Page 286 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Strategies for managing the cash conversion cycle:

1. Turnover inventory as quickly as possible without stockouts that will result in lost sales.
2. Collect accounts receivable as quickly as possible without losing sales from high-pressure
collection techniques.

3. Manage mail, processing and clearing time to reduce them when collecting from customers
and to increase them when paying suppliers.
4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.

Self Assessment

Fill in the blanks:
13. Accounts payable reduce the number of days a firm’s resources are tied up in ……………
cycle.

14. Under a ……………..funding strategy, the firm funds both its seasonal and its permanent
requirement with long-term debt.

13.6 Management of Marketable Securities

Management of marketable securities is an integral part of investment in cash as this may serve
both the purposes of liquidity and cash provided choice of investment is made correctly. As the
working capital needs are fluctuating, it is possible to park excess funds in same short-term
securities, which can be liquidated when need for cash is felt. The selection of securities should
be guided by three principles:
 Safety: Returns and risks go hand in hand. As the objective of this investment is ensuring
liquidity, minimum risk is the criterion for selection.
 Maturity: Matching of maturing and forecasted cash needs is essential. Prices of long-
term securities fluctuate more with changes in interest rates and are therefore, more risky.
 Marketability: It refers to the convenience, speed and cost at which a security can be
converted into cash. If the security can be sold quickly without loss of time and price, it is
highly liquid or marketable.
The choice of marketable securities is mainly limited to government treasury bills, deposits
with banks and inter-corporate deposits, units of Unit Trust of India and Commercial paper of
corporates are other attractive means of parking surplus funds for companies along with deposits
with sister concerns or associate companies.

Example: (On cash budget)

1. The following results are expected by XYZ Ltd. By quarter next year in thousands of
rupees:

Quarter
1 2 3 4
Sales 7,500 10,500 18,000 10,500
Cash Payments
Production Costs 7,000 10,000 8,000 8,500
Selling, administration and other costs 1,000 2,000 2,900 1,600
Purchase of plant and other fixed assets 100 1100 2100 2100

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