Page 292 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes  Management of marketable securities is an integral part of investment in cash. The selection
of securities should be guided by three principles which are Safety, Maturity and
Marketability.
13.8 Keywords

Cash: It is one of the components of current assets and a medium of exchange for the purpose of
transactions.

Cash Budget: It is a statement showing the estimated cash inflows and cash outflows over a
planning period.
Conversion Costs: It is the costs that are associated with the sales of marketable security.

Float: It is the amount of the money tied up in cheques that have been written but not yet
collected.
Optimal Cash Balance: It is that cash balance where the firm’s opportunity cost equals
transactions cost and the total cost is minimum.

13.9 Review Questions

1. Explain the Baumol’s Model of Cash Management.
2. Write short notes on Lock box system and Concentration banking.

3. What is the difference between the firm’s operating cycle and its cash conversion cycle?
4. Why it is helpful to divide the funding needs of a seasonal business into its permanent and
seasonal funding requirements when developing a funding strategy?

5. What are the benefits, costs and risks of an aggressive funding strategy and of a conservative
funding strategy? Under which strategy is the borrowing often in excess of the actual
need?
6. “Cash budgeting or short-term cash forecasting (budgeting) is the principal tool of cash
management.” Discuss.

7. “Efficient cash management will aim at maximizing the cash inflows and slowing cash
outflows”. Discuss.
8. Briefly discuss the various avenues or opportunities available to the companies to park
their surplus funds for a short-term.
9. Analyse the importance of the preparation of the cash budget for the corporates.
10. “Management of cash flows plays a very important role in cash management”. Discuss.

Answers: Self Assessment
1. Speculative 2. organizational structure 3. Cash budget
4. cash flow 5. Lock-box 6. concentration banking
7. ledger 8. net float 9. carrying

10. transaction 11. surplus 12. currency
13. operating 14. conservative 15. Safety
16. Marketability

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