Synopsis of term

paper

[WORKING
PRASHANT
RT1809A10
CAPITAL MANAGEMENT
TYAGI ]
TOPIC: COMPARATIVE ANALYSIS OF CASH MANAGEMENT OF TATA
MOTORS……..

LEC. NEHA TIKOO

 Working capital management

INTRODUCTION
Cash management is a broad term that refers to the collection, concentration,
and disbursement of cash. It encompasses a company's level of liquidity, its
management of cash balance, and its short-term investment strategies. In some
ways, managing cash flow is the most important job of business managers. If at
any time a company fails to pay an obligation when it is due because of the lack of
cash, the company is insolvent. Insolvency is the primary reason firms go
bankrupt. Obviously, the prospect of such a dire consequence should compel
companies to manage their cash with care. Moreover, efficient cash management
means more than just preventing bankruptcy. It improves the profitability and
reduces the risk to which the firm is exposed.

Cash management is particularly important for new and growing businesses. As

Jeffrey P. Davidson and Charles W. Dean indicated in their book Cash Traps, cash
flow can be a problem even when a small business has numerous clients, offers a
superior product to its customers, and enjoys a sterling reputation in its industry.
Companies suffering from cash flow problems have no margin of safety in case of
unanticipated expenses. They also may experience trouble in finding the funds for
innovation or expansion. Finally, poor cash flow makes it difficult to hire and
retain good employees.

It is only natural that major business expenses are incurred in the production of
goods or the provision of services. In most cases, a business incurs such expenses
before the corresponding payment is received from customers. In addition,
employee salaries and other expenses drain considerable funds from most
businesses. These factors make effective cash management an essential part of
any business's financial planning. "Cash is the lifeblood of a [store]," wrote
Richard Outcalt and Patricia Johnson in Playthings. "Without cash for inventory,
payroll, and other expenses, an emergency is imminent."

When cash is received in exchange for products or services rendered, many small
business owners, intent on growing their company and tamping down debt,
spend most or all of these funds. But while such priorities are laudable, they
should leave room for businesses to absorb lean financial times down the line.
The key to successful cash management, therefore, lies in tabulating realistic
projections, monitoring collections and disbursements, establishing effective
billing and collection measures, and adhering to budgetary restrictions.
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Cash Collection and Disbursement

Cash collection systems aim to reduce the time it takes to collect the cash that is
owed to a firm. Some of the sources of time delays are mail float, processing float,
and bank float. Obviously, an envelope mailed by a customer containing payment
to a supplier firm does not arrive at its destination instantly. Likewise, the
payment is not processed and deposited into a bank account the moment it is
received by the supplier firm. And finally, when the payment is deposited in the
bank account oftentimes the bank does not give immediate availability to the
funds. These three "floats" are time delays that add up quickly, and they can force
struggling or new firms to find other sources of cash to pay their bills.

Cash management attempts, among other things, to decrease the length and
impact of these "float" periods. A collection receipt point closer to the customer
—perhaps with an outside third-party vendor to receive, process, and deposit the
payment (check)—is one way to speed up the collection. The effectiveness of this
method depends on the location of the customer; the size and schedule of their
payments; the firm's method of collecting payment; the costs of processing
payments; the time delays involved for mail, processing, and banking; and the
prevailing interest rate that can be earned on excess funds. The most important
element in ensuring good cash flow from customers, however, is establishing
strong billing and collection practices.

Once the money has been collected, most firms then proceed to concentrate the
cash into one center. The rationale for such a move is to have complete control of
the cash and to provide greater investment opportunities with larger sums of
money available as surplus. There are numerous mechanisms that can be
employed to concentrate the cash, such as wire transfers, automated
clearinghouse (ACH) transfers, and checks. The tradeoff is between cost and time.

Another aspect of cash management is knowing a company's optimal cash

balance. There are a number of methods that try to determine this magical cash
balance, which is the precise amount needed to minimize costs yet provide
adequate liquidity to ensure bills are paid on time (hopefully with something left
over for emergency purposes). One of the first steps in managing the cash
balance is measuring liquidity, or the amount of money on hand to meet current
obligations. There are numerous ways to measure this, including: the Cash to
Total Assets ratio, the Current ratio (current assets divided by current liabilities),

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the Quick ratio (current assets less inventory, divided by current liabilities), and
the Net Liquid Balance (cash plus marketable securities less short-term notes
payable, divided by total assets). The higher the number generated by the
liquidity measure, the greater the liquidity—and vice versa. However, there is a
tradeoff between liquidity and profitability which discourages firms from having
excessive liquidity.

