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A Study On Cash Management On
A Study On Cash Management On
A Study On Cash Management On
Submitted by
J.SAKTHIPRIYA
REGISTER NO: 27348335
MRS.R.HEMALATHA M.B.A.
Faculty, Department Of Management Studies
Of
PONDICHERRY UNIVERSITY
PUDUCHERRY, INDIA
SEPTEMBER – 2007
SRI MANAKULA VINAYAGAR ENGINEERING COLLEGE
PONDICHERRY UNIVERSITY
BONAFIDE CERTIFICATE
EXTERNAL EXAMINER
1
2
TABLE OF CONTENTS
ACKNOWLEDGEMENT
ABSTRACT
LIST OF TABLE
LIST OF CHART
INTRODUCTION
1.1 Introduction of the Study
I 1.2 Profile of the Company 1
II REVIEW OF LITERATURE 8
IV RESEARCH METHODOLOGY 30
VII CONCLUSION 56
helped us in all our endeavors and for his blessings on us to make this project a
successful one.
I would like to express my profound gratitude to all those who have been
instrumental on the preparation of the project report I wish to place on deep sense of
Department Of Management Studies for her valuable guidance and inspiration extended
for his valuable guidance and inspiration extended all along the project.
I also wish my sincere thank to all the teacher and non-teaching staff of
Lastly, I wish to thank my parents and friends who supported and helped me in
FLAVORS INDIA (P) LTD”, the aim is to analyses cash position of the company by
and it is one of the component of working capital cash can be regarded as a life blood of
corporate. Cash either a hand or at bank is the most liquidity of all current assets. The
CHAPTER - I
INTRODUCTION
To study the practical work and collect information from the concern.
To compare the theoretical knowledge gained with practice in real life commercial
situation.
To analysis the balance sheet and profit & loss account of the year.
1.2.1Quality:
For the Flavors India with 30 years of standing, quality is the day to
success. Our plant has fully equipped quality control laboratories where the raw
materials, in process and finished products are rigorously tested for their quality
standards.
Our qualified manufacturing and technical personnel deal with material
handling, shop floor and production activities. We maintain stringent quality
control measure and hygienic condition as per the specification of Bureau of India
Standards. The research and development wing devotes its fulltime towards better
product development, cost .effective methods and new products.
The Flavors India (p) Ltd is an ISO 9001_2000 certified company
ensuring the quality systems practiced .with a commitment towards safe
environment we have development an efficient Effluent Treatment Plant fulfilling
the pollution control Board needs.
Our motto being “customer is our Boss” a good amount of time and skill is
put in and translated into action by formulating new products as demands by the
customers.
Our products command its reputation in the market for the past 3decades
and more in leading food processing companies throughout the country and
overseas.
Our customer service is always prompt and sure as the” sun –rises and sun set”
1.2.3 AWARDS:
The Flavors India (p) Ltd believes in the concepts of “the company as a
family “and “working together towards the future” with various welfare
programmes for the employees.
It was a moment of pride when government of puducherry bestowed on us
thrice the Good Industries Relations Award for the consecutive years 2001,
2002and 2003.
We promise to march towards the future with the same zeal and motive.
MANAGING DIRECTOR
FACTORY INCHARGE
INCOME
TAX ACCOUNTS
JUNIOR
SENIOR
ASSISTANT
1.2.6 FINANCE DEPARTMENT:
The accounts department of The Flavors India (p) ltd functions so as to keep as a
system record of the daily events of the business. It maintain records of all financial
transaction to find out the profit and loss according during the year and to financial status
of the company, which helps them to take quick and correct policy decision.
To determine the financial status of the company balance sheet, profit and loss
accounts.
To help the management to analyses the financial standard of the company so
that they can take quick correct decision.
To provide useful information to management.
Analysis the cash flow of the company it will useful for new ventures.
.
CHAPTER-II
REVIEW OF LITERATURE
A, TRANSACTION MOTIVES:
An important reason for maintain cash balance is the transaction motive. This refers to
the holding of cash to meet routine cash requirements to finance the transactions which a firm
carries on the ordinary course of business.
