ABSTRACT

The need for Cash to run the day-to-day business activities cannot be
overemphasized. One can hardly find a business firm, which does not require any
amount of Cash. Indeed, firms differ in their requirements of the Cash.

A firm should aim at maximizing the wealth of its shareholders. In its

endeavor to do so, a firm should earn sufficient return from its operation. Earning a
steady amount of profit requires successful sales activity. The firm has to invest
enough funds in current asset for generating sales. Current asset are needed
because sales do not convert into cash instantaneously. There is always an
operating cycle involved in the conversion of sales into cash.

The objectives are to analyze the Cash management and to determine

efficiency in cash, inventories, debtors and creditors. Further, to understand the
liquidity and profitability position of the firm.
These objectives are achieved by using ratio analysis and then arriving at
conclusions, which are important to understand the efficiency / inefficiency of
Cash.
It was noticed in the study that the company had utilized its Cash efficiently
and can also try to get more effective values by working on it. The cash required to
meet out the current liabilities is maintained at a normal level that shows the
company follows an average policy.
INTRODUCTION:
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 firm’s profitability. Thus, a major function of the financial manager is to
maintain a sound cash position.

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.

NEED FOR THE STUDY

The importance of Cash management in any industrial concern cannot be
overstressed. Under the present inflationary condition, management of Cash is perhaps more
important than even management of profit and this requires greatest attention and efforts of the
finance manager. It needs vigilant attention as each of its components require different types of
treatment and it throws constant attention on exercise of skill and judgment, awareness of
economic trend etc, due to urgency and complicacy the vital importance of Cash.

The anti-inflationary measure taken up by the Government, creating a tight money

condition has placed working capital in the most challenging zone of management and it requires
a unique skill for its management. Today, the problem of managing Cash has got the recognition
of separate entity, so its study and management is of major importance to both internal and
external analyst to judge the current position of the business concerns. Hence, the present study
entitled “An Analysis on Cash Management” has been taken up.
FACTS OF CASH MANAGEMENT:

Cash management is concerned with the managing of: (i) Cash flows into and out of the
firm, (ii) Cash flows within the firm, and (iii) Cash balances held by the firm at a point of time
by financing deficit or investing surplus cash. It can be represented by a cash management cycle.
Sales generate cash which has to be disbursed out. The surplus cash has to be invested while
deficit this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and
control. Cash management assumes more importance than other current assets because cash is
the most significant and the least productive asset that a firm’s holds. It is significant because it
is used to pay the firm’s obligations. However, cash is unproductive. Unlike fixed assets or
inventories, it does not produce goods for sale. Therefore, the aim of cash management is to
maintain adequate control over cash position to keep the firm sufficiently liquid and to use
excess cash in some profitable way.

In recent past, a number of innovations have been done in cash management techniques.
An obvious aim of the firm these days is to manage its cash affairs in such a way as to keep cash
balance at a minimum level and to invest the surplus cash in profitable investment opportunities.

In order to resolve the uncertainty about cash flow prediction and lack of synchronization
between cash receipts and payments, the firm should develop appropriate strategies for cash
management. The firm should evolve strategies for cash management. The firm should evolve
strategies regarding the following four facets of cash management.

• Cash planning: Cash inflows and outflows should be planned to project cash surplus or
deficit for each period of the planning period. Cash budget should be prepared for this
purpose.
• Managing the cash flows: The firm should decide about the properly managed. The
cash inflows should be accelerated while, as far as possible, the cash outflows should be
decelerated.
 • Optimum cash level: the firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be matched to
determine the optimum level of cash balances.
• Investing surplus cash: The surplus cash balances should be properly invested to earn
profits. The firms should decide about the division of such cash balances between
alternative short-term investment opportunities such as bank deposits, marketable
securities, or inter-corporate lending.

MOTIVES FOR HOLDING CASH

The firm’s need to hold cash may be attributed to the following three motives:
• The transactions motive
• The precautionary motive
• The speculative motive

