RESEARCH REPORT

ON

CASH MANAGEMENT IN BANKING SECTOR

SUBMITTED IN THE PARTIAL FULFILLMENT FOR

THE DEGREE OF
“MASTER OF BUSINESS ADMINISTRATION”

Submitted to Dr. A.P.J Abdul Kalam Technical University,

Lucknow

Session: 2019-2020

KIET GROUP OF INSTITUTION, GHAZIABAD

UNDER THE GUIDANCE OF: SUBMITTED BY:

MS.RUCHI SINGH VIKAS SINHA
MBA-IVth Sem.
Roll No-1802970110

1
 CERTIFICATE

This is to certify that Mr.Vikas Sinha a student of KIET GROUP OF INSTITUTION,

GHAZIABAD has undertaken the project on “Cash Management in Banking Sector” The

project has been carried out by the student in partial fulfillment of the requirements for the

award of MBA, under my guidance and supervision.

I am satisfied with the work of Mr.Vikas Sinha

MISS. RUCHI SINGH

2
 DECLARATION

I VIKAS SINHA to declare that the dissertation report entitled “CASH MANAGEMENT
IN BANKING SECTORS” being submitted to the Abdul kalam Technical University for
the partial fulfilment of the requirement for the Degree of Master of business
Administration in my own endeavors and it have not been submitted earlier to any
institution university for any degree.

Date:

Place: VIKAS SINHA

3
 ACKNOWLEDGEMENT

Progress in life, business or any projects comes through taking initiatives & continuing to
progress on new concepts & ideas. The original momentum is not enough to keep you
moving forward. Your progress will grit to halt unless you refill your engine for inspiration
with fuel of fresh ideas with enthusiasm & proper guidance. Accomplishment requires the
effort of many people and this work is no different. I would like to thank all those who
helped me directly or indirectly and whose diligent efforts made this project possible.

My thanks also go to MISS RUCHI SINGH (my mentor) for his valuable suggestions and
direction for the project.
I also take this opportunity to express my profound gratitude to all those respondents who
made this project successful by cooperating with me.
Last but not the least; I would like to thank my parents and colleagues for their kind support.

VIKAS SINHA
1802970110

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 EXECUTIVE SUMMARY

The main ambition of most organization is today to present good financial results. One

important part of this is an effective way managing liquid capital, or in other words cash

management. It is important for organizations that cash management is controlled effectively

between the business units in the organization so that the work with cash management can be

as effective as possible.

Cash management is an effective tool for trade off between the profitability and liquidity.A

business cannot operate without its life- blood cash, and without cash management, there may

remain no cash to operate. Cash movement in a business is two-way traffic. It keeps on

moving in and out of business. The inflow and outflow of cash never coincides. Important

aspect which is unique to cash management is time dimension associated with the movement

of cash. Due to non-synchronicity of cash inflow and outflow, the inflow may be more than

the outflow or the outflow may be more than the inflow at a particular point of time. This need

regulation. Left to itself cash flow is apt to follow monsoonal pattern, and showers of cash

may be heavy, scanty or just normal.

Hence there is a dire need to control its movement through skilful cash management. The

primary aim of cash management is to ensure that there should be enough cash availability

when the needs arise, not too much so that the idle cash can be emerged and, but never too

little so that the operations can’t run effectively and efficiently.

Thus the project report draws some conclusion. One conclusion from the analysis is that the

organization has great potential with cash management. Furthermore the analysis shows that

many of the differences that were found in the control of cash management.

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 TABLE OF CONTENTS

Sr. No Topics Page No.

1. Introduction 07-50
1.1 Meaning of Cash Management 08
1.2 Industry Profile 10
1.3 Cash Flow Management in Banks 15
1.4 Cash Management Service 35
1.5 Purpose of Cash Management 40
1.6 Implications of Cash Management 42
1.7 Cash Management practices in India 47
1.8 How to improve cash management practices in India? 50
2. Objectives 54-55
3. Literature Review 56-61
4. Research Methodology 62-65
5. Finding 66-68
6. Analysis 69-72
7. Limitation of the Report 73-74
8. Conclusion and Recommendations 75-77
8.1 Conclusion 75
8.2 Recommendations 77
9. Bibliography 79-80

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1. INTRODUCTION

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 1.1 MEANING OF CASH MANAGEMENT
Definition
Cash management is a broad term that covers a number of functions that help
individuals and businesses process receipts and payments in an organized and
efficient manner. Administering cash assets today often makes use of a number of
automated support services offered by banks and other financial institutions. The
range of cash management services range from simple check book balancing to
investing cash in bonds and other types of securities to automated software that
allows easy cash collection.
When it comes to cash collections, there are a few popular options today that can
make the process of receiving payments from customers much easier. Automated
clearing houses make it possible to transact a business to business cash transfer that
deducts the payment from the customer account and deposits the funds in the vendor
account. Generally, this service is available for a fee at local banks
Cash management has the following purposes: controlling spending in the aggregate,
implementing the budget efficiently, minimizing of the cost of government
borrowing, and maximizing the opportunity cost of resources (the last two purposes
yielding interest). Control of cash is a key element in macroeconomic and budget
management. However it must be complemented by an adequate system for managing
commitment. For efficient budget implementation, it is necessary to ensure that
claims will be paid according to the contract terms and that revenues are collected on
time. It is necessary to minimize transaction costs; and to borrow at the lowest
interest rate or to generate additional cash by investing in revenue-yielding paper. It is
also necessary to avoid paying in advance and to track accurately the dates on which
payments are due.

In developing countries, governments often do not pay attention to issues related to

cash management. Budget execution procedures and the management of cash flows
focus on compliance issues, while daily cash needs in are met at low cost by the
Central Bank. Spending units are not concerned with borrowing costs since their
interests are already taken account in the budget prepared by the Ministry of Finance.

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However, the costs of borrowing, the fact that the credit granted to the government by
the banking system is a key macroeconomic target and a performance criterion in
IMF-supported financial programs, and the increasing separation between the
activities of the Central Bank and the government budget make cash management
more important. Performance concerns have also had an impact on cash management
and some countries have implemented reforms to make spending agencies more
responsible for cash, while maintaining instruments to ensure fiscal discipline.

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 1.2 INDUSTRY PROFILE
AN INTRODUCTION TO THE BANKING SECTOR IN INDIA
Banks are the most significant players in the Indian financial market. They are the
biggest purveyors of credit, and they also attract most of the savings from the
population. Dominated by public sector, the banking industry has so far acted as an
efficient partner in the growth and the development of the country. Driven by the
socialist ideologies and the welfare state concept, public sector banks have long been
the supporters of agriculture and other priority sectors. They act as crucial channels
of the government in its efforts to ensure equitable economic development.

The Indian banking can be broadly categorized into nationalized (government

owned), private banks and specialized banking institutions. The Reserve Bank of
India acts a centralized body monitoring any discrepancies and shortcoming in the
system. Since the nationalization of banks in 1969, the public sector banks or the
nationalized banks have acquired a place of prominence and has since then seen
tremendous progress. The need to become highly customer focused has forced the
slow-moving public sector banks to adopt a fast track approach. The unleashing of
products and services through the net has galvanized players at all levels of the
banking and financial institutions market grid to look anew at their existing portfolio
offering. Conservative banking practices allowed Indian banks to be insulated
partially from the Asian currency crisis. Indian banks are now quoting al higher
valuation when compared to banks in other Asian countries (viz. Hong Kong,
Singapore, Philippines etc.) that have major problems linked to huge Non
Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble
footed in approach and armed with efficient branch networks focus primarily on the
‘high revenue’ niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the ‘new’
Indian market and is addressing the relevant issues to take on the multifarious
challenges of globalization. Banks that employ IT solutions are perceived to be
‘futuristic’ and proactive players capable of meeting the multifarious requirements of
the large customer’s base. Private Banks have been fast on the uptake and are
reorienting their strategies using the internet as a medium The Internet has emerged

10
as the new and challenging frontier of marketing with the conventional physical
world tenets being just as applicable like in any other marketing medium.

The Indian banking has come from a long way from being a sleepy business
institution to a highly proactive and dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms that
allowed banks to explore new business opportunities rather than generating revenues
from conventional streams (i.e. borrowing and lending). The banking in India is
highly fragmented with 30 banking units contributing to almost 50% of deposits and
60% of advances. Indian nationalized banks (banks owned by the government)
continue to be the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization. The Indian
banking can be broadly categorized into nationalized, private banks and specialized
banking institutions.

The Reserve Bank of India acts as a centralized body monitoring any discrepancies
and shortcoming in the system. It is the foremost monitoring body in the Indian
financial sector. The nationalized banks (i.e. government-owned banks) continue to
dominate the Indian banking arena. Industry estimates indicate that out of 274
commercial banks operating in India, 223 banks are in the public sector and 51 are in
the private sector. The private sector bank grid also includes 24 foreign banks that
have started their operations here.

The liberalize policy of Government of India permitted entry to private sector in the
banking, the industry has witnessed the entry of nine new generation private banks.
The major differentiating parameter that distinguishes these banks from all the
other banks in the Indian banking is the level of service that is offered to the
customer. Their focus has always cantered on the customer – understanding his
needs, pre-empting him and consequently delighting him with various
configurations of benefits and a wide portfolio of products and services. These
banks have generally been established by promoters of repute or by ‘high value’
domestic financial institutions.

The popularity of these banks can be gauged by the fact that in a short span of time,
these banks have gained considerable customer confidence and consequently have

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 shown impressive growth rates. Today, the private banks corner almost four per cent
share of the total share of deposits. Most of the banks in this category are
concentrated in the high-growth urban areas in metros (that account for
approximately 70% of the total banking business). With efficiency being the major
focus, these banks have leveraged on their strengths and competencies viz.
Management, operational efficiency and flexibility, superior product positioning and
higher employee productivity skills. 

The private banks with their focused business and service portfolio have a reputation
of being niche players in the industry. A strategy that has allowed these banks to
concentrate on few reliable high net worth companies and individuals rather than
cater to the mass market. These well-chalked out integrates strategy plans have
allowed most of these banks to deliver superlative levels of personalized services.
With the Reserve Bank of India allowing these banks to operate 70% of their
businesses in urban areas, this statutory requirement has translated into lower deposit
mobilization costs and higher margins relative to public sector banks.

