CASH MANAGEMENT

Sources of Cash:

Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash!)

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit.

Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-

stretch the financial resources of the business. This is called overtrading.

Early warning signs include:

Pressure on existing cash

Exceptional cash generating activities e.g. offering high discounts for early

cash payment

Bank overdraft exceeds authorized limit.

Seeking greater overdrafts or lines of credit

Part-paying suppliers or other creditors

Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing

 Frequent short-term emergency requests to the bank (to help pay wages,

pending receipt of a cheque).

CASH MANAGEMENT IN NTPC :

The cash management system followed by the NTPC is mainly lock box

system.

Cash Management System involves the following steps:

1. The branch offices of the company at various locations hold the collection of

cheques of the customers.

2. Those cheques are either handed over to the CMS agencies or bank of the

particular location take charge of whole collection.

3. These CMS agencies or bank send those cheques to the clearing house to

make them realized. These cheques can be local or outstation.

4. The CMS agencies or bank send information to the central hub of the

company regarding realization/cheque bounced.

5. The central hub passes on the realized funds to the company as per the

agreed agreements.

6. The CMS agencies or concerned bank provides the necessary MIS to the

company as per requirement.

In cash management the collect float taken for the cheques to be realized into cash is

irrelevant and non-interfering because banks such as Standard Chartered, HDFC and

CitiBank who give credit on the basis of these cheques after charging a very small

amount. These credits are given to immediately and the maximum time taken might be

just a day. The amount they charge is very low and this might cover the threat of the

cheque sent in by two or three customers bouncing. Even otherwise the time taken for

the cheques to be processed is instantaneous. Their Cash Management System is quite

efficient.

Cash-Current Liability

Particulars 2008 2007 2006

Absolute Liquid 0.24: 0.31: 0.11:

Ratio 1 1 1

The absolute liquid ratio is the best for three years and the cash balances as to the

current liability has improved for the firm. Firm has large resources in cash and bank

balances. While large resources in cash and bank balances may seem to affect the

revenue the firm could have earned by investing it elsewhere as maintenance of current

assets as cash and in near cash assets and marketable securities may increase the

liquidity position but not the revenue or profit earning capacity of the firm.

Dividend Policy-Cash

Particulars 2008 2007 2006

Dividend 210 310 400
Policy%
Shift in Sales 154295 199886 238136
Cash Balance 4463.4 14582.6 14529.2

3 5 9
Cash in Hand 118.33 128.97 128.97

Dividend Policy %
450
400
350
300
250 Dividend Policy %

200
150
100
50
0
2004 2005 2006
 CASH BALANCE
16000

14000

12000

10000 Cash Balnce

Cash in hand
8000

6000

4000

2000

0
2004 2005 2006

Shift in Sales
300000

250000

200000
Shift in Sales
150000

100000

50000

0
2004 2005 2006

The other notable feature in NTPC statements has been the growing

dividend policy of the firm. The payment of dividend means a cash outflow.
Thus cash position is an important criterion at the time of paying dividends.

There is a theory that greater the cash position and ability to pay dividends.

The firm has adopted a policy of disbursing the revenue earned as profits to

the shareholders as dividends as could be seen from the increasing % of

dividends declared.

Particulars 2008 2007 2006

PBIDT 1428 1563 1452

4 4 3
Equity Dividend% 400 310 210

This could mean two things for the firm the amount of cash retained in the

business for capital expenditure purposes are minimal or nil. But rather than

investing more in plant and machine which they can at any point in time by

adding on a additional line if need they would like to optimize their

utilization in fixed assets at present. This also means that the percentage of

cash in hand maintained by the firm as a source of liquidity could be

reduced, i.e. the amount of idle cash in the business could be made to a level

which the firm feels optimum.

The firm feels that they should retain cash and it would be in the interest of

the firm as well as the shareholders. This would automatically mean as

decrease in Earning/share (EPS)(Basic EPS declined from 8 in 2005 to 6.74

 in 2006). It would prompt more of investors being interested in the shares of

the company, which would boost the purchase of the securities and increase

the market price/share thus being beneficial for the firm.

Cash Flows

Cash Flows 200 2007 2006

8
Net Cash from Operating 692 2675.57 13706.3

activities 4 4
Net Cash from Investing - 15661.2 -2169.16

activities 351 9

5
Net Cash from Financing - -8217.68 -11412.1

activities 351

The firm has disposed of investments worth around 655 Crores to meet its

growing needs. The other notable feature is decline is the firm’s inflows

from operations primarily due to the reason that the cash generated from the

operations is the lowest in three years. And the firm’s growing dividend

policy has contributed to the outflows in financing activities.

Cash Flow in Operating Activities

 Working Capital Changes

Working Capital Changes 2008 200 200

7 6
Trade and other receivables -14166 -14510.69 -7106.68
Inventories -5221 -2683.92 -7221.11
Trade Payables and other Liabilities 13026 6419.13 14311.5

The cash from the operation has been subject to considerable change due to

the changes that could be adjusted towards trade receivables and trade

payables. The outflows in inventory have become as low as 37% of what it

was last year despite an increase in the inventory consumption by 16.64%.