TRANSACTION MOTIVE
The transactions motive requires a firm to hold cash to conduct its business in the
ordinary course. The firm needs cash primarily to make payments for purchases, wages and
salaries, other operating expenses, taxes, dividends etc. The need to hold cash would not arise if
there were perfect synchronization between cash receipts and cash payments, i.e., enough cash is
received when the payment has to be made. But cash receipts and payments are not perfectly
synchronized. For those periods, when cash payments exceed cash receipts, the firm should
maintain some cash balance to be able to make required payments. For transactions purpose, a
firm may invest its cash in marketable securities. Usually, the firm will purchase securities
whose maturity corresponds with some anticipated payments, such as dividends or taxes in the
future. Notice that the transactions motive mainly refers to holding cash to meet anticipated
payments whose timing is not perfectly matched with cash receipts.
PRECAUTIONARY MOTIVE
The precautionary motive is the need to hold cash to meet contingencies in the future. It
provides a cushion or buffer to withstand some unexpected emergency. The precautionary
amount of cash depends upon the predictability of cash flows. If cash flows can be predicted
with accuracy, less cash will be maintained for an emergency. The amount of precautionary cash
is also influenced by the firm’s ability to borrow at short notice when the need arises. Stronger
the ability of the firm to borrow at short notice, less the need for precautionary balance. The
precautionary balance may be kept in cash and marketable securities. Marketable securities play
an important role here. The amount of cash set aside for precautionary reasons is not expected to
earn anything; the firm should attempt to earn some profit on it. Such funds should be invested
in high-liquid and low-risk marketable securities. Precautionary balances should, thus, be held
more in marketable securities and relatively less in cash.

SPECULATIVE MOTIVE

The speculative motive relates to the holding of cash for investing in profit-making
opportunity to make profit may arise when the security prices change. The firm will hold cash,
when it is expected that interest rates will rise and security prices will fall. Securities can be
purchased when the interest rate is expected to fall; the firm will benefit by the subsequent fall in
interest rates and increase in security prices. The firm may also speculate on materials prices. If
it is expected that materials prices will fall, the firm can postpone materials purchasing and make
purchases in future when pric4e actually falls. Some firms may hold cash for speculative
purposes. By and large, business firms do not engage in speculations. Thus, the primary
motives to hold cash and marketable securities are: the transactions and the precautionary
motives.

CASH PLANNING

Cash flows are inseparable parts of the business operations of firms. A firm needs cash
to invest in inventory, receivable and fixed assets and to make payment for operating expenses in
order to maintain growth in sales and earnings. It is possible that firm may be making adequate
profits, but may suffer from the shortage of cash as its growing needs may be consuming cash
very fast. The ‘poor cash’ position of the firm cash is corrected if its cash needs are planned in
advance. At times, a firm can have excess cash may remain idle. Again, such excess cash
outflows. Such excess cash flows can be anticipated and properly invested if cash planning is
resorted to. Cash planning is a technique to plan and control the use of cash. It helps to
anticipate the future cash flows and needs of the firm and reduces the possibility of idle cash
balances ( which lowers firm’s profitability ) and cash deficits (which can cause the firm’s
failure).
.
CASH MANAGEMENT – BASIS STRATEGIES

The management should, after knowing the cash position by means of the cash budget,
work out the basic strategies to be employed to manage its cash.

CASH CYCLE:

The cash cycle refers to the process by which cash is used to purchase materials from
which are produced goods, which are them sold to customers.
Cash cycle=Average age of firm’s inventory
+Days to collect its accounts receivables
-Days to pay its accounts payable.

The cash turnover means the numbers of times firm’s cash is used during each year.

360
Cash turnover = ----------------
Cash cycle

The higher the cash turnover, the less cash the firm requires. The firm should, therefore, try to
maximize the cash turn.
MANAGING COLLECTIONS:

a) Prompt Billing:
By preparing and sending the bills promptly, without a time log between the dispatch of
goods and sending the bills, a firm can ensure earlier remittance.

b) Expeditious collection of cheques:

An important aspect of efficient cash management is to process the cheques receives very
promptly.

c) Concentration Banking:
Instead of a single collection center located at the company headquarters, multiple
collection centers are established. The purpose is to shorten the period between the time
customers mail in their payments and the time when the company has use of the funds are then to
a concentration bank – usually a disbursement account.

d) Lock-Box System:
With concentration banking, a collection center receives remittances, processes them and
deposits them in a bank. The purpose is to lock-box system is to eliminate the time between the
receipt of remittances by the company and their deposit in the bank. The company rents a local
post office box and authorizes its bank in each of these cities to pick up remittances in the box.
The bank picks up the mail several times a day and deposits the cheque in the company’s
accounts. The cheques are recorded and cleared for collection. The company receives a deposits
the cheque in the company’s accounts. The cheques are recorded and cleared for collation. The
company receives a deposit slip and a lift of payments. This procedure frees the company from
handling a depositing the cheques.
CONTROL OF DISBURSMENT

a) Stretching Accounts Payable

A firm should pay its accounts payables as late as possible without damaging its credit
standing. It should, however, take advantages of the cash discount available on prompt payment.

b) Centralized Disbursement
One procedure for rightly controlling disbursements is to cenrealise payables in to a
single account, presumably at the company’s headquarters. Such an arrangement would enable a
firm to delay payments and can serve cash for several reasons. Firstly, it increases transit time.
Secondly, if a firm has a centralized bank account, a relatively smaller total cash balances will be
needed.