PEST ANALYSIS

Technological Environment: Technology plays a very important role in bank’s internal

control mechanisms as well as services offered by them. It has in fact given new dimensions
to the banks as well as services that they cater to and the banks are enthusiastically adopting
new technological innovations for devising new products and services.

The latest developments in terms of technology in computer and telecommunication have

encouraged the bankers to change the concept of branch banking to anywhere banking. The
use of ATM and Internet banking has allowed ‘anytime, anywhere banking’ facilities.
Automatic voice recorders now answer simple queries, currency accounting machines makes
the job easier and self-service counters are now encouraged. Credit card facility has
encouraged an era of cashless society. Today MasterCard and Visa card are the two most
popular cards used world over. The banks have now started issuing smartcards or debit cards
to be used for making payments. These are also called as electronic purse. Some of the banks
have also started home banking through telecommunication facilities and computer
technology by using terminals installed at customers home and they can make the balance

12
inquiry, get the statement of accounts, give instructions for fund transfers, etc. Through ECS
we can receive the dividends and interest directly to our account avoiding the delay or chance
of losing the post.

Today banks are also using SMS and Internet as major tool of promotions and giving great
utility to its customers. For example SMS functions through simple text messages sent from
your mobile. The messages are then recognized by the bank to provide you with the required
information.

All these technological changes have forced the bankers to adopt customer-based approach
instead of product-based approach.

Economic Environment: Banking is as old as authentic history and the modern commercial
banking are traceable to ancient times. In India, banking has existed in one form or the other
from time to time. The present era in banking may be taken to have commenced with
establishment of bank of Bengal in 1809 under the government charter and with government
participation in share capital. Allahabad bank was started in the year 1865 and Punjab
national bank in 1895, and thus, others followed

Every year RBI declares its 6 monthly policy and accordingly the various measures and rates
are implemented which has an impact on the banking sector. Also the Union budget affects
the banking sector to boost the economy by giving certain concessions or facilities. If in the
Budget savings are encouraged, then more deposits will be attracted towards the banks and in
turn they can lend more money to the agricultural sector and industrial sector, therefore,
booming the economy. If the FDI limits are relaxed, then more FDI are brought in India
through banking channels.

Political/ Legal Environment: Government and RBI policies affect the banking sector.
Sometimes looking into the political advantage of a particular party, the Government
declares some measures to their benefits like waiver of short-term agricultural loans, to
attract the farmer’s votes. By doing so the profits of the bank get affected. Various banks in
the cooperative sector are open and run by the politicians. They exploit these banks for their
benefits. Sometimes the government appoints various chairmen of the banks. Various

13
policies are framed by the RBI looking at the present situation of the country for better
control over the banks.

Social Environment: Before nationalization of the banks, their control was in the hands of
the private parties and only big business houses and the effluent sections of the society were
getting benefits of banking in India. In 1969 government nationalized 14 banks. To adopt the
social development in the banking sector it was necessary for speedy economic progress,
consistent with social justice, in democratic political system, which is free from domination
of law, and in which opportunities are open to all. Accordingly, keeping in mind both the
national and social objectives, bankers were given direction to help economically weaker
section of the society and also provide need-based finance to all the sectors of the economy
with flexible and liberal attitude. Now the banks provide various types of loans to farmers,
working women, professionals, and traders. They also provide education loan to the students
and housing loans, consumer loans, etc.

Banks having big clients or big companies have to provide services like personalized
banking to their clients because these customers do not believe in running about and waiting
in queues for getting their work done. The bankers also have to provide these customers with
special provisions and at times with benefits like food and parties. But the banks do not mind
incurring these costs because of the kind of business these clients bring for the bank.

7 P’S of BANKING SECTOR

It is very important for any bank to identify the 7 P’s of services so was understands
their customers better and provide them with best of service. The 7 P’s are:
1. PRODUCT MIX
1. PRICE MIX
2. PLACE
3. PROMOTION
4. PEOPLE
5. PROCESS
6. PHYSICAL EVIDENCE

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 1.3 CASH FLOW MANAGEMENT
Cash flow management is a process of monitoring, analysing, and adjusting one’s business
cash flows. The most important aspect of cash flow management is avoiding extended cash
shortages, caused by having too great a gap between cash inflows and outflows. Therefore,
one needs to perform a cash flow analysis on a regular basis, and use cash flow forecasting so
that one can take the steps necessary to head off cash flow problems. Cash management
involves the efficient collection, disbursement and temporary investment of cash. The
treasurer department of an organization is usually responsible for the firm’s cash
management system. A cash budget, instrumental in the process, tell us how much cash we
likely to have it, and for how long.
With timely information reporting a firm can generate significant income by properly
managing collections, disbursement cash balance and cash equivalents investments

COLLECTION DISBURSEMENT

CASH

CASH EQUIVALENTS

CONTROL THROUGH INFORMATION REPORT

Therefore, managing cash flow involves several objectives:

 Accelerating cash inflows wherever possible.

 Delaying cash outflows until they come due.

 Investing surplus cash to earn a rate of return.

 Borrowing cash at the best possible terms.

This course will attempt to outline how these objectives can be met. We will try to answer
the following questions:

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  How much cash do we need to run our business?

 How much cash is locked-up in other current assets?

 How long does it take to collect our cash from customers?

 How much cash should we hold?

 How do we cover cash deficits?

 How do we identify problems with cash flow?

Two Cycles: Disbursements and Receipts

As we indicated, cash flow management consists of several activities: Collecting

accounts receivable, processing vendor payments, etc. We need to understand the time
involved with each of these activities before we can properly plan our cash flows.
Since cash consists of disbursements and receipts, we can think of cash flow in terms
of two cycles.

Disbursement Cycle: The total time between when an obligation occurs and when the
payment clears the bank.

Example 1 - Disbursement Cycle Time

Specific Activity Day

Obligation to Supplier 0
Process Invoice from Supplier 10
Run Payables and cut checks 25
Payment clears the bank 35
Total Cycle Time for Disbursement = 35 days

The overall objective within the Disbursement Cycle is to increase the cycle time;
i.e. delay making payments until they are due. We can delay payments by:

 Mailing checks from locations not close to customers. This will increase the mail
time or mail float within the disbursement cycle.

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  Disbursing checks from a remote bank. This will increase the time required for the
payment to clear the bank; i.e. clearance float.

 Purchasing with credit cards so that the time required for making payment is much
longer. By using a credit card, you will receive a bill at the end of the month payable
in 30 days. This creates more processing time or processing float.

Therefore, when we manage cash flow cycles, we try to control three types of float times:

 Mail Float: Time spent in the mail.

 Clearance Float: Time spent trying to clear the bank.

 Processing Float: Time required to process cash flow transactions.

By increasing the float times within disbursements, we have the use of cash for several
more days. This is a source of spontaneous financing and we can measure our cash
savings.

Receipt Cycle: The total time between when products or services are delivered and when
payment from the customer clears the bank.

Example 2 - Calculate Receipt Cycle Time

Specific Activity Day

Begin Services to Customer 0
Issue Invoice to Customer 30
Receive Payment 62
Payment clears the bank 66
Total Cycle Time for Receipts = 66 days

The overall objective within the Receipts Cycle is to decrease the cycle; i.e. shorten
the time necessary to collect and have use of cash. We can shorten the receipt cycle
by:

17
  Invoicing customers as quickly as possible.

 Taking immediate action when a customer becomes delinquent.

 Rewarding customers for making early payment by offering a discount.

 Imposing a finance charge on customers that are seriously delinquent.

 Evaluating the financial soundness of customers before extending credit.

 Accepting credit cards for payment.

 Issuing monthly statements to remind customers of amounts owed.

 Placing collection centers near customers and/or having banks control deposits.

Lockbox system
A lockbox system is an example of placing control with the bank. Under a lockbox
system, customers send payments to a lockbox which is cleared daily by the bank. This
can reduce processing time for deposits and reduce clearance float. Before adopting a
lockbox system, you should weigh the costs versus the benefits (see example 4).

Example 3 - Cost Benefit of Lockbox Service It currently takes 6 days to

receive and deposit payments from customers. A lockbox will cut this time
down to 4 days. Average daily collections are estimated at $ 150,000. Idle funds
earn 5% and the total annual costs for a lockbox will be $ 22,000. Should you
adopt a lockbox?

Additional Cash Flows are $ 150,000 x 2 days $ 300,000

Return on Cash x .05
Total Annual Benefit of Lockbox $ 15,000
Total Annual Costs of Lockbox $ 22,000
Net Benefit (Costs) $ (7,000)

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Based on costs vs. benefits, a lockbox service will not provide cash savings.
However, you still may want to consider the internal control benefits of the
lockbox.

Measuring Cycle Times

In order to monitor progress in managing cash, it is useful to understand how much cash is
locked-up; i.e. not available to us. We can get an idea of cycle times by looking at average
days in inventory, average days in receivables, and average days in payables. These three
components cover the two basic cash flow cycles, disbursements and receipts.

a: Average Days in Inventory = Average Inventory Balance / Average Daily Cost of

Goods Sold

b: Average Days in Receivables = Average Receivable Balance / Average Daily Credit

Sales

c: Average Days in Payables = Average Payables Balance / Average Daily Purchases on

Account

The overall cash flow cycle time is calculated as: a + b - c; i.e. inventory and receivables
tie up cash receipts less payable for disbursements.

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This calculation is illustrated in Example 4.

Example 4 - Calculate Cash Flow Cycle Time

Average Monthly Activity for selected financial accounts is as follows:

Credit Sales $ 950,000 Accounts Receivable $ 1,300,000

Purchases $ 525,000 Inventory $ 550,000
Cost of Goods Sold $ 700,000 Accounts Payable $ 200,000

Average Days in Accounts Receivable = 1,300,000 / (950,000 / 30) = 41

Average Days in Inventory = 550,000 / (700,000 / 30) = 24
Average Days in Accounts Payable = 200,000 / (525,000 / 30) = 11

Total Cash Flow Cycle Time = 41 + 24 - 11 or 54 days.

You also can plot cash flow cycle times by looking at the activity times within each cycle.

