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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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