Page 265 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 2. Cash Turnover = the assumed number of days in a year divided by the cash cycle = 365/
120= 3.04

Example: The under mentioned facts are available:
1. Cash turnover rate 4.5
2. Annual cash outflow 175,000

3. Accounts payable can be stretched by 20 days
What would be the effect of stretching accounts payable on the minimum operating cash
requirement?

Assuming the firm can earn 8% on its investments, what would be the saving on cost?
Solution: Cash turnover 4.5 i.e., 360/4.5 i.e., 80 days and annual cash outflow 175,000 hence cash
requirement = 175000/4.5 = 38,889.

With accounts payable stretching by 20 days, cash cycle will be 80+20 days i.e., 100 days, cash
turnover 360/60 =6 times, hence cash requirement will change to 175,000/6 = 29,167.
Cash requirement will reduce by 38,889 - 29,167 = 9,722 and savings in cost will be 8% on 9722
= 778.

Self Assessment

Fill in the blanks:

15. The selection of securities should be guided by three principles which are ……………………,
Maturity and Marketability.
16. …………………… refers to the convenience, speed and cost at which a security can be
converted into cash.



Case Study Bajaj Electronics – Cash Forecasting

T his case tests the reader's ability to develop a basic cash forecast for a firm 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 reflect
the somewhat seasonal nature of the firm's marketing activities.

Contd...

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