Cash Flow Planning

One of the objectives of cash flow management is to hold the right amount of cash. If we
hold too much cash, we lose the opportunity to earn a return on idle cash. If we hold too
little cash, we run the risk of not making timely payments to suppliers, banks, and other
parties. We want to have an optimal cash balance that is neither excessive nor deficient.
The optimal cash balance is determined by looking at the four reasons for holding cash:

 Transaction Amounts: We have to hold enough cash to cover our outstanding

payments or transactions. In addition to transaction amounts, we should add any
compensating balances required under loan agreements. Therefore, the amount of cash
on hand must be transaction amounts + compensating balances.

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  Precautionary Amounts: We need to maintain cash for unexpected disbursements.
This is the precautionary amount of cash.

 Speculative Amounts: If we are anticipating making an investment, we will hold a

speculative amount to take advantage of opportunities in the marketplace.

 Financial Amounts: In order to acquire assets, retire debt, or meet some major
event, we will accumulate and hold a financial amount of cash.

Key Point  The minimal cash balance is usually equal to the total transaction
amount (includes compensating balances) + total precautionary amount.

Cash Flow Forecasting

One of the best ways to determine the optimal cash balance is to fully understand cash
flow patterns. This requires that we plot cash flows and prepare a forecast. A cash flow
forecast gives us a detail projection of future cash inflows and outflows. This will help us
avoid cash deficiencies as well as excessive cash balances. A cash flow forecast also
answers several questions, such as how long can we invest idle cash, when will it be
necessary to borrow cash, and when can we purchase new capital assets? A typical cash
flow forecast will include: Cash on Hand, Expected Receipts, and Expected
Disbursements. Each major receipt and disbursement should be listed as a separate line
item.

Example 5 illustrates a basic cash flow forecast.

Example 5 — Monthly Cash Flow Forecast

January ($)
Beginning Cash on Hand 60
Operating Receipts:
Accounts Receivable 1,200
Other Receipts -0-
Operating Disbursements:

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 Payroll (850)
Taxes (35)
Utility (80)
Insurance (110)
Supplies (60)
Services (350)
Other (40)
Net Operating Cash Flow (325)
Investment Receipts:
Investment Income -0-
Sale of Marketable Securities -0-
Sale of Assets -0-
Investment Disbursements:
Invest in Marketable Securities -0-
Invest in Capital Assets -0-
Financing Receipts:
Proceeds from Loans -0-
Proceeds from Asset Borrowings -0-
Financing Disbursements:
Repay Loans & Debt -0-
Net Change in Cash $ (325)
Total Available Cash (265)
Minimum Cash Balance 40
Surplus (Deficit) (305)
Activate Line of Credit 325
Ending Cash Balance $ 60

The overall objective is to prepare a cash flow forecast that is accurate enough to determine
cash sufficiency. As a general rule, it is more difficult to predict cash receipts than cash

22
 disbursements. When making estimates about receipts and disbursements, consider using
expected values, especially if you are uncertain about final amounts.

The overall objective is to prepare a cash flow forecast that is accurate enough to
determine cash sufficiency. As a general rule, it is more difficult to predict cash
receipts than cash disbursements. When making estimates about receipts and
disbursements, consider using expected values, especially if you are uncertain about
final amounts.

Example 6. Illustrates the calculation of expected values for cash receipts from three
service contracts.

Example 6.Calculate the Expected Value of Receipts

Sales Probability of Expected

Customer Contract Getting Contract Value
Ashcroft $10,000 20% $ 2,000
Carson $15,000 50% $ 7,500
Franklin $ 8,000 80% $ 6,400
Total Expected Value $15,900

One way to predict customer receipts is to simply plot your collection patterns.

Example 7. Summarizes collection patterns based on past sales collections.

Example7. Plot Historical Collection %'s

0 - 30 31-60 61-90 91-120 Over 121

Sales Month Days Days Days Days Days Total %
January 15% 38% 40% 6% 1% 100%
February 14% 42% 39% 4% 1% 100%
March 14% 41% 39% 5% 1% 100%
April 12% 46% 36% 5% 1% 100%

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 Finally, consider the following points when preparing cash flow forecasts:

 Prepare cash forecasts for shorter periods of time (weekly or daily) if cash flows
are tight.

 Use available data as much as possible to prepare cash flow forecasts.

 If necessary, prepare two forecasts: Early Warning Forecast for longer periods of
time (six months) and Targeted Forecast for shorter periods of time (weekly).

 Be advised that cash flow forecasting is extremely difficult in periods of rapid

growth.

Special Bank Accounts

One method for maintaining an optimal cash balance is to use Zero Balance Accounts,
Sweep Accounts, and Investment Accounts. These accounts will automatically invest
surplus cash while still serving as your main transaction account. Disbursements are
cleared through a special account which has just enough cash to cover all transactions. The
Bank makes a "sweep" of the account and takes any surplus cash and places it into a
money market account. Money market accounts are one of the most popular accounts for
investing surplus cash. Brokerage houses also offer investment accounts which sometimes
earn slightly higher rates than money market accounts. When deciding which types of
accounts to use, consider the following guidelines:

 If your average daily surplus cash exceeds $ 500,000, setup a direct overnight
investment program with a brokerage house.

 If your average daily surplus cash exceeds $ 50,000, but is well below $ 500,000,
setup a sweep account with your bank.

 If your average daily surplus cash is below $ 50,000, consider using a regular
investment account with a brokerage house.

Short-Term Financing

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Part of managing cash flows is to understand how to finance operating cash flows. We
previously discussed how to predict cash deficits with forecasting. We now have to
understand how to finance our cash flow deficits. Whenever we use short-term financing
to cover cash deficits, we must consider costs, risks, restrictions imposed upon the
organization, financing flexibility, our current financial situation, and other factors. Some
of the questions we need to ask include:

 How long will we need financing?

 How much cash do we need?

 How will we use the borrowed funds?

 When and how will we repay the borrowed funds?

The first and most practical source of financing is spontaneous financing or trade credit.
By lengthening the disbursement cycle, we obtain additional cash. Once we have
exhausted spontaneous sources of financing, we than use conventional sources of
financing, such as bank loans, lines of credit, and asset based borrowing.

Bank Financing

One of your key partners in business should be your bank. Therefore, it is essential that
you establish a good working relationship with a bank officer. This relationship is the
basis for how you will obtain bank financing. For example, a line of credit is one way to
address recurring cash deficits. You can also arrange a revolving loan. Under these
arrangements, you borrow as deficits occur up to a maximum amount. Unless you have
excellent credit, you will be required to put up collateral (such as receivables, inventory,
etc.). The bank may also require a commitment fee or compensating balance (percentage
of loan). Some key points about bank financing are:

 Make arrangements to borrow when you least need it. This is the best way to
obtain favorable terms and conditions for short-term financing.

 Borrow more than you think you will need. Many organizations under-estimate
the amount of borrowing required for short-term financing.

25
  The moment you think you will need short term financing, begin preparing
immediately. Bank financing takes time to arrange and execute.

 Borrow to meet your strategic plans, not to avoid possible bankruptcy. Banks are
much more receptive to financing when it fits with some type of long-term plan.

 Make sure you maintain the best possible relationship with the bank. Send regular
reports and information to the bank officer.

Example 8.Calculate Effective Rate for Line of Credit

You have established a $ 250,000 line of credit. The bank requires a 5%

compensating balance on outstanding borrowings and 3% on any unused
balance. The bank will charge 16%. You recently borrowed $ 100,000. What is
your effective interest rate?

Borrowed Funds $ 100,000 x .05 = $ 5,000

Unused Funds $ 150,000 x .03 = 4,500
Total Compensating Balance $ 9,500

($ 100,000 x .16) / ($ 100,000 - $ 9,500) = 17.7% effective rate

Receivable Financing

In addition to bank financing, you can borrow against your assets from a financing
company. Accounts Receivable is a liquid asset that provides a form of financing. In order
to borrow against your accounts receivable, you must meet the following criteria:

 Receivables are related to the sale of merchandise and not services.

 Receivable customers are financially sound and there is a high probability of

payment.

 Receivable customers obtain title to merchandise when it is shipped.

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  Your overall receivable balance is at least $ 50,000 with sales that are substantially
higher than your receivable balance.

There are two forms of receivable financing, factoring and assignments.

Factoring: Under this form of financing, you sell your receivables to the financing
company. You receive the face value of the receivable less a commission charge. The
financing company assumes responsibility for collecting the receivable. Factoring gives
you immediate cash and freedom from collecting from customers. However, it is costly
and it sometimes confuses customers since they now make payment to a financing
company.

Assignment: Under this arrangement, you transfer or assign your receivables over to the
financing company. However, you still retain ownership of the receivables. The financing
company advances 60% to 80% of the receivable balance. You continue to collect the
receivables and the financing company charges you interest and service fees on the
borrowed funds.

Inventory Financing

Inventory financing is similar to receivable financing. Inventory financing has the

following requirements:

 Inventory must be highly marketable.

 Inventory is non-perishable and not subject to obsolescence.

 Inventory prices are relatively stable.

There are three forms of inventory financing:

Floating or Blanket Liens: The financing company will place a lien on your inventory;
i.e. they obtain a security interest in your inventory in exchange for lending you cash.
You continue to manage and control the inventory.

Warehouse Receipts: The financing company obtains an interest in a certain segment or

part of your inventory. You will have to separate the inventory that you use for financing

27
from the inventory not used for financing. This may require physical separation as well as
separate accounting.

Trust Receipts: The financing company lends you money for a specific item in your
inventory until you are able to sell it. When you receive cash for the inventory sale, you
pay the financing company. For example, car dealerships often buy automobiles by
financing the purchase. When the car is sold, they pay off the financing company.

Example 09 illustrates the costs of financing inventory under a warehouse receipt

arrangement.

Example 09.Calculate Costs of Financing Inventory

You have arranged for financing against $ 200,000 of your inventory. You will
need financing for four months. The warehouse receipt loan costs 18% with
80% advanced against the inventory value. Additionally, you will have to
separate your inventory and maintain separate records. This will costs about $
6,000 over the four-month period.

