payments from
availability. By reducing
business can use the delays in collections,
funds sooner for operational
needs or investments,
ensuring a steady flow of cash.

3. Optimize
Payments: Managing the timing of
payments helps maintain a
balanced cash flow.For
example, businesscan pay their
the due date to hold suppliersjustbefore
onto cash longer while
still avoiding
helps ensure that cash is penalties.This
availableforother pressing needs.
4. Controlling Spending
(Disbursement Control): It is important to
when and how much to spend. decide
Businesses should avoid spending
all their
money at once and plan their expenses carefully.
S. Risk Mitigation: By maintaining proper cash reserves,
businesses can avoid
financial risks such as running out
of money during
emergencies or
overcommitting resources.Effective cash
management minimises thechances
of cash
shortages or excess idle funds, keeping the business
stable. Having
enough cash to pay bills while avoiding holding too much
idle cash
balance liquidity without losing potential income fom excess cash helps
 Entrepreneurship and New
18.2
does not Veniure
Idie cash generate returns,
Profitability: so
6. Enhance loN-risk Planniny
fundsin short-term,
to invest surplus while
opportunities,
businesSses
additional incomne still Thhiis aim
company to earn ensuring that alloNS
for future needs. cash ihe
accessible
remaims
Amount of Cash: Having enough
7. Keeping the Right cash topay
too much idle cash helps balance bills
avoiding holding liquidity while

potential income from excess cash. without

Iosing

8. Planning: Good cash management helps businesses

Strategic
plan
the flexibility to seize for
investmentsand growth.It provides new future
cash, it can
when they arise. If a business has extra invest in safe.
opportunities

options to earn extra incoe. These investmentsshould be

easy to short-term
when needed. convert back
into cash

18.3 MOTIVES FOR HOLDING CASH

Businessesmaintain cash for the folowing reasons:
1, Transaction Motive: This refers to keeping cash on hand to pay
forthe
business's daily expenses and operations. Examples include
paying forraw
materials,employee salaries, utility bills, or taxes. Insufficient cash for
these
transactions can disrupt businessoperations.
2. Precautionary Motive: Businesses maintain extra
as a safety net to cash
hande
unexpected situations, such as a sudden marketslowdown,
,strikes, or
unforeseen
expenses. This reserve ensures that the business can continue
fuunctioning
smoothly even during emergencies or uncertainties.
3. SpeculativeMotive: Companies may hold cash
to take advantage of unexpected
opportunities, such as purchasing inventory in bulk at
discounted rates or
investing in a profitable
venture.This motive ensures thatthe
business can act
quicklywhen favourableopportunities arise.
4. Conmpensation Motive:Businesses oftenneed to
maintain a minimum balance
in their bank accounts
to receive banking servicesor
lines ofcredit. This ensures
thatthe company can access
essential banking facilities like loansor overdraft
protectionwhen required.

18.4 UNDERSTANDING CASH FLOW

The following factors affect the cash needs
ofbusiness:
1. Cash Cycle:The cash
cycle isthe time
and receivingmoney between spending money
from selling them. It to buy goods
includes:
Buying goods on credit.

Sellingfinishedproducts.

Collecting payments from

customers.
 183
BusineSCs
necd enough cash to cover this
cycle and keep operations running
sNothly.
Cash inflowsandOutlows:
Cash coming in (inflows) and
.stien d not match in timing.
Businesses require
going out (outflows)
additional fundsto manage
delayed customerpayments.

Cost of Holding Cash: Keeping too

much cash means missing out on
opportunities to invest and eam
profits. Businesses must
cash they keep avoiding balance how much
losing potential
income.
uncertaintiesin Business:
Unexpected events like changes
in demand,
emergencies, or urgent needs require
extra cash. Having a
the busIness can reserve ensures
handle such events without
trouble.
The three main components
of a cash flow statement
include:
Casb Flow from Operating
Activities:Cash flow from
daily operations,
including custoner
payments, expenses like
unterest. shows whether a supplies, wages, taxes, and
business generates enough
costs,with positive money to cover its
cash flow indicating financial
health.
2. Cash Flow from InvestingActivities:
Cash flow from investing
including buying or selling activities,
assets, businesses, or
securities, often shows
negative cash flow in growing
businesses as they invest in assets to
future growth and drive
earnings.
3. Cash Flow from Financing
Activities: Cash flow from funding
including activities,
loans, sharetransactions, and dividendpayments, reflects
a business is raising funds (positive whether
cash flow)or repaying debts and returning
money to investors (negativecash flow).