B, PRECAUTIONARY MOTIVES:
It will clearly determine the cash inflows and outflows in the ordinary course of business,
a firm may have to pay cash for purposes which cannot be predicted or anticipated.
C, SEPCULATIVE MOTIVE:
It refers to the desire of a firm to take advantage of opportunities which present
themselves at unexpected moments and which are typically outside the normal course of
business.
D, COMPENSATIVE MOTIVE:
Bank provides a variety of service of business firms, such as clearance of cheque, of
credit information, transfer of funds.
2.3 OBJECTIVE OF CASH MANAGEMENT:
The basic objective of cash management is two-fold.
To meet the cash disbursement needs (payment schedule) and.
To minimize funds committed to cash balance.
Meet payments schedule:
Firms have to make payments of cash on a continuous and regular basis to suppliers of
goods, employees. At the same time, there is a constant inflow of cash through collections from
debtors.
Minimizing funds committed to cash balance:
In minimizing the cash balance
B, SHORT COST.
Another general factor to be considered in determining cash needs is the cost associated
with a shortfall in the cash needs. The cash forecast presented in the cash budget would reveal
periods of cash shortages. In addition, there, may be some unexpected shortfall. Every shortage
of cash whether expected or unexpected- involves a cast depending upon the severity, duration
and frequency of the shortfall and how the shortage is covered.
TRANSACTION COSTS:
Transaction costs are associated with raising cash to tide over the shortage. This is
usually the brokerage incurred in relation to the sale of some short-tern near-cash assets such as
marketable securities.
BORROWING COSTS:
Borrowing costs associated with borrowing to cover the shortage. These include items
such as interest on loan, commitment charge and other expense relating to the loan.
E, PENALTY RATES:
Penalty rates by banks to meet a shortfall in compensating balances.
A, BAUMOL MODEL:
The purpose of this model is to determine the minimizing cost amount of cash that a
financial manager can obtain by converting securities to cash.
They are two elements
Conversion cost
Opportunity cost
CONVERSION COST:
Conversion costs are incurred each time marketable securities are converted into cash.
OPPORTUNITY COST:
Opportunity cost is derived from the cost\forfeited interest rate (i) that could have been
earned on the investment of cash balance.
I (c\2)
Where,
c\2= the average cash balance
(i)=interest rate that could have been earned.
i(c\2)+(Tb\c)
C, ORGLER’S MODEL:
According this model, an optimal cash management strategy can be determined through
the use of a multiple linear programme model. The construction of the model comprises three
sections
Selection of the appropriate planning horizon.
Selection of the appropriate decision variables and
Formulation of the cash management strategy itself.
The advantage of linear programming model is that it enables coordinates of the optimal
cash management strategy with the other operations of the firm such as production and with less
restriction on working capital balances.
The model basically uses one year planning horizon with twelve monthly periods because
of its simplicity. It has four basic sets of decisions variables which influence cash management of
a firm and which must be incorporated into the linear programming model of the firm. These are
Payment schedules.
Short-term financing.
Purchase and sale of marketable securities and
Cash balance.
The formulation of the model requires the financial managers first specify an objective
function and then specify a set of constraints.
Orgler’s objectives function is to minimize the horizon value to the net revenues from the
cash budget over the entire planning period; using the assumption that all revenues generated are
immediately re-invested and that any cost is immediately financed, the objective function
represented the value of the net income from the cash budget at the horizon by adding the net
returns over the planning period. Thus, the objective function recognizes each operation of the
firm that generated cash inflow or cash outflows as adding pr subtracting profit opportunities for
the firm from its cash management operations. In the objective function, decision variables
which cause inflows, such as payments on receivables, have positive coefficient.
The most important techniques of analysis and interpretation of cash management are us follows.
CASH FLOW STATEMENT.
CASH BUDGETING
RATIO ANALYSIS.