Interest Costs = .18 x .80 x $ 200,000 x ( 4 / 12 ) = $ 9,600

Internal Costs 6,000
Total Costs for 4 months $15,600

Unsecured Financing

For large corporations with financially sound operations, cash can be obtained on the
credit worthiness of the corporation; i.e. unsecured financing. Smaller organizations can
sometimes obtain unsecured financing, but costs are often much higher than secured
financing. For large corporations in the United States, commercial paper is perhaps the
most popular form of unsecured financing. Commercial paper is sold at a discount in the
form of a promissory note. The promissory notes are short-term, usually less than 270
days.

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 Example 10 illustrates the costs of commercial paper.

Example10. Calculate Costs of Commercial Paper

Bowie Corporation will issue $ 500,000 of 90 day, 16% commercial paper. The
funds will be used for 70 days. Unused funds can be invested at 12%. The
broker will charge 1.5% for the issuance of commercial paper. What is the total
costs of this financing arrangement?

Interest Expense = $ 500,000 x .16 x ( 90 / 360 ) = $ 20,000

Brokers Fee = $ 500,000 x .015 = 7,500
Less Return on Unused Funds = $ 500,000 x .12 x ( 20 / 360 ) (3,333)
Total Costs of Commercial Paper $ 24,167

This concludes the overall process of cash flow management: Cash Flow Cycles, Cash
Flow Forecasting, and Short Term Financing. We will now finish-up by touching on
some finer points in cash flow management.

Some Finer Points in Cash Flow Management

We will now focus on some specific practices that are part of cash flow management. For
example, how do we manage the collection of cash and how can we reduce certain types
of cash outflows?

Collection Practices

As we previously discussed, the receipts cycle requires a diligent collection process. We

need to balance this need for quick cash collections with the needs of our customers. For
example, customers who are important to our business should be treated carefully as

29
opposed to customers who mean little or nothing to our future. Therefore, collection
efforts must be customer specific in order to be effective.

Specific collection techniques include letters, telephone calls, faxes, emails, and legal
action. Two examples of collection letters are illustrated below:

Example 11.Collection Letter after 90 days

Our records indicate that a balance of $ 4,650.30 is over 90 days past due. We
have sent monthly statements and reminders several times, but we have yet to
receive payment or any explanation as to why payment should not be made.

Please review this matter immediately. I will call you in the next five days to
arrange payment.

Example12. Final Collection Letter (Certified Mail)

Despite numerous requests and phone calls, we have not received payment for
the attached invoices totaling $ 4,650.30.

Unless we receive full payment on or before September 15 th, we will take

whatever action is necessary to collect the balance.

The overall collection process should be pro-active and preventative. For example,
wherever possible try to collect payment immediately as products or services are
delivered. This eliminates the need for invoicing and follow-up collection. Require
deposits from customers that have a history of late payments. Use credit applications to
weed-out bad customers. Include a clause in the credit application that states all collection

30
 costs are reimbursed by the customer on delinquent accounts. Finally, if you receive
payment in the form of a bad check, retain the check as evidence that you have a valid
claim.

Disbursement Practices
How you manage various disbursements and current assets can have a big impact on cash
flows. There are several problem areas to watch-out for, such as payroll, purchasing,
inventories, and insurance.

Payroll: Payroll is a large cash outflow and requires special attention. One obvious trend
in payroll is to implement a flexible workforce since the flow of work fluctuates.
Outsourcing and temporary workers are often part of a flexible workforce. Retain a full-
time workforce for core activities. You can also increase payroll float times by simply
distributing payroll checks after 2:00 p.m. Banks will not clear payroll checks until the
following week.

Purchasing: Flexible purchasing can help cash flow. Consider renting certain items as
opposed to purchasing. Ask yourself do we really need this item and how often will we
use it? If practical, order items out-of-season when prices are low. Finally, consider using
credit cards to make purchases since this will give you more time for making payment.

Inventory: Inventories have several hidden costs that can drain cash flow. These costs
include storage, insurance, spoilage, handling, taxes, and financing. Get rid of inventory
that is not moving. Obsolete inventory should be removed immediately. Find new ways of
disposing of inventory. For example, it is better to sell inventory at costs than not at all.
Your overall objective is to maintain inventory levels at a profitable level.

Insurance: Make sure you do not over insure your business. Purchase insurance in group
packages to obtain the lowest premiums. Start by covering your largest risks first.
Structure as high a deductible as you can afford. Avoid duplication and excessive
insurance. Shift certain costs, such as health insurance to the employee through higher
payroll deductions. Insurance should be used to cover risks that are material, but occur
infrequently.

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Warning Signs

One important element in cash flow management is to fully understand the warning
signs of cash flow distress. Some early warning signs include:

 Cash balances are low compared to historical balances.

 Inventory is not moving.

 Vendor payments are made late.

 Banks are requesting financial statements.

 Major purchases have to be postponed.

 Management has become very risk adverse; i.e. overly cautious about spending
money.

One way to monitor cash flow is to track liquidity ratios and compare these ratios to
historical ratios and/or industry averages. Some examples include:

Current Ratio = Current Assets / Current Liabilities

Acid Test = Cash + Accounts Receivable + Marketable Securities / Current Liabilities

Cash Flow to Debt Ratio = Cash Flow / Total Debt

Cash Flow to Income Ratio = Operating Cash Flow / Net Income

Another warning sign is an unfavorable Z Score. The Z Score is about 90% accurate in
predicting bankruptcy in the first year and about 80% accurate the second year. The Z
Score combines five ratios and compares the result to a scoring scale. A weight is assigned
to each ratio. The Z Score is calculated as follows:

Z = 1.2 (A) + 1.4 (B) + 3.3 (C) + .6 (D) + .999 (E)

A: working capital / total assets
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B: retained earnings / total assets
C: earnings before interest taxes / total assets
D: market value of equities / book value of debt
E: sales / total assets
The scoring scale for the Z Score is:
If the Z Score is 1.8 or less, there is a very high probability of bankruptcy.
If the Z Score is 1.81 to 2.99, we are not sure about bankruptcy.
If the Z Score is 3.0 or higher, bankruptcy is unlikely.

Example13. Calculate the Z Score

Assume we have account balances of:

Total Assets = $ 1,000, Retained Earnings = $ 400, Sales = $ 1,500,
Earnings Before Interest & Taxes (EBIT) = $ 50, Working Capital = $ 100,
Market Value of Stock = $ 600, Book Value of Debt = $ 700

1.2 x ($100 / $1,000) = .120 1.4 x ($400 / $1,000) = .560

3.3 x ($ 50 / $ 1,000) = .165 .6 x ($600 / $700) = .514
.999 x ($1,500 / $1,000) = 1.499

Z Score = 2.86 (.120 + .560 + .165 + .514 + 1.499)

Result

Managing cash flow is a major balancing act between making sure all obligations are paid
on time, doing everything you can to collect cash as quickly as possible, and not holding
excessive cash balances. An understanding of cash flow cycles is an important first step in
managing cash flows. Once you understand the cycles, you want to lengthen the
disbursement cycle and shorten the receipt cycle. Controlling float times is a common way
of adjusting cash flow cycle times.

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In order to understand the magnitude and timing of cash flows, you need to plot cash
flows. This leads to the use of cash flow forecasts. Cash flow forecasts help optimizes the
amount of cash that should be held. Cash flow forecasts also help identify when short-term
financing will be required.

Finally, be aware that cash flows are influenced by many factors, ranging from payroll to
inventories. A static workforce and runaway inventories can be detrimental to cash flows.
You need to be aware of the warning signs of cash flow distress, such as late vendor
payments and delayed purchases.

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 1.4 CASH MANAGEMENT SERVICES

The Bank has constructed a wide range of CMS products covering Collections and
Disbursements of operating flows, as well as specialized cash flow streams such as
rights/public issue collections, dividends, interest/principal repayments, excise and
sales tax payments etc. We operate out of a large and expanding network of over 780
outlets across the country. This is the largest network of online, electronically linked
branches in the country. This provides us with a clear competitive advantage over the
rest of the competition, which naturally translates into a lower cost and faster credit to
corporate

In United States banking, cash management, or treasury management, is a

marketing term for certain services offered primarily to larger business customers. It
may be used to describe all bank accounts (such as checking accounts) provided to
businesses of a certain size, but it is more often used to describe specific services such
as cash concentration, zero balance accounting, and automated clearing house
facilities. Sometimes, private banking customers are given cash management services.

Cash management services generally offered

The following is a list of services generally offered by banks and utilized by larger
businesses and corporations:

 Account Reconcilement Services: Balancing a checkbook can be a difficult

process for a very large business, since it issues so many checks it can take a lot
of human monitoring to understand which checks have not cleared and therefore
what the company's true balance is. To address this, banks have developed a
system which allows companies to upload a list of all the checks that they issue
on a daily basis, so that at the end of the month the bank statement will show not
only which checks have cleared, but also which have not. More recently, banks
have used this system to prevent checks from being fraudulently cashed if they
are not on the list, a process known as positive pay.

 Advanced Web Services: Most banks have an Internet-based system which is

more advanced than the one available to consumers. This enables managers to
create and authorize special internal logon credentials, allowing employees to

35
send wires and access other cash management features normally not found on the
consumer web site.

 Armored Car Services (Cash Collection Services): Large retailers who

collect a great deal of cash may have the bank pick this cash up via an armored
car company, instead of asking its employees to deposit the cash.

 Automated Clearing House: services are usually offered by the cash

management division of a bank. The Automated Clearing House is an electronic
system used to transfer funds between banks. Companies use this to pay others,
especially employees (this is how direct deposit works). Certain companies also
use it to collect funds from customers (this is generally how automatic payment
plans work). This system is criticized by some consumer advocacy groups;
because under this system banks assume that the company initiating the debit is
correct until proven otherwise.

 Balance Reporting Services: Corporate clients who actively manage their

cash balances usually subscribe to secure web-based reporting of their account
and transaction information at their lead bank. These sophisticated compilations
of banking activity may include balances in foreign currencies, as well as those at
other banks. They include information on cash positions as well as 'float' (e.g.,
checks in the process of collection). Finally, they offer transaction-specific details
on all forms of payment activity, including deposits, checks, and wire transfers in
and out, ACH (automated clearinghouse debits and credits), investments, etc.

 Cash Concentration Services: Large or national chain retailers often are in

areas where their primary bank does not have branches. Therefore, they open
bank accounts at various local banks in the area. To prevent funds in these
accounts from being idle and not earning sufficient interest, many of these
companies have an agreement set with their primary bank, whereby their primary
bank uses the Automated Clearing House to electronically "pull" the money from
these banks into a single interest-bearing bank account.

