TECHNIQUES OF CASH

MANAGEMENT
(Cont’d)

JANEESHA V V
17/MBA/2021
 OTHER TECHNIQUES OF CASH MANAGEMENT

To minimise cash balances and to improve efficiency in cash

management, the cash manager has to undertake the following actions:

• Synchronize cash flows

• Accelerate cash collection
• Delay cash disbursements as much as possible without damaging the
firm’s credit rating or angering its suppliers
 SYNCHRONIZING CASH FLOWS

• The need for maintaining cash balances arises from the non
synchronization of the inflows and outflows of cash: if the receipts
and payment of cash perfectly coincide with each other, there would
be no need for cash balances.
• The first consideration in determining the cash balances is hence the
extent of synchronization of cash receipts and disbursements. For this
purpose, the inflows and outflows have to be forecast over a period of
time.
 ACCELERATING CASH RECEIPTS
• The finance manager should take steps for speedy recovery from debtors
• For this purpose proper internal control system, should be installed in the firm.
• Periodic statements should be prepared to show the outstanding bills.

Techniques to reduce the time banking and automated clearing houses are,
1. Lock Box system
2. Concentration Banking
3. Automated clearing Houses
4. Zero Balance Accounts
5. Wholly owned collection centre
6. Pre-authorized cheques
 DELAYING PAYMENTS (Managing Outflows or
Disbursements)
• A finance manager should try to slow down the payments as much as
possible.
• Care must be taken that goodwill and credit rating of the firm is not
affected.
Following techniques are used:
1. Centralised cash payments
2. Avoidance of early payments
3. Payment through cheques
4. Float Management
 OPTIMUM CASH BALANCE

• The aim of efficient cash management is to maintain an optimum level

of cash.
• The optimum level of cash is that level of cash at which there is a trade
off between cost of maintaining the cash surplus and cost of deficit
financing.
• It should be adequate enough to manage the contingencies and basic
cash requirements of the firm.
GRAPH- OPTIMUM CASH BALANCE
 CASH CONVERSION CYCLE

• The cash conversion cycle (CCC) is a metric that expresses the length
of time (in days) that it takes for a company to convert its investments
in inventory and other resources into cash flows from sales.
• This metric takes into account the time needed to sell its inventory, the
time required to collect receivables, and the time the company is
allowed to pay its bills without incurring any penalties.
 FORMULA FOR CASH CONVERSION CYCLE

• Cash conversion cycle = Operating cycle – Average payment period

• Operating cycle = Average inventory period + Average receivables period

i.e, Cash conversion cycle =

(Average inventory period + Average receivables period) – Average payment
period
 Example
• Sun Ltd purchases and sells entirely on credit basis. The credit allowed to it by
suppliers is 30 days and the firm allows 60 days to it’s customers. In actual
practice, the average of accounts payable is 40 days and that of accounts
receivables is 70 days. The average age of firm’s inventory is 90 days. Calculate
a)The firm’s Cash cycle
b)Cash turnover assuming 360 days in an year
Solution :
Cash conversion cycle = (Average inventory period + Average receivable
period) – Average payment period
= (90 + 70) – 40 = 120 days
Cash turnover = No. of days in an year/Cash cycle in days = 360/120 = 3 times
THANK YOU