Page 157 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Being a huge organization, the majority of IOCL’s transactions took place through
e-collections and while the rest were through instruments i.e. cheques, demand drafts,
letters of credit, etc. A very few were in cash with a negligible amount being involved. SBI
provided for a completely customized SBI FAST (CMP) facility to IOCL. The project
pioneered, initiated, and implemented by IOCL was the largest fully automated B2B
implementation in India. This project helped the company make exchanges happen
throughout the length and breadth of the country and connect to all suppliers and the
stakeholders.

Banking Arrangements
There were two collection modes in IOCL: Non E-Collection Modes and E-Collection
Modes. With Internet banking becoming a necessity in the business world, IOCL with the
help of its bankers introduced the concept of E-collections within its working environment.
Indian Oil Corporation, as stated earlier, had a centralized collection system whereas its
payment mechanism was totally decentralized, i.e. Funds would flow through all the
regional offices or state offices to the Head Office.

Cash Flow Forecasting
A key element of cash management involved projections of inflows and outflows of cash
by the corporation. It also required constant updating on a day-to-day basis for ensuring
effective fund management.
Projections were done in two stages:
Monthly: by the 7th of every month

Rolling: by the 22nd of every month for the next month.
For effective forecasting, managers at IOCL required credible information from multiple
sources. The process of cash flow forecasting was on a daily/monthly basis, and employed
forecasting by three months moving average, forecasting by OCC seasonal index, and
forecasting by five years’ trend analysis.

Though IOCL used a centralized collection system, it had a decentralized payment system.
In early 2011, it started a centralized payment system but restricted it to employee payments.
However, IOCL had plans to eventually centralize the whole payment system.
Questions
1. Discuss the about IOCL and its organization structure.
2. Explain the banking arrangements.

3. Explain the Cash Flow Management and Cash Budgeting in IOCL.
Source: http://www.icmrindia.org/casestudies/catalogue/Finance/FINC075.htm

9.4 Summary

To execute, collect receivables and manage liquidity, efficient cash management processes
are mandatory.
CMS is a mechanism to efficiently handle cash flow in order to cut-down risks, minimize
costs and maximize profits. Generally Cash Management constitutes integrated collection,
payments, liquidity management, and receivables functions.
Cash management is a term which pertains to the collection, concentration, and disbursal
of cash.

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