Apple's Cash Flow Analysis

Apple'scash flow forthe periodcan be
summarized as:
Operating Activities: +$69.4 billion (a strong cash inflow from
business operations).

Investing Activities: -$45.9 billion (cash spent on buying

assets and
makng investments).
Financing Activities: -$90.9 billion
(cash used to repay debts, pay
dividends, and execute strategic share
buybacks).
Vet Change in Cash: -$67.4 billion
This show that while Apple generated substantial cash from its
operations,
it ade signiticant investments and returncd cash to its shareholdersthrough
div idends and share buybacks.

l'nderstandng and analyzing cash flow is essential as it provides insights into a

companv' tinancal health, operationalefficiency, and ability to execute growth
strategies or meet obligations.
 18.4
Entrepreneurship and
New
18.5 ANALYZING CASH FLOW Venture

STATEMENTS Planning

The cash flow statementis an important financialI

reportthat
and payments over a specific
cash receipts period. highlights aa
The
the importance of cash flow analysis: following company's
factors
Financial Health ASsessment: Cash explain
1.
flow analysis
to generatecash and meet its shows a
financial
obligations. It firm's
company can sustain helps
its operationsin thelong term. assess ability

whether
2. Operational Efficiency: the
It identifies whether. cashis
wasted. This enables being used
businesses to optimizecash usage and efficiently or
expenses. reduce
3. unnecessary
Investment and Growth
Planning: Itdetermines ifthe
cash toinvest in new opportunities or company has
expand. It
making for sustainable supports strategic enough
growth.
decision-
4. Liquidity Management:
It helps in
ensuringthe business managing working capital
has adequate effectivel
cash to cover
prevents disruptions in day-to-day expenses, This
operations due to cash
5. PredictiveTool: It
shortages.
forecasts future cash
and avoidpotential balances, helping
cash deficits. This businesses plan
ensures the
prepared for uncertainties. company remains financially
6. Valuation: It
is helpful in
assessing the value of a company.
18.6 CASH MANAGEMENT
The following cash
TECHNIQUES
management techniques
liquidity to meet ensure that businesses
their needs,
reduce financial have enough
risks, and
opportunities. make the most of growth
1. Cash Flow
Forecasting: Cash flow
amount of cash that forecasting involves
will flow in estimating
and out of the the
period.This helps business
businessesprepare over a specitic
enablingbetter for potential
financial
planning. shortages or surpluses,
Forexample, a
retail chain
uses forecasting
ensuring enough to plan for
cash is peak shopping
on bulk purchases. available topay seasons,
supplierswhile
leveragingdiscounts
2. Working Capital
Management:
company's current assets Effective cash
and
to-day operations liabilities are management ensuresthat a
and efficiently
liquidity. It managed to maintain day
payments, optimizingi involves
to balance inventory to encouraging faster customer
cash flow avoid
while overstocking, andImanaging payables
avojding penalties.
For example, a
manufacturingfirm
suppliers to align with ;
its
receivables
negotiates
extended
borrowing. cycle, payment terms with
improvingcash flow and
minimizing
 of Cash
Management
18.5
SnoedingUp Cash
3. Collection:
eures Accelerating the collection of
f liguidity is available
online
invoicing systemsthat
to meet
operational and
send
receivables
investment needs. Use
hout due automatedreminders to
payments, ottering customers
diverse payment
ollection strategies based on methods, and tailoring
collection and improve cash flow.
customer behavior
streamline payment
Eor example, an
e-commerce company
that reminds implementsan automated
customersofoutstanding billingsystem
and improving cash flow. payments,reducing
collection delays