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 Lockbox - Retail: services: Often companies (such as utilities) which receive
a large number of payments via checks in the mail have the bank set up a post
office box for them, open their mail, and deposit any checks found. This is
referred to as a "lockbox" service.

 Lockbox - Wholesale: services: are for companies with small numbers of

payments, sometimes with detailed requirements for processing. This might be a
company like a dentist's office or small manufacturing company.

 Positive Pay: Positive pay is a service whereby the company electronically

shares its check register of all written checks with the bank. The bank therefore
will only pay checks listed in that register, with exactly the same specifications as
listed in the register (amount, payee, serial number, etc.). This system
dramatically reduces check fraud.

 Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the
process is reversed, with the company, not the bank, maintaining the list of checks
issued. When checks are presented for payment and clear through the Federal
Reserve System, the Federal Reserve prepares a file of the checks' account
numbers, serial numbers, and dollar amounts and sends the file to the bank. In
reverse positive pay, the bank sends that file to the company, where the company
compares the information to its internal records. The company lets the bank know
which checks match its internal information, and the bank pays those items. The
bank then researches the checks that do not match, corrects any misreads or
encoding errors, and determines if any items are fraudulent. The bank pays only
"true" exceptions, that is, those that can be reconciled with the company's files.

 Sweep accounts: are typically offered by the cash management division of a

bank. Under this system, excess funds from a company's bank accounts are
automatically moved into a money market mutual fund overnight, and then moved
back the next morning. This allows them to earn interest overnight. This is the
primary use of money market mutual funds.

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 Zero Balance Accounting: can be thought of as somewhat of a hack.
Companies with large numbers of stores or locations can very often be confused if
all those stores are depositing into a single bank account. Traditionally, it would
be impossible to know which deposits were from which stores without seeking to
view images of those deposits. To help correct this problem, banks developed a
system where each store is given their own bank account, but all the money
deposited into the individual store accounts are automatically moved or swept into
the company's main bank account. This allows the company to look at individual
statements for each store. U.S. banks are almost all converting their systems so
that companies can tell which store made a particular deposit, even if these
deposits are all deposited into a single account. Therefore, zero balance
accounting is being used less frequently.

 Wire Transfer: A wire transfer is an electronic transfer of funds. Wire

transfers can be done by a simple bank account transfer, or by a transfer of cash at
a cash office. Bank wire transfers are often the most expedient method for
transferring funds between bank accounts. A bank wire transfer is a message to
the receiving bank requesting them to effect payment in accordance with the
instructions given. The message also includes settlement instructions. The actual
wire transfer itself is virtually instantaneous, requiring no longer for transmission
than a telephone call.

 Controlled Disbursement: This is another product offered by banks under

Cash Management Services. The bank provides a daily report, typically early in
the day, that provides the amount of disbursements that will be charged to the
customer's account. This early knowledge of daily funds requirement allows the
customer to invest any surplus in intraday investment opportunities, typically
money market investments. This is different from delayed disbursements, where
payments are issued through a remote branch of a bank and customer is able to
delay the payment due to increased float time.

In the past, other services have been offered the usefulness of which has
diminished with the rise of the Internet. For example, companies could have daily

38
faxes of their most recent transactions or be sent CD-ROMs of images of their
cashed checks.

Cash management services can be costly but usually the cost to a company is
outweighed by the benefits: cost savings, accuracy, efficiencies, etc.

39
 1.5 PURPOSE OF CASH MANAGEMENT

Cash management is the stewardship or proper use of an entity’s cash resources. It

serves as the means to keep an organization functioning by making the best use of
cash or liquid resources of the organization.

The function of cash management at the U.S. Treasury is threefold:

 To eliminate idle cash balances. Every dollar held as cash rather than used to
augment revenues or decrease expenditures represents a lost opportunity. Funds
that are not needed to cover expected transactions can be used to buy back
outstanding debt (and cease a flow of funds out of the Treasury for interest
payments) or can be invested to generate a flow of funds into the Treasury’s
account. Minimizing idle cash balances requires accurate information about
expected receipts and likely disbursements.
 To deposit collections timely. Having funds in-hand is better than having
accounts receivable. The cash is easier to convert immediately into value or
goods. A receivable, an item to be converted in the future, often is subject to a
transaction delay or a depreciation of value. Once funds are due to the
Government, they should be converted to cash-in-hand immediately and deposited
in the Treasury's account as soon as possible.
 To properly time disbursements. Some payments must be made on a specified
or legal date, such as Social Security payments. For such payments, there is no
cash management decision. For other payments, such as vendor payments,
discretion in timing is possible. Government vendors face the same cash
management needs as the Government. They want to accelerate collections. One
way vendors can do this is to offer discount terms for timely payment for goods
sold.

40
41
 1.6 Implications of cash management

However cash management at a majority of the financial institutions is like being

stuck in a loop. Calling it ‘management’ perhaps is being generous when it is more a
case of ‘coping’. Each day an opening balance is derived from the previous day’s
closing statement, projections are applied and somehow a closing position is
estimated, which is used to place excess cash overnight.

This current state of play has a number of implications:

 Cost: Firms are losing millions in lost and overpaid interest, using
unnecessary overdraft facilities and incurring significant fees for doing so. In a
manual-intensive process, more staff is required to manage transactions.
 Compliance: Globally regulators are scrutinizing operations at financial
institutions and identifying where the greatest risks occur. UK’s Financial Service
Authority (FSA), Monetary Authority of Singapore (MAS) and the Hong Kong
Monetary Authority (HKMA) are already insisting that organizations automate
their nostro processes.
 Risk: Duplicate trades and missed payments create substantial risk, both
operational and reputational. Organizations working hard to balance core
currencies (USD,GBP,EUR) manually, can on a busy day easily miss large
positions from a high volume of ‘below the threshold’ flows, in JPY or AUD.
 Scalability: As trade volumes rise (or currency or geographic reach extends)
the nostro operations needs to scale. When staff numbers increases, so too does
the number of point-to-point interactions, communication between geographic
centers is harder and the risk of error can breach acceptable limits.
 Revenue Generations: Through automations the cash management Centre
can calculate interest opportunities, so that the nostro department can evolve into
a profit Centre instead of simply an operational cost.
 The Differences that intra-day makes: There are solutions available that
enable financial institutions to break down organizational silos with a single
enterprise-wide solutions for cash, collateral and treasury management,
exceptions management and reconciliation management. This creates a global,

42
 real time view of all money movements, cash and liquidity positions, to support
optimal investment and lending opportunities. As a result, financial institutions
can reduce operational risk through real-time reconciliation of payments and same
day exceptions identification and resolution. It also achieves cost reduction both
through more profitable cash management and the retirement of multiple legacy
systems. The introduction of individual liquidity assessments means that the
regulators currently present in just some jurisdictions but likely to spread, have
the discretion to specify how much organizations need to set aside in costly cash
buffers. Financial institutions who automate their nostro cash management
function will demonstrate to regulators that they have in place the systems and
control required to manage their cash and liquidity effectively.

Intelligent automation

Introducing intelligent automation to cash management processes benefits firms in a

number of critical way, as is outlined below:

 Avoid payment of interest on overnight balances: With greater automation,

the closing ‘funding balance’ for each currency can be arrived at more accurately
by:

 Checking projections against intra-day transaction confirmations from

counterparties, so that confirmed transactions are guaranteed.
 Removing human error and relieving stress in the system through
automation.
 Defining the funding balance policy within the system, recording the
actual investment made and tracking and refining the policy.

In this way, the interest or other profit received on surpluses is maximized on

days with a positive closing balance and the interest paid on any borrowings is
minimized on days when there is a shortfall.

 Automate under supervision: The cash management can also set up

powerful cut off scheduled automate sweeps to:

43
  Handle the primary business of cash collection and zero balancing
accounts spread across many entities as a matter of routine.
 Create cross-currency sweeps if the position in one currency is long
and that in another is short.
 Automatically generate forward deals to act now on a projected future
imbalance.
 Pledge, lend, borrow, buy or sell collateral today as a future automated
rules.
 Automatically or manually generate these sweeps and ensure they
have manual authorization, above a threshold if required.

 Avoid fees (overdraft or facility fees): By having a more accurate figure for
the end-of-day investable balance, backed up with limits and alerts, cash
managers can avoid costly fees for holding balance at variance with the policy
with the holding bank. In the case of client funds, clients may define Service
Level Agreements (SLAs) regarding holding cash within specific boundaries with
a counterparty bank. The system can monitor the total position by bank or by
client by bank and thus ensure that the cash manager acts upon a potentially
awkward position. These limits can operate not just at account level but on any
defined balance.
 Minimize the risk of the impact of late deposits/payments: By having clear
system-held definitions of currency cut-off times(by account in necessary) with
alerts, it becomes much easier to ensure that large balances do not go unnoticed,
especially on busy days. This is particularly useful for ‘minor currencies’ that can
be easily missed in a manual process or high volumes of small amounts that
otherwise often hide below the ‘of interest’ threshold. One bank found that 61
percent of the value in one currency was below the threshold. By configuring
alerts based on values as well as timings, together with using the powerful rule-
based sweeps, the likelihood of these being overlooked is minimized.
 Gain a cross-organization view for divisional netting: Setting up what can
be a myriad of legal entities directly allows the cash manager to concentrate on
the net position across the group and to resolve problem transactions that
represent the highest risk. A powerful sweeping setup automates the management
44
of many entities within the department, so that the concentration on effort is on
the net figure and investigating unexpected transactions (or unconfirmed
transactions) before cut-off.
 Refine and fine tune funding policy over time: Institutions should retain
intra-day data so that it become possible after the event to look back at the
previous days ‘activities and identify the actual efficacy of the funding balance
used. It enables the cash desk team to specify the funding policy of the
organization in the system-i.e. the rules that govern how much will be used as the
closing balance. This may be as simple as ‘only fund-based on confirmed
transactions ‘or may be more complex, allowing, for example, a percentage of
unconfirmed projected movements form a particular, trusted source. The data can
then allow insights to make these rules based on the comparison of actual
performance. This is particularly valuable where movements below a certain
amount is often ignored and which can, over time, add up to significant sums.
 Revenue generation: The ability to compare the cash ladder with interest
rates at both the account level( i.e. the interest payable if the money is left in the
account) and at market for other level( i.e. if it is invested/funded) enables the
nostro department to become a profit centre instead of just a cost. This is
enhanced further with the management information so that problematic (and
costly) upstream departments for clients can be identified and quantified, either to
charge fees or price of funds or purely to help during negotiation.
 Lower operational cost faster ROI: Automation also delivers at lower
operational costs as the staff needed for effective nostro management is reduced,
while also enabling financial institutions to manage higher transaction volumes. A
majority of cash management teams are located at high cost centres.Deploying an
automated system should pay for itself in pure cost reduction.
 Achieving that better tomorrow: Many institutions are currently unable to
measure how much money is at risk and are losing money through poor decisions
based on old data. They leave themselves open to unnecessary levels of risks, a
situation that has been recognized by regulator globally, who are now acting
accordingly. However, smart banks are automating these processes. They are
basing their funding on actual information, not fallible projections, and carry the

45
day’s information forward to assist tomorrow’s accounting reconciliation
problems. They take in actual information from counterparties and match that to
their predictions.

