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Unit 11: Cash Management




          Illustration 1: From the following information prepare cash budget for VSI Co. Ltd.:  Notes

           Particulars                 Jan        Feb        March          April
           Opening cash balance       20,000
           Collection from customer  1,30,000    1,60,000    1,65,000      2,30,000
           Payments:
               Raw materials purchase  25,000     45,000      40,000        63,200
               Salary and wages      1,00,000    1,05,000    1,00,000      1,14,200
               Other expenses         15,000      10,000      15,000        12,000
               Income tax             6,000        ----        ----          ----
               Machinery               ----        ----       20,000         ----
          The firm wants to maintain a minimum cash balance of ` 25,000 for each month.  Creditors are

          allowed one-month credit.  There is no lag in payment of salary, other expenses.
          Solution:

                                 Cash budget for the period Jan to April (`)
                    Particulars          Jan         Feb         March        April
           Opening cash balance         20,000      29,000       49,000       34,000
           Cash collection from customer  1,30,000  1,60,000     1,65,000    2,30,000
            (A) Total receipts          1,50,000    1,89,000     2,14,000    2,64,000
           Payments :
                 Raw materials           ----       25,000       45,000       40,000
                 Salary                 1,00,000    1,05,000     1,00,000    1,14,200
                 Other expenses         15,000      10,000       15,000       12,000
                 Income tax              6,000       ----         ----         ----
                 Machinery               ----        ----        20,000        ----
            (B) Total payments          1,21,000    1,40,000     1,80,000    1,66,200
           Closing Balance (A – B)      29,000      49,000       34,000       97,800

          11.5 Managing Cash Flows

          After estimation of cash flows, then the next financial manager’s job is to ensure that there should



          not be more deviation between the projected cash flows and the actual cash flows, for that effi cient

          cash management is must. That financial manager will have the control on collection of receipts

          and cash disbursements. As the objectives of cash management is to accelerate cash receipts as
          much as possible and decelerate or delay cash payments as much as possible.  In other words,
          the various collection and disbursement methods can be employed to improve cash management

          efficiently constitutes two sides of the same coin. Both collections and disbursements exercise a

          joint impact on the overall efficiency of cash management. The idea is that speed collection of

          accounts receivables so that the firm can use money sooner; otherwise, it has to borrow money,

          wherein costs are involved. Conversely,  firm wants to pay accounts payables late without

          affecting credit standing with suppliers, so that firm can make use of the money it already has.

          Hence, for efficient cash management firm has (A) to collect accounts receivables as early as

          possible, and (B) it has to delay the accounts payables without affecting credit standing.
          11.6 Computation of Optimum Cash Balance
          A firm has to maintain optimum cash balance. Optimal cash balance is that cash balance where

          the firm’s opportunity cost equals to transaction cost and the total cost are minimum.  Then how

          to determine optimum cash balance?



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