Controlling Payments: Optimizing

retains cash as long outgoingpaymentsensures the
as possible while business
supplier payments meetingobligations on
with cash inflows, time. Aligning
and using consolidating payments for
electronic transfers efficiency,
for speed and
processes. security optimize
payment
For example,a
smallbusiness schedules
its
dayofthe credit paymentsto suppliers for
period, allowing it the last
to use the cash
interim. for other purposes
in the
5.
Building Good Bank Relationships: Strong relationships
partners provideaccess to better financial tools,
with banking
financial solutions, reduced fees, and
negotiate better terms, tailored
and receive expert
efficient cash advice for
management.
Forexample,a startup
partners with a bank to
ithas accessto fundsfor secure a line ofcredit,
ensuring
unforeseen expenses
loans. without resorting to
high-interest

6. PoolingCash: Pooling
consolidates cash from multiple
into a accountsor locations
centralized
account,enhancing control
and efficiency. Optimizing
surplus cash reduces
borrowing costs, facilitates efficient
global fund
management, and provides centralized
oversight forbetter liquidity
decisions.
For example, a multinational
corporationpools excess cash from
its
subsidiaries globally into one
account, using it to finance
with short-term cash deficits. operations in regions

7. Short-term Investments: Investing

surplus cash in short-termn, low-risk
options ensuresfunds arenot idle
while maintaining liquidity for operational
needs. A liquidity-focused investmentstrategy prioritizes secureoptionslike
treasury bills, balancing risk management with optimized returns and quick
cash access.

For example, a company invests extra funds in a 30-day fixed deposit, earning
interest while keeping the money accessible for upcoming payroll expenses.

8. Using Technology: Leveraging technologyimprovesthe

accuracy, speed,and
etficiency of cash management processes. Leveraging real-time updates,
automation, and predictive analytics enhances cash management by ensuring
 Entrepreneurship and
18.6 New
Venture

minimizing errors, and enabling

accurate information, informed
Planntg

making. decision-

For example. a medium-sized businessuses a

treasury
management
track global cash flows in real time,
ensuring funds are systemto
optimally:
different operations. allocated to

9. Internal Controls and Risk Management: Establishing effective

controls ensures cash is managed securely, reducing risks internal

of

mismanagement.Eftective cash control involvessegregating en

fraud or

clear handling policies, and conducting regular audits to prevent

duties,enforcing
misuseand
detect discrepancies.

For example, a retail business requires daily cash

reconciliations
by an by a
supervisor and regular audits independent team to
ensure
accuracy
and prevent fraud.

18.7 MANAGING CASH INFLOWS AND OUTFLOWS

Accelerating Cash Inflows
The following strategies help in effective management of cash inflows:

1. Efficient Billing and Collection Practices: The following methods can

help turn receivables into cash quickly, supporting better cash fow
managerment.
Send Bills Promptly: Issueinvoices immediately after delivering goods
or services to avoid delays in payment.

Follow Up Regularly: Use reminders foroverdue payments to ensure

timely collections.

SimplifyBills: Ensure invoices are clear and easy to understand, avoiding

confusion for customers.

Offer Flexible Payment Options: Provide solutions for customers

facing financial challenges to encourage timelypayments.

2. Electronic Funds Transfer (EFT): EFT is the electronic transfer ofmoney

between accounts, making payments faster and easier. It includes online

transfers, deposits, and check usage. It has the following benefits:

Speed: Transfers are completed within 24-48 hours, making funds

quickly available.

Convenience: Eliminates physical handling of cheques, saving time

for businesses and customers.

Security: Safer due to advanced technology.

Cost-Effective: Reduces administrativecosts by minimizing manual

processes.

3. Lockbox System: A lockbox system is a bank service where customers

send payments to a specific post office box. The bank collects thesepaymens.
 18.7

and deposits the money directly into the company's

thhem, account. It
proesses benefits:
the tollowing
has
Payment Processing: Reduces the time taken to
Faster receive and

process payments.
Efficiency:
Saves company staff time by outsourcing cheque
handling
to the
bank.
Cash Flow: Speeds up deposits, better cash
Improves ensuring

availability.

Accuracy: Minimizes erOrs in recording payments,improvingaccount

records.