46
 1.7 CASH MANAGEMENT PRACTICES IN INDIA

This examines the cash management and payments developments in India, in terms of
bank offerings and new corporate best practice.

Traditionally having a paper-based clearing system involving not only high

processing cost but security risk, cash management in India has certainly undergone a
paradigm change. From a product-centric approach, the focus for almost all banks
today has shifted emphatically to the customer. And success is all about bringing the
maximum possible delivery channels to the prospect's doorstep.

In the rapidly transforming world of business, banking faces its biggest challenge yet
- constant change. With every bank seeming to offer service possible, efficiency
coupled with innovative value added solutions have emerged as the key business
differentiators that affect a bank's bottom line. Confronted with shrinking
deposits/margins, rising customer expectations and intensifying competition, banks
must at all times strive to be a step ahead of industry standards. At the same time,
they cannot lose sight of credit risk, a natural by-product of the increasingly complex
relationships in today's dynamic markets.

For some time now, technology has been the key driving force behind every
successful bank. In such an environment, the ability to recognize and capture market
share depends entirely on the bank's competence to evolve technically and offer the
customer a seamless process flow. The objective of a cash management system is to
improve revenue, maximize profits, minimize costs and establish efficient
management systems to assist and accelerate growth.

Today a corporate treasurer’s dilemma is multifaceted. With more movement towards

the regional/central liquidity management in the complex structure of rules and
regulations, further complication is caused by taxation issues.

I describe what a corporate treasurer needs as VOC - Visibility of funds, Optimized

returns on funds, and Control over receivables and payables. Treasury can face a
number of issues related to the slow movement of funds, locked working capital, loss
of float income, high cost of funds, time consuming reconciliation and manual

47
processes. In India the cash management business primarily involves collections and
payments services.

Products offered by banks under collections (paper and electronic):

 Local cheque collections.
 High value (0 Day clearing).
 Magnetic ink character recognition (MICR) (three day clearing of cheques).
 Outstation cheque collections.
 Cheques drawn on branch locations.
 Cheques drawn on correspondent bank locations.
 Cheques drawn on coordinator locations.
 House cheque collections.
 Outside network cheque collections.
 Cash collections.
 ECS-Debit.
 Post-dated cheque collections.
 Invoice collections.
 Capital market collections.

Products offered by banks under payments (paper and electronic):

 Demand drafts/bankers cheques.
 Customer cheques.
 Locally payable.
 Payable at par.
 RTGS/NEFT/ECS.
 Cash disbursement.
 Payments within bank.
 Capital market payments.

48
The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological
infrastructure. Electronic banking, cheque imaging, enterprise resource planning
(ERP), real time gross settlement (RTGS) is just few of the new initiatives.

The evolution of payment systems such as RTGS has posed some tough challenges
for cash management providers. It is important that banks now look towards a shift to
fees from float although all those cash management providers who have factored in
float money in their product pricing might take a hit. But of course there are
opportunities also attached like collection and disbursal of payments on-line across
the banks.

There are a number of regulatory and policy changes that have facilitated an efficient
cash management system (CMS). Fox example, the Enactment of Information
Technology Act gives legal recognition to electronic records and digital signatures.
The establishment of the Clearing Corporation of India in order to establish a safe
institutional structure for the clearing and settlement of trades in foreign exchange
(FX), money and debt markets has indeed helped the development of financial
infrastructure in terms of clearing and settlement. Other innovations that have
supported in streamlining the process are:

 Introduction of the Centralized Funds Management Service to facilitate better

management of fund flows.
 Structured Financial Messaging Solution, a communication protocol for intra-
bank and interbank messages.

49
 1.8 How to Improve Cash Management Practice in India?
Now the issue is how to improve cash management in India? So for this purpose
followings step can be taken:

Account reconciliation services: Balancing a cheque-book for a very large business

can be quite a difficult process. Banks have developed a system to overcome this
issue. They allow companies to upload a list of all the cheques whereby at the end of
the month, the bank statement will show not only the cleared cheques but also
uncleared ones.

Positive pay: An effective anti-fraud measure for cheque disbursements, using the
cheque issuance data, updated regularly with cheque issuance and payment, the bank
balances all cheques offered for payment. In the case of any discrepancies, the cheque

is reported as exception and is returned.

Balance reporting services: Balance reporting provides help in procuring a

company's current banking information from its accounts. With this service the banks
can offer almost all types of transaction-specific details on activities related to
payment like deposits, cheques, wire transfers etc. It also helps in an effective and
efficient management of regular cash flow.

Lockbox: Facilitates the cash improvement where, instead of being delivered to

business address, customer payments are delivered to a special post office (PO) box.
It is only the customers' payments that are delivered in the PO box and the company's
own bank collects the amount and delivers them to the banks of the customers. The
bank of the customers opens and processes the payments for direct deposit to the bank
account. Lockbox contents regularly removed and processed.

There are, of course, many ways to improve and re-engineer the processes.
However, depending on budgets and also to minimize disturbances to the
business, the following are the suggested simple and initial steps. Note that the
larger the corporation, the more involved the process will be.
(1) Commit to change:

50
Recognize the need for improvement and commit to change (this commitment must
come from top management and cannot be just lip service).
(2) Establish a credible project team:
The project team must have a credible and strong project leader and be sponsored by
the decision maker(s).

(3) Study the existing internal financial transaction processes:

This is straightforward and a simple overview. Ask questions such as: Is electronic
banking used? To what degree? How are revenues collected and how are payments
made? How many staff are dedicated to these functions? What is the decision-making
and authorization chain? What information is available from internal management
information systems?
(4) Review services available in the marketplace:
Review existing service providers and other service providers, making initial
presentations and discussions with banks and providers. Quickly shortlist potential
providers for further in-depth discussions and presentations. Develop a good idea of
what solutions, services and products are on offer.
(5) Establish high-level, practical goals and objectives:
There must be a true desire and commitment to improve and make changes for the
better; however, the process should be evolutionary and practical. Take care to ensure
goals are not artificially set for easy attainment nor established for ideal perfection so
to be unreachable or unrealistic. The goals should be at a higher level than where the
company is now and the initial level of improvement. For example, a goal may be to
achieve costs savings and efficiency gains on the process of collecting revenues and
reconciling with the accounts receivable system.
(6) Establish and commit to specific initiatives, sequence and timeframe:
Action points, initiatives and a realistic time frame must be decided for achieving
each initiative. Communicate these to the providers. For example, an initiative may
include automating and outsourcing vendor payments.
(7) Obtain simple written proposals from the shortlisted potential providers:
Have providers present proposals and be prepared to ask questions and probe exactly
what is being offered and whether the proposed solution, services and products meet
your objectives. Look for comprehensive, well thought-out and realistic solutions.

51
 (8) Decide on the solution and decide on a provider(s):
It is not necessary to have only one provider of services. For example, there could be
a domestic collection bank and a regional account management bank. Document all
goals and services as well as pricing and the period the pricing covers, such as one-
year or two-year, and the start dates.
(9) Review the internal project team and add actual users to help implement the
proposed changes:

This process is to help obtain commitment from the bottom up and to gain the buy in
of
internal users. The bank provider(s) should also have a parallel team to work with
your implementation or project team. Also, a mutually designed and agreed schedule
and action plan should be established.
(10) Review, establish and commit to a process for ongoing
improvement:
Services should be reviewed once implemented to ensure that the high-level goals and
objectives are obtained. There should also be an ongoing emphasis on improvement,
and a culture for empowering staff to recommend and look for ways and means to
improve cash management services and processes. This needs to be encouraged,
especially with the new developments in technology afforded by the Internet.
Management and users must commit to the discipline of cash management.

Protecting Yourself from Fraud

Safeguarding your personal and financial information has become increasingly
challenging, as the threat of fraud has never been greater. Personal computers, the Internet
and e-mail can become dangerous weapons in the hands of someone looking to deceive you.
You can help prevent many types of fraud if you know what to look for. Below are
some of the most common online threats.
What types of scams should I be aware of?
 Among ways that scam artists obtain access to personal and/or financial information are:
 Phishing: These authentic-looking e-mail messages instruct the recipient to
provide sensitive personal, financial or password information. The e-mail appears

52
 to have been sent by a reputable company from a legitimate e-mail address and
includes logos and links to reputable businesses and government agencies.
 Social engineering (a term used in the information security industry):
Criminals pretend to be, for example, from the security and fraud department of a
major credit card company. They ask questions to verify personal information
such as your home address, as well as the numbers on the back of your credit
card, to verify you have the card.
 Bank scams: Perpetrators attempt to get you to log on to a fake Web site to
capture your personal financial information. They send an e-mail to bank
customers asking them to click on a fake bank Web site and supply their account
name and password. These e-mails may contain logos and graphics that appear to
be legitimate, but they often contain typos, e-mail addresses or URLs that have
nothing to do with the company. An example of this is the 419, or advance-fee
scam, run by Nigerian gangs who set up fake bank Web sites.
How can I protect myself from these scams?
 Use extreme caution in providing personal information on Web sites or on
unsolicited phone calls. Be cautious of unexpected e-mails linking to online forms
that ask you to submit sensitive personal information. Legitimate Web sites hardly
ever ask for this kind of information to confirm account renewal or other information.
Scam artists take many precautions to make consumers believe their site is secure and
legitimate.
If you receive an e-mail that warns you, with little or no notice, that an account of
yours will be shut down unless you confirm your billing information, do not reply or
click on the link in the e-mail. Instead, contact the company cited in the e-mail by a
telephone number or Web site address you know to be genuine. (Note: Merrill Lynch
will not ask a client to send sensitive personal information via non-secure e-mail.)
If someone calls about a potential attempt at credit card theft, hang up and call back,
using the phone number on the back of your credit card. Do not share any personal
information over the phone with an unsolicited caller.

