Page 118 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 7: Cash Management

Questions Notes
1. Draw the monthly report giving the real picture about:
(a) Total Cheques Written
(b) Average Cash Balance

2. For how many days, the firm have negative cash balance and also mention the day
of week, which has highest level of deposit and highest level of cheques written?

Source: Sudhindra Bhat, Financial Management – Principles and Practice, Excel Books
Self Assessment

Fill in the blanks:

8. ............................ is the cash flow generated from internal operations.
9. ............................ is the cash to and from external sources.
10. After estimating the cash flows, efforts should be made to adhere to the estimates of
............................ and ............................ of cash.
11. When firms hold cash in currency or in non-interest-bearing accounts, they obtain no
direct return on their ............................

7.4 Approaches to Determine an Optimal Cash Balance

There are basically two approaches to determine an optimal cash balance namely,
1. Preparing cash budget
2. Minimizing cost models.

7.4.1 Cash Budget

Cash budget is the most important tool in cash management. A cash budget is an estimate of
cash receipt and disbursements of cash during a future period of time. In the work of Soloman
Ezra, a cash budget is an analysis of flow of cash in a business over a future, short or long period
of time. It is a forecast of expected cash intake and outlay. It is a device to plan and control and
use of cash. This cash budget pin points the period when there is likely to be excess or shortage
of cash. Thus a firm by preparing a cash budget can plan the use of excess cash and make
arrangements for the necessary cash as and when required.

The cash receipts from various sources are anticipated. The estimated cash collections for sales,
debts, bill receivables, interests, dividends and other incomes and sale of investments and other
assets will be taken into account. The amounts to be spent on purchase of materials, payment to
creditors and meeting various other revenue and capital expenditure need should be considered.
Cash forecasts will include all possible sources from which cash will be received and the channels
in which payments are to be made so that a consolidated cash position is determined.

7.4.2 Models

Different analysts have developed and presented are different models to determine the optimum
cash balance with a firm. Let us see a few of them.

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