2 RATIO ANALYSES:
An analysis of financial statements based on ratios is known as ratio analysis. Ratio
analysis involves the process of computing determining and resenting the relationship of items or
group of items of financial statements. Ratio analysis is a widely – used tool of financial
analysis. It can be used to compare the risk and return relationship of firms of different sizes. It is
defined as the systematic use of ratio to interpret the financial statements so that the strengths
and weaknesses of a firm as well as its historical performance and current financial condition can
be determined. The term ratio refers to the numerical or quantitative relationship between two
items.
SIGNIFICANCE:
Working capital measures the effective utilization of working capital. It also
measures the smooth running of business. Net working capital represents the excess of
current assets over current liabilities. The term current assets refers to assets which in the
normal course of business get converted into cash without dimunition in value over a
short period ,usually not exceeding one year or length of operation cycle whichever is
more. The greater is the amount of net working capital, the greater is the liquidity of the
firm, accordingly net working capital is a measure of liquidity, and inadequate working
capital is the first sign of financial problem for a firm.
COMPONENTS:
The components of working capital ratio are current assets and current liabilities.
FORMULA:
This ratio is calculated with the help of the following formula.
Net Work capital = current assets - Current liabilities
MEANINGS:
This ratio expresses the relationship between current assets and current liabilities.
SIGNIFICANCE:
The liquidity position of any company is easily measured with the help of current ratio.
The current ratio is the ratio of total current assets to total current liabilities. It’s
calculated by divided current assets by current liabilities.
The current assets of a firm, as already stated, represent that asset which can be, in
the ordinary course of business, converted into cash within a short period of time
normally not exceeding one year.
COMPONENTS:
The components of currents assets of the firm are cash at bank, deposits, sundry debtors
and closing stock. The components of current liabilities are sundry creditors and provision for
Income Tax.
FORMULA:
Current ratio = Current assets
Current Liabilities
MEANINGS:
This ratio determines the debtors constitute of current assets and therefore the quality of
debtors to great extent determines a firm’s liquidity.
SIGNIFICANCE:
This ratio helps in cash budgeting since the flow of cash from customers can be worked
out on the basis of sales. It is determine by dividing the net credit sales by average debtors
outstanding during the year. Thus, net credit sales consist of gross credit sales minus returns, if
any, from customer’s average debtors is the simple average of debtors (including bills
receivables) at the beginning and at the end of the year
COMPONENTS:
The components of Debtors Turnover Ratio are the Credit Sales and the Average Accounts
Receivable.
FORMULA:
Debtors’ turnover ratio = Credit sales
Average Accounts Receivables
MEANINGS:
This ratio indicates whether investment in inventory is efficiently used or not. It therefore,
explains whether investments in inventories is within proper limits
B SIGNIFICANCE:
The ratio is measure to discover the possible trouble in the form of overstocking
or overvaluation. The stock position is known as the graveyard of the balance sheet It is
computed by divided the cost of good sold by the average inventory thus, the cost of
good sold means sales minus gross profit. The average inventory refers to the simple
average of the opening and closing inventory. The ratio indicated how fast inventory is
sold.
COMPONENTS:
The component of Stock Turnover Ratio is determined by the Cost of Goods Sold during the
Year and the Average Inventory.
FORMULA:
MEANING:
The ratio expresses the relationship between liquid assets and current liabilities of the
firm. It is otherwise known as absolute liquid ratio or quick ratio.
SIGNIFICANCE:
It is a measure of judging the immediate ability of the firm to pay – off its current
obligations. The quick test ratio is the ratio between quick current ratio and current
liabilities and is calculated by dividing the quick assets by the current liabilities.
The term quick assets refers to current assets which can be converted into cash
immediately or at a short notice without diminution of value
COMPONENTS:
All the components of current assets are included except stock and prepaid expenses and
the various components of currents liabilities are same as the items included in current ratio.
FORMULA:
Liquid ratio can be calculated as follows.
Liquid Ratio = Liquid assets
Current Liabilities
3 CASH BUDGETING:
A firm is well advised to hold adequate cash balance but should avoid excessive balances.
The firm has, therefore, to assess its need for cash properly. The cash budget is probably the most
important tool in cash management. It is device to help a firm to plan and control the use of cash.