Outflows
Managing Cash
can help businesses handle cash flow better and stay
strategies
The following
future needs.
lexible for
Not Early
1. Pay on Time but
Pay bills before the due date to avoid late fees, butnot too carly to keep
cash available.

Use online payments to avoid mailing cheques too soon.

2. Use Credit Terms Wisely

suppliers to hold cash longer.
Negotiate longer payment terms with

Encourage customers to pay early by offering small benefits.

Avoid using credit cards if it charges interest.

3. Control Spending

Set spending limits and approve payments carefully.

change methods they are not working.
daily expenses and
if

Keep track of

4. Manage Inventory Smartly

itemsjust when needed.
Do not store too much inventory; order
slow-moving products.
Regularlyreview stockto remove
5. Lease Instead of Buying
of making
over time instead
or propertyto spread costs
Lease equipment
big purchases.

6. Prioritize Payments
first to keep the business
important suppliers
Pay employees and
running.
vendors in advance.
adelay in payments, inform the
If there is

7. Use Technology
and control cash flow.
to predict
Use software
bill paynents to avoid errors and delays.
Automate
 18.8 Entrepreneurshipand
New
Venture

8. Build Cash Reserves Planning%

Save money for emergenciesto handle unexpected

expenses
Or
drops.
revenue

9. Review Expenses often

Check Expenses Regularlyto Find Ways to SaveMoney

Keep cash available as much as possible while
meeting
obligations. business

Optimal Cash Balance

The following methods help to determine optimal cash balance:
1.
Cash Flow Forecasting:This is afinancial plan that listsall
expected
such as sales, and all expected expenses, such as bills, to income,
project futurecash
availability.

2. Buffer Approach: A cash buffer,

like an emergency fund, involves settino
aside extra cash to manage unexpected expenses or payment delays.
3. Operating Cycle Analysis: The operating cycle is the
time it takes for a
business to produce, sella product,and receive
payment, requiring sufficient
cash to ensure smooth operations.

4. Financial Ratios: Use simple calculations like:

Current Ratio =(CurrentAssets +Current Liabilities)

The current ratio measures a company's ability to pay short-term debts
using its current assets, showing how well it can meet obligations within
a year.
Quick Ratio =(Quick Assets +Current Liabilities)
Thequick ratio showsa company's ability to pay current liabilities using
its most liquid assets, like cash, marketable securities, and receivables,
without relying inventoryor new financing.It is mnore conservative
on
than the current ratio, excluding less liquid
assets like inventory and
prepaid expenses.
5. Scenario Analysis: Considering various
scenarios, such as strong or weak
economic conditions, helps determine the cash needed
to maintain the
business's financial stability.

18.8 CASH BUDGETING

A cash budget is a financial plan that forecasts the
cash a company expectsto receive
and spend over a specific period, such as weekly,monthly,
quarterly, or annually. It
helps businessestrack cash
inflowsand outflows,ensuring
they allocate resources
wisely and maintain financial stability.
By creating a cash budget, companies can
determinewhen payments should be made,
manage resources efficiently, and plan for a
stable financial structure. It acts as a
tool for managing money effectively and.avoiding cash shortages
or excesses.
 ofCash 18.9
Munagement
of a Cash Budget
Components
the following
ccash budget has
parts:
A typical
Opening
Cash Balance: The amount of cash available at the beginning of the
1.

period.
.CasbReceipts: Money coming in, including sales, bank deposits, or
income
like interest.

.CashPayments: Money going out for expensesand other costs during the
period.
.Cash Excessor Shortage:The net cash flow,showing the
difference between
cash coming in and goingout.
.Ending Cash Balance: The remaining cash at the end ofthe period after all
transactions.

Importanceof Cash Budgets

Cash budgets are important for the following reasons:
1 ClarifyingFund Flows:They simplify the understanding of
where fundscome
from and how they are used, providing
a clear picture offinancial activity.
This
helps in maintaining transparency in financial planning.
2 AddressingCash Shortfalls: Cash budgets
identify potential cash shortages
in advance,enabling
businesses to take timely corrective
actions, such as
arranging additional fundingor delaying
non-essential expenses.
1. Controlling Costs and Expenses: They play a vital role
in cost management
by setting spendinglimits and
monitoring actual expenditures against planned
budgets. This ensures financial discipline.
4. Supporting Decision-Making: Cash budgets assist
in making informed
decisions, particularly for capital
investmentsand sourcing funds.They help
businesses assess their ability to undertake
new projects or secureloans.
5. Enhancing Financial Stability: By forecasting cash flow,they ensure the
business maintains enough liquidity to meet obligations, avoiddisruptions, and
capitalize on opportunities.