53
2. OBJECTIVE

54
 OBJECTIVE

 To learn about various aspects of cash management.

 To gain insights about functioning of cash management.
 To explore the future prospects of cash management

55
3. LITERATURE

REVIEW

56
 LITERATURE REVIEW
According to (Davidson et al, 1999), cash is any medium of exchange, which is immediately
negotiable. It must be free of restriction for any business purpose. Cash has to meet the prime
requirements of general acceptability and availability for instant use in purchasing and
payment of debt. Acceptability to a bank for deposit is a common test applied to cash items.
This is a process of Planning, controlling, and accounting for cash transactions and cash
balances. It is channelling available cash into expenditures that enhance productivity, directly
or indirectly.

In addition, Cash is ready money in the bank or in the business. It is not inventory, it is not
accounts receivable (what you are owed), and it is not property. These might be converted to
cash at some point in time, but it takes cash on hand or in the bank to pay suppliers, to pay
the rent, and to meet the payroll. Profit growth does not necessarily mean more cash.
(Davidson et al, 1999)

Cash is the important current asset for the operations of the business. Cash is the basic input
needed to keep the business running on a continuous basis: it is also the ultimate output
expected to be realized by selling the service or product manufactured by the firm. The firm
should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm's
manufacturing operations while excessive cash will simply remain idle. Without contributing
anything towards the tint's profitability. Thus, a major function of the financial manager is to
maintain a Sound cash position. (Pandey, 2007)

Cash is the money which a firm can disburse immediately without any restriction. The term
cash includes coins, currency and cheques held by the firm, and balances in its bank
accounts. Sometimes near-cash items, such as marketable securities or bank times deposits,
are also included in cash. The basic characteristic of near-cash assets is that they can readily
be converted into cash. Generally, when a firm has excess cash, it invests it in marketable
securities. This kind of investment contributes some profit to the firm. (Hampton, 2001)

Waltson and Head (2007) explained Cash management as the concept which is concerned
with optimizing the amount of cash available, maximizing the interest earned by spare funds
not required immediately and reducing losses caused by delays in the transmission of funds.

57
According to Zimmerer et al (2008) cash management is the process of forecasting,
collecting, disbursing, investing, and planning for cash a company needs to operate smoothly.
They further added that cash management is a vital task because it is the most important yet
least productive asset that a small business owns. A business must have enough cash to meet
its obligations or it will be declared bankrupt. Creditors, employees and lenders expect to be
paid on time and cash is the required medium of exchange.

However, some firm retain an excessive amount of cash to meet any unexpected
circumstances that might arise. These dormant cash have an income-earning potential that
owners are ignoring and this restricts a firm’s growth and lowers its profitability. Investing
cash, even for a short time, can add to company’s earning. Proper cash management permits
the owner to adequately meet cash demands of the business, avoid retaining unnecessarily
large cash balances and stretch the profit generating power of each dollar the business owns
(Zimmerer et al, 2008).

Cash management is particularly important for new and growing businesses. (Jeffrey P.
Davidson et al, 1992) indicated in their book that cash flow can be a problem even when a
small business has numerous clients, offers a superior product to its customers, and enjoys a
sterling reputation in its industry.

Companies suffering from cash flow problems have no margin of safety in case of
unanticipated expenses. They also may experience trouble in finding the funds for innovation
or expansion. Finally, poor cash flow makes it difficult to hire and retain good employees.

Westerfield et al, 1999 noted that it is important to distinguish between true cash
management and a more general subject of liquidity management. The distinction is a source
of confusion because the word cash is used in practice in two different ways.

First, it has its literal meanings, actual cash on hand. However, financial managers frequently
use the word to describe a firm's holdings of cash along with its marketable securities, and
marketable securities are sometimes called cash equivalents or near cash. In our distinction
between liquidity management and cash management is straightforward, they added.

Cash Management and Payment Choices: A Simulation Model with International

58
Comparisons by Carlos Arango, Yassine Bouhdaoui, David Bounie,
Martina Eschelbach and Lola Hernández
Bank of Canada Working Paper 2013-53 December 2013
Increasing the efficiency of retail payment systems is high on the agenda of every central
bank. This objective is shared by the electronic payment systems promoting the use of debit
and credit cards (Borzekowski et al., 2008), and the adoption of innovations such as prepaid
cards (Shy and Tarkka, 2002) and contactless cards (Fung et al., 2012). However,despite the
huge investments in promoting multiple technological innovations, cash is still the main
payment instrument used to pay for low-value transactions in most developed countries.
Jonker et al. (2012) _nd that 69 per cent of transactions up to =C20 in the Netherlands were
paid with cash in 2011. In Germany, 98 per cent of transactions up to=C5 were settled in
cash in 2011 (Deutsche Bundesbank, 2013). 1 In France, Bouhdaoui and Bounie (2012) _nd
that the cash market share for transactions under =C5 was about 90 per cent in 2011, a
proportion that has not changed since 2005. To better understand the role of cash and
alternative payment instruments in the payments ecosystem, it is crucial to study what
determines their use at di_erent transaction values.

In this paper, we develop a simulation model based on two standard rules on payments and
cash withdrawals that are traditionally examined in the economics literature to explain the
use of payment instruments for di_erent transaction values. First, following Alvarez and
Lippi (2009), we assume that an agent makes cash withdrawals even though his cash
holdings are not zero; we de_ne a "Minimum Cash Holdings" rule to mean that an agent
withdraws cash when his cash balances drop below a given threshold. This rule has also been
introduced in stochastic inventory models à la Eppen and Fama (1968, 1969) and Milbourne
(1983), where cash balances are allowed to wander freely between a lower (nonzero) and an
upper limit, beyond which a cash transfer occurs. Second, we assume that a consumer prefers
to use cash whenever he has enough cash; otherwise, the consumer uses a payment card. This
feature of cash as "burning" when it is on hand, called here "Cash First," has been examined
empirically in Arango et al. (2014), Bouhdaoui and Bounie (2012), and Eschelbach and
Schmidt (2013). All three studies con_rm that higher cash holdings lead to greater use of
cash in payments. This Cash First rule has also been formally considered in Alvarez and
Lippi (2013). The authors show that if the level of 1Mooslechner et al. (2012) also show that, in

59
Austria, 86.7 per cent of payments up to =C20 were transacted in cash in 2011.cash holdings is greater
than the transaction amount, it is optimal to use cash and not apayment card.

We assess the validity of the "Minimum Cash Holdings" and "Cash First" rules in a dynamic
shopping environment derived from Milbourne (1983), but adding the fact that consumption
occurs randomly in discrete amounts of di_erent sizes. We contrast the predictions of the
model about cash payment shares at di_erent transaction values with data from payment
diaries in four countries, namely Canada, France, Germany and the Netherlands.
Interestingly, we _nd that the two rules are operating in Canada, France and Germany, but to
a lesser extent in the Netherlands. Indeed, in the Netherlands, a signi_cant fraction of low-
value transactions are paid with cards even though the public has enough cash on hand
(which contradicts the Cash First rule). In addition, the Dutch have the lowest Minimum
Cash Holdings compared to Canada, France and Germany, who hold more cash for various
precautionary reasons. We document how the Netherlands have succeeded in reducing the
use of cash for low-value transactions by implementing a set of strategies with the objective
of decreasing the costs of the point-of-sale (POS) payment system as a whole. These
strategies implied making changes to the payment infrastructure of retailers (reductions in
retailer fees, etc.) and promoting card acceptance and usage among retailers and consumers.
The Netherlands experience shows that retail paymentsystems can switch from a "Cash First"
rule toward a "Card First" rule through adequate incentives and information campaigns,
reaping the potential reductions in costs of a digital payments economy.

Our contribution to the payments literature is threefold. First, we develop an original

framework that predicts the use of payment instrument for each transaction size. In the recent
past, economists have tried to incorporate multiple payment instruments in a cash-
management model. Most of this work is built on Baumol's view (Baumol, 1952)of a
continuous and exogenous _ow of consumption that is not equipped to analyze the use of
payment instruments for speci_c transaction values. One interesting exception is Whitesell
(1989, 1992). Given the respective costs of payment instruments, Whitesell shows that there
are exclusive transaction domains for payment instruments: cash for lowvalue transactions,
and other payment instruments (e.g., payment cards) for higher-value transactions. However,
this approach is not fully consistent with the empirical fact that, although cash is used more

60
frequently for low-value transactions, there are no exclusive transaction domains, and cards
and cash are used to pay for both low- and high-value transactions (Arango et al., 2014;
Bouhdaoui and Bounie, 2012). Second, we assess the validity of our model across different
economies, exploiting four detailed micro data sets based on surveys and payment diaries
commissioned by central banks and card payment networks.
This effort is significant in the _eld of payment economics, where public detailed data are
scarce and hardly homogeneous for this type of comparison. Third, our results imply that our
theoretical understanding of cash demand is still limited and should be rethought in the light
of payment innovations that may significantly change the way consumers handle cash.

The remainder of the paper is structured as follows. In section 2, we present the simulation
model and the methodology of the simulations. Section 3 describes the data and section 4 the
results of the simulations.

61
 4. RESEARCH
METHODOLOGY

62
 Research methodology

Undertook extensive literature survey connected with the problem. Its ultimate goal is to
bring the reader update with current literature on a specific topic and forms the basis for
another goal, such as the justification for future research in the area. For this purpose, the
abstracting and indexing journals and published or unpublished bibliography are the first
place to go to. Academic journals, conferences proceedings, Government reports, books etc
must be tapped depending on the nature of the problem.