It is a statement showing the estimated cash inflows and cash outflows over the planning
horizon. In the other words, the net cash position of a firm as it moves from one budgeting sub
period to another is highlighted by the cash budget.
Cash budgeting or short-term cash forecasting is the principal tool of cash management.
Estimating cash requirement
Planning short-term financing
Scheduling payments in connection with capital expenditure projects
Planning purchase of materials
Developing credit policies and
Checking the accuracy of long term forecasting
Firms use multiple short-term forecasts of varying length and detail, suited to meet different
needs. The commonly used design for short –term cash forecasts are
One year divided into quarters or monthly.
One quarter divided into months and
One month divided into weeks.
Prior to the project, the billing process was distributed across different product processors
like (those handling cross border transfer, non resident yen related, mass payments, through post
office etc). Wipro’s solution aims to implement a centralized billing system that maximizes
automation.
The transaction details would be pushed from the product processors to the billing system
as an end of day offline process, which will then calculate the charges based on the transaction
type and generate accounting entries. At the end of the billing cycle, customer invoices would be
generated by the system and the customer account debits will take place in the bank host.
Customer information and charge information (fixed, transaction and event based) are
maintained in the billing system. For transactions that require immediate charge calculation, the
billing system's pricing engine would provide the charges in real time.
2.8 CASH MANAGEMENT SYSTEM FOR A NATIONALIZED BANK
The Bank has its Corporate Office in Bangalore and International transaction center at
Mumbai. The realization of cheque or any cash transactions required a couple of days. This delay
leads to a situation where the Bank was not in a position to get at its head office the transaction
happened at each of its branches or extension counters at.
The head office and the International transaction office faced numerous problems in
terms of managing the cash at various locations. The customers also could not really track the
transaction especially if they are more than one transaction at different places. The Bank thought
of an ambitious program of offering Cash Management Services to its customers across the
country The Customer deposit their cheque at various Cheque Collection Center’s (CCC) across
the country and this information is processed and consolidated at the Fund Management Centre
(FMC) located at Mumbai. The FMC will further communicate the processed information to
various Fund Collection Centre (FCC). The Customers can contact directly the Fund Collection
Centre (FCC) to obtain updated information about their funds position as required
CHAPTER-III
To assess the liquidity and short term solvency position of the firm.
To understand the relationship maintained with the trade creditors and the debtors of the
firm.
To identify the basic forces influencing the cash management of the firm.
CHAPTER-IV
RESEARCH METHODOLOGY
The research approach used for the study is descriptive. The form of the study is on the
financial statement analysis in general and specific to the cash position.
PRIMARY DATA:
The primary data is collected from the personnel interview.
SECONDARY DATA:
The study has been made using secondary data, which are obtained from annual reports
and statements of accounts. The study is period for the annual reports and statements of accounts
extended form the year 2001-02 to 2005-06.
CHAPTER-V
A cash flow statement is used in conjunction with the other financial statements,
provides information that enables users to evaluate the change in net assets of an
enterprise, its financial structure (including its liquidity and solvency), and its ability to
affect the amounts and timing of cash flow in order to adapt to changing circumstance
and opportunities. Cash flow information is useful in assessing the ability of the
enterprises to generate cash and cash-equivalents and enables users to develop models to
assess and compare the present value of the future cash flows of different enterprises. It
also enhances the comparability of the reporting of operating performance by different
because it eliminates the effects of using different accounting treatments for the same
transactions and events.
TABLE NO-5.2
CLOSING BALANCE
Cash in Hand 6266
TOTAL APPLICATION
AVAILABLE 4856233 4451797 443130
OPENING BALANCES
SOURCE OF CASH
APPLICATION OF CASH
CLOSING BALANCE
TABLE NO-5.4
TABLE NO-5.5
OPENING BALANCES
SOURCE OF CASH
APPLICATION OF CASH
CLOSING BALANCE
TABLE NO-5.6
INTERPRETATION:
The above table explains that the beginning of the (2001-02) opening balance is
in0.61 but in the other year it reduced gradually. So the concern should take
necessary step to overcome the default.