Challenges in Managing Cash Budgets

Businesses often encounter the followingchallenges when
creating and managing
cash budgets:

1. UnpredictableCash Flows: Irregular or seasonal

income can make it difficult
to forecastcash accurately, leading to potential
cash shortages or surpluses
that disrupt
financial planning
2. Inaccurate Sales Projections:
Overestimating or underestimating sales
revenue can affect the reliability of thebudget, resulting in
either unmet financial
Commitments or underutilized funds.

3 tnexpected Expenses: Sudden costs, such

as repairs, legal fees, or market
changes, can affect even the most
well-prepared budget, necessitating
adjustments to maintain
stability.
 18.10

Entrepreneurshipand
4. Completing Cash Flows: Accurately New Venture
Plo
aligning all cash
in a comprehensive budget can be
challenging, inflows
with multiple revenuestreamsand expenses. especially in and
complex outflioWs
5. Adapting to Changing Conditions: businesses
External
economic downturns, or factors like
changes in customer
assumptions used in the behavior market
cash budget, can shifts,
requiring frequent
Short-term vs. Long-term revisions.impactthe
Cash Budgets
Short-term budgets help manage
immediate needs, while
strategic planning.
Together, they give the long-term
position and allow for better business a budgets
complete view
decision-making over ofits support
different time financial
Short-term Cash Budgets frames.
Coverashortperiod,
like one to three
Focusonmanaging months, or even
weekly ordaily
working capital to ensurethe
€Xpenses. businesscan cover
near-term
Includedetailed
cash flow
estimatesfor daily
Help make quick operations.
decisions to meet immediate
financial needs.
Long-term Cash Budgets
Cover ayear or more and
focusonthe
strategies. company's long-term
financial goals and
Provide guidance
for major
projects. expenses,
investments, and
long-term
Less accurate
than short-term
estimates. budgets since they
rely on
broader
Help in planning and making
financial decisionsfor the
stability. company's future
growthand
Preparing a Cash Budget
The following
steps help in
1. preparing a cash
Forecast Cash budget:
Inflows: List all
payments from sources of
customers, loans, or incoming cash, like
2. other income. sales,
Forecast Cash
Outflows: Identify
materialcosts, all
expected
salaries, payments, such as raw
3. Calculate manufacturing expenses,
Net Cash Flow: and loan
to see if Subtractthetotal repayments.
there is extra outflows from the
cash or total
4. shortage. inflows
Determine Cash
to find the Position:Add thenet cash
cash available flow to the
for the starting cash
5. Plan for period. balance
Surpluses or Deficits
Use extra cash
for short-term
investments.
Arrange to borrow or
delay
payments to
cover
shortages.
 of Cash
Mengement 18.11

|
,Finalizethe Budget: Create
the final cash balance forr better
cash budget showing
a clear
summary showinginflows,outflows, and
decision-making.

A simple inflows, outflows, and net cash is as follows:

Month January February March April
Cash Inflows
nebtors (Previous Month) 30,000
25,000 35,000 60,000
Debtors (Current
Month) 50,000
60,000 1,20,000 70,000
Total Inflows 80,000
85,000 1,55,000 1,30,000
Cash Outflows

