Page 189 - DMGT409Basic Financial Management

Basic Financial Management

Notes
Upper Control Limit

Purchase of securities
Cash (Rs.) Return point

Sale of securities
Lower Control Limit
Time

The following formula is used to determine the spread between UCL and LCL (called Z) as per
MO model.

(
ZRP )= 3 3Cσ 2 + LCL or ⎛ ⎜ 3 × Cσ 2 ⎞ ⎟ 13 + LCL
4O ⎝ 4 O ⎠
Where,
Z = Control limit of cash balance (or) return point

C = Transaction cost
σ = Variance of net cash fl ow
LCL = Lower control limit
O = Opportunity cost or interest rate earned on marketable security

Case Study Bajaj Electronics: Cash Forecasting
T his case tests the reader’s ability to develop a basic cash forecast for a fi rm and
prepare a recommendation for backup financing over a period of 12 months.

A leading producer of telecommunications components and a major contender in
shorter antennas is Bajaj Electronics Company. Bajaj’s business has grown tremendously
in recent years despite increased competition. The primary reasons for increased growth
are technological advancement that have expanded production capacity, an aggressive
marketing effort, and a reputation for quality products and excellent service.
Loofer the financial analyst for the company, has been assigned the task of preparing a

quarterly cash forecast for the next fiscal year. After checking with marketing, he was given
a monthly breakdown of actual sales for last month and the current month and the current
month and a forecast for the next 12 months. These are given in Table 1 and refl ect the

somewhat seasonal nature of the firm’s marketing activities.

Contd...

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