The borrowing of concerns high in the year 2003-04 at 1.26 it indicates that the
concern uses more loan. The concern should reduce to borrow the money from the
various resources. It leads to take more advantage to the borrowers.
The closing balance is not high than the opening balance .it indicates that the cash
is not properly managed in the concern.
A firm is well advised to hold adequate cash balance but should avoid excessive
balances. The firm has, therefore, to assess its need for cash properly. The cash budget is
probably the most important tool in cash management. It is device to help a firm to plan
and control the use of cash. It is a statement showing the estimated cash inflows and cash
outflows over the planning horizon. In the other words, the net cash position of a firm as
it moves from one budgeting sub period to another is highlighted by the cash budget
CASH BUDGET
TABLE NO – 5.7
CHART NO –5.1
INTERPRETATION:
In the above table it clearly determines the availability of the cash balance in the
subsequent year. It will clearly determine the minimum cash balance requirement of the
concern. In the 2005-06 leads to higher need of cash balance 11.62 lakhs. The cash
balance is highly required for the day- to day transaction.
Net working capital represents the excess of current assets over current liabilities.
The term current assets refers to assets which in the normal course of business get
converted into cash without dimunition in value over a short period ,usually not
exceeding one year or length of operation cycle whichever is more. The greater is the
amount of net working capital, the greater is the liquidity of the firm, accordingly net
working capital is a measure of liquidity, and inadequate working capital is the first sign
of financial problem for a firm.
FORMULA:
TABLE NO-5.8
Interpretation:
This ratio indicates there is lower amount required in the working capital. The
higher amount is in the year 2001-02 at 59.03. It will clearly determine the firm is in
liquidly position but this is reducing gradually. The financial manager should
concentrated more on the working capital as it is not satisfactory.
The current ratio is the ratio of total current assets to total current liabilities. It’s
calculated by divided current assets by current liabilities.
The current assets of a firm, as already stated, represent that asset which can be, in the
ordinary course of business, converted into cash within a short period of time normally
not exceeding one year.
FORMULA:
CURRENT RATIO
TABLE NO-5.9
Interpretation:
The company is highly efficient is short – term solvency position. The company
should maintain this current ratio. The concern should concentrate on 2005-06 year
current ratio position.
FORMULA:
TABLE NO-5.10
Chart no.5.4
Interpretation:
The liquidity position is not near to the standard ratio. The concern should clearly
determine the various liquidity position of the concern.
FORMULA:
Chart no.5.5
Interpretation:
The inventory turnover is increasing gradually to the period of the year. It will
clearly determine the capacity of the concern
FORMULA:
Interpretation:
The debtor’s turnover ratio is not in the concert way in the concern. The higher
ratio is in the year 2001-02 is 6.90. The past performance is clearly determining the
various formation of the concern.
FORMULA:
TABLE NO-5.13
Interpretation:
The creditor’s availability of the concern keeps on decrease in the year. It will
clearly determine in the year 2001-02 2.42.
CHAPTER-VI
The various suggestions are followed after analyzing the main finding of this study.
The cash management of the company is failed to strengthen the cash position so
the company so required to table steps to improve the cash position by
concentrating on receivables, inventories avoiding to much on borrowings.
The company failed to manage the receivable in the normal level because of poor
performance of the collection procedure and inefficient performance related with
managing the receivables.
The inventories play a major role in production. So, the concern should take
measure to maintain the inventories that are required to in order reduce the e cost,
and keep the production flow continuously.
In 2005-06 the net profit is increased compare to the other four year. So the
concern should maintain the same position to improve the net profit.
The cash and bank balance indicate high liquidity position of a company, The
Flavors India (p) Ltd maintain cash including bank balance is at a optimum level
and it is enough to meet day to day requirement.
CHAPTER-VII
CONCLUSION
Analysis and Interpretation of the financial data of The Flavors India (p) ltd,
ascertain the cash position of the firm. The results explores that the firm is unable toe
meet its short term obligations.
The concern should reduced the long term loan and obtain the profit.
The concern should take various measures to increase the net profit.
CHAPTER-VIII