Raw Materials 70,000

1,00,000 80,000 85,000
Manutactunng Expenses 10,000
20,000 29,000 16,000
Loan Instaliment 1,000
11,000 21,000
Outflows 21,000
Total
81,000
1,31,000 1,30,000 1,22,000
Net Cash Flow -1,000 46,000 25,000 8,000
Example
Cuiarat Industries Ltd. wishes
to arrangeoverdraft
dhe neriod facilities with its bankers for
August to October 2024when
it will be manufacturingmostly for
Prepare a cash budget for the above stock.
period from the following
data:
Month Sales
Purchases WagesMfg. Exp.
(Rs.) Office
(Rs.) Exp.Selling Exp.
(Rs.) (Rs.) (Rs.)
June 1,80,000 (Rs.)
1,24,800 12,000 3,000 2,000 2,000
July 1,92,000 1,44,000 14,000 4,000 4,000 4,000
August 1,08,000
2,43,000 11,000 3,000 1,500 2,000
September 1,74,000 2,46,000 12,000 4,500 2,000 5,000
October 1,26,000 2,68,000 15,000 S,000 5,000 4,000

Additional Information
1. Cash on hand: Rs. 25,000 on
Ist August 2024.
2. Credit sales realization:

50% in the month following the sale.

50% in the second month following the sale.

3. Creditor pay ments: Paid in the month of purchase.

4. Lag in manufacturing expense payment: Half a
month.
5. Lag in other expense payments: One
month.
Solution

Step 1: (alculate Receipts

Receipts from sales:
 Entrepreneurship and
I8.12 New
Venture
,80,000
June sales: Rs. Planning
Rs. 90,000
SO°.realized in August
July sales: Rs. I,92,000

S0°o realzed in August =Rs. 96,000

S0° realzed in September Rs. 96,000-

1,08,000
August sales: Rs.
S0°orealized in September
Rs. 54,000 =
in October = Rs.
54,000
50° realized
1,74,000
September sales: Rs.
50° realized in October Rs. 87,000 =
Month Total Receipts from Sales (Rs.)

90,000+ 96,000 = 1,86,000

August
September 96,000 + 54,000 = 1,50,000
October 54,000 + 87,000 =1,41,000

Step 2: Calculate Payments

Purchases: Paid in the month ofpurchase.

August payment =Rs. 2,43,000 (Augustpurchases)

Septemberpayment= Rs. 2,46,000 (Septemberpurchases)

October payment =Rs. 2,68,000 (Octoberpurchases)
Wages: Paid with a one-month lag.

August payment =Rs. 14,000 (July wages)

=
September payment Rs. 11,000 (Augustwages)

Octoberpayment Rs. 12,000 (Septemberwages)

Manufacturing Expenses:Paid with a half-month lag.

=
August payment Rs. 2,000 (50% of Rs.4,000 for July) +Rs. 1,500(50%

Rs. 3,000for August)= Rs. 3,500

Septemberpayment =Rs. 1,500(50% of Rs. 3,000 for August) + Rs. 280

(50% of Rs. 4,500 for September) =Rs. 3,750
Octoberpayment Rs. 2.250 (50% of Rs.4,500 for September) + Rs 250
(50°o of Rs. 5,000 for October) Rs. 4,750 =
Office Expenses and Selling Expenses:Paid with a one-month lag.

Total
Month Purchases Wages Míg.Exp. Office Selling
Exp. (Rs.) Paymets
(Rs.) (Rs.) (Rs.) Exp.(Rs.)
(Rs.)

26 50
4,000 4,000
August 2.43,000 14,000 3.500
26424
1.500 2,000
iSeptember 2.46.000 11000 3.750
291.
"9
October 2,6%.000 12,000 4,750 2,000 5,000
 of Cash
18.13
Wunuemenl
the Cash Budgets
3: Prepare
Step
Receipts Payments Net Cash
Month (Rs.) (Rs.) Opening Closing
Flow (Rs.) Balance (Rs.) Balance (Rs.)|
1,86,000 2,68,500
(82,500) 25,000
August (57,500)
1,50,000 2,64,250
(1,14,250)
September (57,500) (1,71,750)
1,41,000 2,91,750
(1,50,750)
loctober (1,71,750) (3,22,500)

Conclusion
will face a cash
deficit in all three
The company months(Augustto October 2024).
balances are negative, indicating
Thee closing the need for an overdraft
facility of at
Rs. 3.22,500 to meet the requirements
least by October.