The resulting reduction in the cash outflows might be because of the

inventories being procured more on credit. That the cash from operations has

declined has affected the current liability index of the firm.

Cash Flow in Investing Activities

Investments in Mutual 200 200 2004

Funds 6 5
Investments (year end) 13539 12277.44 28059.88
Purchase of Investment -65992 -53075.99 -59249.81
Disposal/Redemption of 65312 65489.84 52087.36

Investment

The investments have reduced from the last year due to the redemption of investments

taken place to meet various needs such as increasing demand in stock or inventory and
to ensure better credit and receivables policy. We can see that the firm has in these

three years increased their cash inflow from the investing activities by way of disposal

of investments when in need. That is the firm has redeemed to realize cash as to meet

its expanding operations, fund the inventory procurement and meet the obligations.

The investments in mutual funds are beneficial to the firm in the context that they

contain interest bearing securities which add up as a source of revenue for the firm

unlike cash which remains idle and unproductive when not in use. This reduction of

dividend could be attributed to disposal of investments in mutual funds and subsidiary.

This disposal creates a fund, which can be used by the company as and when the need

arises.

Cash vs. Marketable Securities

The investment in marketable securities rather than having large cash balances in

something that has been given thought for by the firm. This is because while a firm

gets revenue in the form of interests by investments, it actually has to pays certain

amount money to the banks for maintaining current accounts and fixed deposits

usually have a longer maturity period. That is, the problem with high investments is

that the opportunity to earn is lost, thus a firm has to maintain an optimal cash balance.

But the investment in mutual funds or other marketable securities might create a

problem of investment, as they might not be readily realizable as say liquid cash or the
amount deposited in the current account. The investments in say fixed assets say may

earn a fixed rate of interest but they have a maturity period attached to them.

In NTPC, Standard Chartered is the concentration bank in which all the inflows from

the deposit banks are concentrated and passed on to the disbursement banks for further

disbursement.

Liquid Cash Balance

The liquid cash maintained in the business is only that much as is required to satisfy

the daily requirements of the firm and not more. The rest of the cash is invested into

mutual funds and also held in fixed deposits and current accounts.

Instruments Used

The instrument used here are primarily cheques comprising of around 97% of what is

used in. The rest 2-3% comprise of the letters of credit.

Thus working capital is the lifeline for every business. The main advantages of

sufficient working capital are:

 It helps in prompt payment

 Ensures high solvency in the company and good credit standing.

 Regular supply of material and continuous production.

 Ensures regular payment of salaries and wages and day to day

commitments.
RECEIVABLES MANAGEMENT

Cash flow can be significantly enhanced if the amounts owing to a business are

collected faster. Every business needs to know.... who owes them money.... how

much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business; in particular on small businesses

whom can least afford it. If you don't manage debtors, they will begin to manage your

business as you will gradually lose control due to reduced cash flow and, of course,

you could experience an increased incidence of bad debt.

The following measures will help manage your debtors:

1.Have the right mental attitude to the control of credit and make sure that it gets the

priority it deserves.

2.Establish clear credit practices as a matter of company policy.

3.Make sure that these practices are clearly understood by staff, suppliers and

customers.

4.Be professional when accepting new accounts, and especially larger ones.

5.Check out each customer thoroughly before you offer credit. Use credit agencies,

bank references, industry sources etc.

6.Establish credit limits for each customer and stick to them.

7.Continuously review these limits when you suspect tough times are coming or if
 operating in a volatile sector.

8.Keep very close to your larger customers.

9.Invoice promptly and clearly.

10.Consider charging penalties on overdue accounts.

11.Consider accepting credit /debit cards as a payment option.

12.Monitor your debtor balances and aging schedules, and don't let any debts get too

old.

Recognize that the longer someone owes you, the greater the chance you will never

get paid. If the average age of your debtors is getting longer, or is already very long,

you may need to look for the following possible defects.

 Poor collection procedures.

 Lax enforcement of credit terms.

 Slow issue of invoices or statements.

 Errors in invoices or statements.

 Customer dissatisfaction.

 Weak credit judgement.

Debtors due over 90 days (unless within agreed credit terms) should generally

demand immediate attention. Look for the warning signs of a future bad debt. For

example…..
1. Longer credit terms taken with approval, particularly for smaller orders.

2. Use of post-dated checks by debtors who normally settle within agreed terms.

3. Evidence of customers switching to additional suppliers for the same goods.

4. New customers who are reluctant to give credit references.

5. Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many reasons and

therefore put on the long finger because they convince themselves that there is

something more urgent or important that demand their attention now. There is

nothing more important than getting paid for your product or service. A customer

who does not pay is not a customer.

Here are few ways in collecting money from debtors: -

 Develop appropriate procedures for handling late payments.

 Track and pursue late payers

 Get external help if you own efforts fail.

 Don’t feel guilty asking for money .. its yours and you are entitled to it.

 Make that call now. And keep asking until you get some satisfaction.

 In difficult circumstances, take what you can now and agree terms for the

remainder, it lessens the problem.

 When asking for your money, be hard on the issue – but soft on the person. Don’t

give the debtor any excuses for not paying.

 Make that your objective is to get the money, not to score points or get even.