Cash Management in Troubled Times

Many small business experience cash flow difficulties, especially during their first
years of operation. But entrepreneurs and managers can take steps to minimize
the impact of such problems and help maintain the continued viability of the
business. Suggested steps to address temporary cash flow problems include:

 Create a realistic cash flow budget that charts finances for both the short
term (30-60 days) and longer term (1-2 years).
 Redouble efforts to collect on outstanding payments owed to the company.
"Bill promptly and accurately," counseled the Journal of Accountancy. "The
faster you mail an invoice, the faster you will be paid.…If deliveries do not
automatically trigger an invoice, establish a set billing schedule, preferably
weekly." Businesses should also include a payment due date.
 Offer small discounts for prompt payment.
 Consider compromising on some billing disputes with clients. Small
business owners are understandably reluctant to consider this step, but in
certain cases, obtaining some cash—even if your company is not at fault in
the dispute—for products sold/services rendered may be required to pay
basic expenses.
 Closely monitor and prioritize all cash disbursements.
 Contact creditors (vendors, lenders, landlords) and attempt to negotiate
mutually satisfactory arrangements that will enable the business to
weather its cash shortage (provided it is a temporary one). In some cases,
you may be able to arrange better payment terms from suppliers or banks.
"Better credit terms translate into borrowing money interest-free," states
the Journal of Accountancy.
 Liquidate superfluous inventory.
 Assess other areas where operational expenses may be cut without
permanently disabling the business, such as payroll or goods/services with
small profit margins. "Every operation struggling for survival is losing
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money in some of its components," observed Outcalt and Johnson. you

probably noticed some places where cash was bleeding out of your
business without an adequate return. Plan to step the bleeding; that is—cut
out the losers."

Cash management services in TATA MOTORS

 Account Reconcilement Services: Balancing a checkbook can be a difficult
process for a very large business, since it issues so many checks it can take a
lot of human monitoring to understand which checks have not cleared and
therefore what the company's true balance is. To address this, banks have
developed a system which allows companies to upload a list of all the
checks that they issue on a daily basis, so that at the end of the month the
bank statement will show not only which checks have cleared, but also
which have not. More recently, banks have used this system to prevent
checks from being fraudulently cashed if they are not on the list, a process
known as positive pay.

 Advanced Web Services: Most banks have an Internet-based system which

is more advanced than the one available to consumers. This enables
managers to create and authorize special internal logon credentials,
allowing employees to send wires and access other cash management
features normally not found on the consumer web site.

 Armored Car Services (Cash Collection Services): Large retailers who

collect a great deal of cash may have the bank pick this cash up via an
armored car company, instead of asking its employees to deposit the cash.

 Automated Clearing House: services are usually offered by the cash

management division of a bank. The Automated Clearing House is an
electronic system used to transfer funds between banks. Companies use
this to pay others, especially employees (this is how direct deposit works).
Certain companies also use it to collect funds from customers (this is
generally how automatic payment plans work). This system is criticized by
some consumer advocacy groups, because under this system banks assume
that the company initiating the debit is correct until proven otherwise.

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 Balance Reporting Services: Corporate clients who actively manage their

cash balances usually subscribe to secure web-based reporting of their
account and transaction information at their lead bank. These sophisticated
compilations of banking activity may include balances in foreign currencies,
as well as those at other banks. They include information on cash positions
as well as 'float' (e.g., checks in the process of collection). Finally, they offer
transaction-specific details on all forms of payment activity, including
deposits, checks, wire transfers in and out, ACH (automated clearinghouse
debits and credits), investments, etc.

 Cash Concentration Services: Large or national chain retailers often are in

areas where their primary bank does not have branches. Therefore, they
open bank accounts at various local banks in the area. To prevent funds in
these accounts from being idle and not earning sufficient interest, many of
these companies have an agreement set with their primary bank, whereby
their primary bank uses the Automated clearing House to electronically
"pull" the money from these banks into a single interest-bearing bank
account.

 Lockbox - Retail: services: Often companies (such as utilities) which receive

a large number of payments via checks in the mail have the bank set up a
post office box for them, open their mail, and deposit any checks found.
This is referred to as a "lockbox" service.

 Lockbox - Wholesale: services: are for companies with small numbers of

payments, sometimes with detailed requirements for processing. This
might be a company like a dentist's office or small manufacturing company.

 Positive Pay: Positive pay is a service whereby the company electronically

shares its check register of all written checks with the bank. The bank
therefore will only pay checks listed in that register, with exactly the same
specifications as listed in the register (amount, payee, serial number, etc.).
This system dramatically reduces check fraud.

UNDER PROCESS………………….

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