18.9 MANAGING AND INVESTING SURPLUS CASH

.
managing surplus cash effectively, businesses can strengthen their financial
grow strategically, and reduce risks.The
position, following ways help to use
excess
cash wisely:
.Deinvestment in the Business:Cash can be reinvested in the following ways:
Expansion and Improvement:
Surplus cash can be used to grow the
business by investing in new equipment,
expandingfacilities, or launching
new products,with potential tax benefits providing
additional savingson
equipment purchases.
Research and Development (R&D):
Investing in new products or
improving existing ones enhances competitiveness, with research and
development driving long-term growth and innovation.
Recruitment and Retentinn: Using funds to hire skilled
employees or
retain top talent helps the businessstay competitive and ensuresit
hasthe
right people forfuturegrowth.

2. Financial Restructuring: Tax-efficient restructuring, such as separating

business segments, can help manage cash more efficiently and reduce tax
burdens,providing flexibility in handling surpluscash while benefiting from
tax savings.

3. Paying Down Debt: Surplus cash can be used to pay offhigh-interest loans,
reducing financial risks, improving the company's balance sheet, and saving
money in the long run by lowering interest payments.

Investment Options

Ihebest way to invest surpluscash depends on businessgoals. Though it is advisable

to consult financial planners to create an investment plan that aligns with long-term
goals. following are some of thecommon investment options:

I. Interest-Bearing Accounts: Bank accounts like checking or sweep accounts

eam interest on thecash balance and allow casy accessto the money.
 18. 14 Entrepreneurship and
New
2. Treasury Bills and Notes: Safe government Venture
investments
and act assecurecash savings. provide Plunning

fixed
3. Certificates of Deposit (CDs) and Money Market incomc
Funds:
returns than regular savings accounts,providings These
steady
income ofler
better
4. Direct Equity:Investin stocks for potentially with
high \ow
returns, risk.
requiring market knowledge. though
risky
5. Mutual Funds: Funds managed by experts, with and
options
and investment goals are ideal for those who based on risk
do not have
investmnents. timetotolerance
6. Manage
Gold ETFs: Investin goldI without
owning physicalgold,
and protection against inflation. offering easy
liquidity
7. Liquid Funds: Invest in short-term debt with better
accounts, suitable for returns
short-term goals or than
to funds. emergencies due to savings
quick
access

QUESTIONS
1. What are the main components
of a cash flow
(Level:Remembering) statement?

2. Explain the difference

between liquidity and
cash managemernt. profitability in the context of
(Level:Understanding)
3 If a company
has a cash inflow of
Rs.350.000 for a month, Rs.500,000 and a cash
calculate its net cash outflow of
flow. Based on
recommendations would you give this, what
for managing
(Level:Applying) surplus cash?
4. Design a cash
management strategy for a small
fluctuations in revenue. business facing
Include steps for cash seasonal
expenses, and maintaining flow forecasting,
controlling
liquidity.
(Level:Creating)
5. Integrate
cash
management practices,
term investments, such as risk
into a management and short
strategy for a
downturn while company to survive an
positioning for future economic
(Level: growth.
Synthesizing)

MULTIPLE CHOICE
Which ofthe
QUESTIONS
following is a component
(a) Net Profit of acash
flow statement
(b) Cash Flow
from
OperatingActivities
(c) Revenue Growth
(d) Equity
Contributions
 18.15
from Operating
ash Flow Activities

e
objective of maintaining cash
swer:(b) primary
is the reserves?
# hat
profitability
a) Increase
market share
Enhance
unexpected expenses
Handle
(c) operational complexity
Reduce
unexpected expenses
(c)Handle
AnSWer: cash managementtechnique involves consolidatingfunds into a single
Which
3
account?

(a) Risk
Management
Cash
(b) Pooling
Cash Flow Forecasting
ic)

(d) Lockbox System

Cash
(b) Pooling
ApSwer:
for holding cash ensures a business can act on unexpected
WWhich motive
4.

pportunities?
Transaction Motive
(a)

Motive
(b) Precautionary

(c) Speculative
Motive
Motive
(d) Compensation
Motive
Answer: (c) Speculative
the benefit of using a lockbox system?
5 What is

(a) Reduces errors in cash management

satisfaction
(b) Improves customer

(c) Speeds up payment processing

reconciliations
(d) Ensuresdaily cash
processing
Answer:(c) Speeds up payment