Good library will be a great help to the researcher at this stage. A good literature review is
characterized by;
A logical flow of ideas, current and relevant references with consistent, appropriate
referencing style, proper use of terminology, and an unbiased and comprehensive view on the
topic. Researcher must devote sufficient time in reviewing of research already undertaken on
the related problem. This is done to find out what data and other materials, if any, are
available for operational purpose.

RESEARCH DESIGN & NATURE

Research design explains the decisions regarding what, where, when, how by what means
concerning an enquiry or a research. Research design as such is defined as -an arrangement
of
conditions for collection and analysis of data in a manner that aims to combine relevance the
research purpose with economy in procedure.
Research design is a framework within which researches conducted and contains a blueprint
for collection, measurement and analysis of data.
Research design is mainly of following types: -
 Exploratory research: The major purposes of exploratory studies are the

63
 identification of problems, the more precise formulation of problems and the
formulations of new alternative courses of action.
 Descriptive Research: Descriptive research in contrast to exploratory
research is marked by the prior formulation of specific research questions.
Descriptive research is also characterized by a Preplanned and structured design.
 Casual Research: A casual design investigates the cause and effect
relationship Between two or more variables. The hypothesis is tested and the
experiment is done.

The study that was carried out in this project is Analytical and Exploratory kind of
research in which an attempt is made it explore as much information as possible
about the cash management

64
 DATA COLLECTION
There are two types of data:
 Primary Data: These data are collected first time as original data. The data is
recorded as observed or encountered. Essentially they are raw materials. They
may be combined, totaled but they have not extensively been statistically
processed. For example, data obtained by the peoples.

 Secondary Data: Sources of Secondary Data are Official Publications,

Publications Relating to Trade, Journal/ Newspapers, Data Collected by Industry
Associations, Unpublished Data etc.

My main source of data collection for this project report is Secondary Data.

65
5. FINDING

66
 Finding
GROUND REALITIES:
The XYZ Ltd. is a FMCG Company. The company has presence in more than 15 cities and
has its head quarter in Mumbai. The company has Depots at these cities. And each depot has
some turnover every month. The name of Cities, the monthly turns over of the each depots
and no. Of retailers in each cities are as follows:

Sr. No. Cities Monthly Turnover (Rs. In Crore) No. of Retailers

1 Mumbai 1.5 200
2 Delhi 1.25 180
3 Calcutta 1.00 175
4 Madras 0.75 180
5 Ahmadabad 0.75 150
6 Bangalore 0.70 160
7 Hyderabad 1.00 155
8 Pune 0.50 140
9 Jaipur 0.60 150
10 Indore 0.75 120
11 Cochin 0.50 130
12 Agra 0.50 120
13 Jalandhar 0.40 110
14 Jammu 0.10 115
15 Nagpur 0.10 135
16 Lucknow 0.10 140
The requirements of the XYZ Ltd. are as follows:
1. All money should be XYZ Ltd. a/c at Delhi.
2. All money should on the next day basis.
3. Details of cheques deposited at different location on daily basis:
 Location
 No. of cheques deposited
 Cheque number
 Cheque amount
 Date of deposit

67
 Clearing date
 Retailer name/code
 Returned cheques
 Date
 Reason
 Location
 Amount

 Courier pick-up service at each location.

 Monthly reports of each location about sales, collection, expenditures etc.
 Other MIS reports

68
6. ANALYSIS

69
 ANALYZING PROCESS:
These are the conditions and facts of the organization. Now, what the bank will do?
BANK will analyse the location of the company. The XYZ Ltd. has sixteen locations in the
country. This is not always possible to have the branches at each location of the client for the
banks. In this case, we are taking the assumptions as follows:
 In 10 locations of the company, the bank has its own presence.
 In 2 locations of the company, the bank has tie-up with correspondent bank
 And in remaining 4 locations, the bank has no presence as well as no tie-up
with any other bank.

How the bank makes allocation of the different instruments?

The bank broadly categorized the instruments into two types:

1. Local Cheque Collections (LCC)
LCC are the cheques, which are drawn and deposited at the same location. Eg. A
Cheque drawn at Jaipur and deposited at Jaipur only.

The LCC is again categorised into two types:

a) LCC BRN: A local Cheque which is drawn and deposited at the same
location where the bank has its own presence.

b) LCC COR: A local Cheque which is drawn and deposited at the

same location where the bank doesn’t have its own presence but has
tie up with correspondent Bank.

2. Upcountry Cheque Collections (UCC)

The UCC are the cheques, which are drawn and deposited at different locations.
Eg. A Cheque drawn at Jaipur and deposited at Delhi.

The UCC is again categorised into two types:

70
 a) UCC BRN: An upcountry Cheque which is drawn at one location and
deposited at another location where the bank has its own presence.
b) UCC COR: An upcountry Cheque which is drawn at one location and
deposited at another location where the bank has tie-up with correspondent Bank.

c) UCC ONW: An upcountry Cheque which is drawn at one location and

deposited at another location where the bank neither have its own presence nor
have tie-up with correspondent bank.

PRICING:

Pricing is competitive; varies from centre to center. It also varies from

instruments to instruments.

Special pricing can be worked out taking into account the volume of funds & the
centres. The pricing part of the CMS is very complex. Normally, the STANDARD
CHARTERED bank takes into account the following factors while going for pricing:

1) Bank In Funds/ Out of Funds & Correspondent Bank Charges: When

Cheque is deposited in the bank it passes through the clearing house. In India,
clearing is done through RBI, SBI and PSU banks. The RBI has presence in 15
cities in India while SBI has 938 locations in India including its associates. Other
cities where clearing
house is not there, the clearing is done through Correspondent Bank, mostly these
are PSU Banks or Co-operative Banks.

Suppose I deposit the Cheque on day 0, then the time taken by the
clearing houses to debit the bank account would be different. The SCB
has to debit its customer’s account on the next day basis irrespective of
days to clear.

71
Day when the Clearing Bank Days for which Bank In Fund/Out of
Cheque will be bank is out Fund
credited fund
Day1 RBI 0 Not out of funds
Day2 SBI 1 1 Day out of funds
Day3 Correspondent Bank 1 1 Day out of funds

In this case, the bank charges interest on the money which it gives in form of “Credit
against Uncleared Cheque”, to the company. When it comes to the Correspondent
bank, the bank has to pay extra charges to these banks.

2) Overheads: The bank takes into account the overheads charges, which it
occurs in the process. The overheads charges include salary, administration
charges, maintenance etc.

3) Margin: After including the transaction and other overheads charges, the
bank gets the cost of transaction. On this the bank adds its margin for being in the
business.

In pricing, other elements like courier charges return cheques etc. also considered.
Pricing in CMS in generally negotiable between the company and the Bank.

72
7. LIMITATIONS
OF
THE REPORT

73
 LIMITATIONS OF THE REPORT
Following are the limitations faced by me during this project:
 The allotted time period for the study was relatively
insufficient, keeping in mind the long duration it can take at
times, to close a particular corporate deal.

 The study might not produce absolutely accurate results as

it was based on a sample taken from the population.

 It was difficult getting time and access to senior level

Finance/HR managers (who had to be talked to, to get
required information) due to their busy schedules and prior
commitments.

74
 8. CONCLUSION
AND
RECOMMENDATIONS

75
 CONCLUSION

 The policies which the bank adopt to complete the formalities from their
customers are very complex.

 Banks are much more conscious for deposits rather than exploring the new
opportunities for growth.

 Customers are not aware that the service was a free one, this is clear that
almost all the attributes of the services are favorable to the customers still
customers are not using the service and are not even aware of it

 Almost all customers once educated about the service readily enrolled for it
whereas a mere portion did not trust the bank and thought that the bank would
have some hidden charges that they are not putting forward.

 Banks are losing millions in lost and overpaid interest, using unnecessary
overdraft facilities and incurring significant fees for doing.

 Banks are suffering from low credit off take and possibility of non-performing
assets, and also the increasing stress on accountability.

76
 RECOMMENDATIONS

We suggest following measures, which Bank could take:

 To identify regions where promotions are required. Banks should open more
branches in different cities and identifying prospective customers in potential
geographical location and convincing them to open an account so that new
Business Opportunities of the bank can be explored.

 Try to reduce cost, so that benefits can be passed on to customers. Senior

managers at Banks keep on telling that it is difficult to reduce cost, because of
services they provide. But the fact is, India being a price sensitive market; people
at times go for monetary benefits rather than for long-term non- monetary
benefits.

 If charges can’t be reduced because of costs involved, make the services

customized, so that services are provided to only those customers who are
willing to pay the price for services they are getting and let the other customers
enjoy costs benefits without getting services.

 Banks should provide competitive prices as nowadays a lot business is being

acquired.

 Banks should contact with their clients regularly for knowing the problems
faced by them. This will help Banks in providing best services to customers. This
will result in additional customer base by getting further references from
satisfied clients.

 Banks should provide a separate relationships manager who should be liable

to handle all the needs of the client.

77
 Banks should curtail their cash expenditure and increase their cash in hand,
cash at bank, and marketable securities, so that liquidity could be maintained.

 Banks should try to increase their liquid assets and decrease current liabilities
so that firm can easily meet out the current liabilities. At present the current
liabilities or short term liabilities are not secured.

 Banks should not only increase cash in hand, cash at bank and marketable
securities but also increase other current assets for payment of short term
liability.

 Banks should curtail their long term borrowings from short term funds so that
financial obligation may be managed properly.

 Minimize and simplify the formalities to be followed by customers for getting

the loans sanctioned and for its disbursal.

 Necessary steps may be taken to improve the reporting system for easy
transfer of funds. In this context, the need for introducing Management
Information System (MIS) may be explored.

78
BIBLIOGRAPHY

79
 BIBLIOGRAPHY
 Referred Sites

 http://www.investopedia.com/terms/c/cash-management.asp

 http://www.thebanker.com/Transactions-Technology/Cash-Management

 https://www.quora.com/What-are-the-objectives-of-cash-management

 http://www.theindianbanker.co.in/html/abt.htm

 http://economictimes.indiatimes.com/topic/cash-management

 Khan and Jain (Financial Management)

 P.Periasamy (Management of Working Capital)

 L.M Bhole (Financial Institution and Market)

 Referred to Book CASH MANAGEMENT MADE EASY for better

understanding of the concept

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