Page 129 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes 2. When the three-month rolling projections indicate there may not be enough cash available
within one or more of the three forward months to cover expenditures, action can be taken
to delay expenditure commitments, accelerate revenue collection, or borrow, with the
choice depending on feasibility, costs, and borrowing constraints.
3. The operational cash management plan for the firm, for the month ahead, should ideally,
include a daily (or at least weekly) forecast of cash outflows and inflows. This cash
management plan should be prepared and updated at least every week.

Notes The operational monthly cash management plan is often translated into a monthly
cash limit set on some, or all, expenditures of individual departments.
Some organisations have put limits on certain sub aggregates. These cash limits are often seen
as being the way in which a “hard” budget constraint operates. But, as noted, as a means of
expenditure rather than cash control, cash plans on their own are ineffective when there is no
separate control over commitments, and often lead to a buildup of (unpaid) liabilities.
The cash plan assists in determining the realism of fiscal criteria or benchmarks for each month/
quarter. It can engender a sense of confidence among the authorities that they have cash control
and give them greater confidence that other important monetary targets (e.g., credit ceilings)
will be respected. Thus, to be viable, the targets included in an adjustment program should
always be supported by a cash plan that is updated to take into account the latest available
information on revenues collected, other receipts (including borrowing), and expenditure
committed and paid.
The continuous monthly updating of the cash plan should help in ensuring that the initial
budget targets will be met. When it is clear from the latest forecast available that targets may not
be met in the future or at the end of the year, measures will have to be taken to constrain
expenditure or to increase revenues. The cash plan can contribute to the decisions on the size,
type, and targeting of the measures required.

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Caselet Coming Out of Financial Pressures

rjun Rathore was a self employed professional in Jodhpur. While he had only
started a business of ethnic shoes, the government declared the new policy as a
Aresult of which, the credit would get squeezed. It went very harsh on Rathore,
given the lack of a properly maintained accounting system, due to which he was now to
face difficulty in borrowing from banks.

This resulted in Rathore’s seeking the support of unregulated lenders, who were charging
higher interests that would eventually squeeze Rathore’s profit margins. The only way
out was to manage the credit cycle and make proper cash planning.

Rathore met a chartered accountant named Holas Badheja who suggested him to aim at
reducing the credit period given to the buyer by raising the bill immediately upon delivery
and follow up meticulously till the payment was received. He suggested Rathore to also
attempt to collect some margin money upfront. Another way to cut borrowing cost was
awarding customers for prompt payment by giving competitive rates. This would also
help gain repeat orders.
Contd...

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