c) Bank Draft
Unlike an ordinary cheque, the draft is not payable on demand. When it is presented to
the issuer’s bank for collection, the bank must present it to the issuer for acceptance. The funds
then are deposited by the issuing firm to cover payments of the draft. But suppliers prefer
cheques. Also, bank imposes a higher service charge to process them since they require special
attention, usually manual.

d) Paying the float

The amount of cheques issued by the firm but not paid for by the bank is referred to as
the “payment float”. The differences between “payment float” and “collection float” are the net
float. So, if a firm enjoys a positive “net float”, it may issue cheques even if it means having an
ever drown account in its books. Such an action is referred to as “playing the float”, within
limits a firm can play this game reasonably safely.
Thus management of cash becomes essential and it should be seen to, that neither
excessive nor inadequate cash balances are maintained.
CASH FLOW ANALYSIS

The cash flow analysis is done with the help of cash flow statement. A cash flow
statement is a statement depicting changes in cash position from one period to another. It is an
important planning tool. Cash flow statement gives a clear picture of the source of cash, the uses
of cash and the net changes in cash. The primary purpose of cash flow statement is to show that
as to where from the cash to be acquired and where to use them.

UTILITY OF CASH FLOW ANALYSIS

A Cash flow analysis is an important financial tool for the management. Its chief
advantages are as follows.
1. Helps in efficient cash management
Cash flow analysis helps in evaluating financial policies and cash position. Cash is the
basis for all operation and hence a projected cash flow statement will enable the management to
plan and co-ordinate the financial operations properly. The management can know how much
cash is needed from which source it will be derived, how much can be generated, how much can
be utilized.
2. Helps in internal financial management
Cash flow analysis information about funds, which will be available from operations.
This will helps the management in repayment of long-term debt, dividend policies etc.,
3. Discloses the movements of Cash
Cash flow statement discloses the complete picture of cash movement. The increase in
and decrease of cash and the reasons therefore can be known. It discloses the reasons for low
cash balance in spite of heavy operation profits on for heavy cash balance in spite of low profits.
4. Discloses success or failure of cash planning
The extent of success or failure of cash planning be known by comparing the projected
cash flow statement with the actual cash flow statement and necessary remedial measures can be
taken.
DETERMINE THE OPTIMUM CASH BALANCE

One of the primary responsibilities of the financial manager is to maintain a sound

liquidity position of the firm so that the dues are settled in time. The firm needs cash to purchase
raw materials and pay wages and other expenses as well as for paying dividend, interest and
taxes. The test of liquidity is the availability of cash to meet the firm’s obligations when they
become due.
A firm maintains the operating cash balance for transaction purposes. It may also carry
additional cash as a buffer or safety stock. The amount of cash balance will depend on the risk-
return trade-off. If the firm maintains small cash balance, its liquidity position weakens, but its
profitability improves as the released funds can be invested in profitable opportunities
(marketable securities). When the firm needs cash, it can sell its keeps high cash balance, it will
have a strong liquidity position but its profitability will be low. The potential profit foregone on
holding large cash balance is an opportunity cost to the firm. The firm should maintain optimum
– just to enough, neither too much nor too little – cash balance. How to determine the optimum
cash balance if cash flows are predictable and if they are not predictable.

Optimum cash balance under certainty

BAUMOL’S MODEL
The Baumol model of cash management provides a formal approach for determining a
firm’s optimum cash balance under certainty. It considers cash management similar to an
inventory management problem. As such, the firm attempts to minimize the sum of the cost of
holding cash (inventory of cash) and the cost of converting marketable securities to cash.
The baumol’s model makes the following assumptions:
• The firm is able to forecast its cash needs with certainty.
• The firm’s cash payments occur uniformly over a period of time.
• The opportunity cost of holding cash is known and it does not change over time.
• The firm will incur the firm sells securities and starts with a converts securities to cash.

Cash balance

C/2 Average

Time

0 T1 T2 T3
Baumol’s model for cash balance

Cost trade-off: Baumol’s model

 OBJECTIVES OF THE STUDY

 Primary Objective:
• To analyze the cash management of Standard Polymers.

 Secondary Objective:
• To find out the liquidity position of the concern through ratio analysis.
• To study the growth of standard polymers in terms of cash flow statement.
• To make suggestion and recommendation to improve the cash position of standard
polymers.

DATA ANALYSIS & INTERPRETATION

5.1 CALCULATIONS OF FUNDS FROM OPERATION AND CASH FROM

OPERATION FOR THE YEAR ENDED (Rs in Thousand)

Particulars 2003-2004 2004-2005 2005-2006 2006-2007

Net Profit 621082 1183275 478738 400470
Depreciation during the 1260161 1440184 1620207 1800231
year
FFO(FLO) 1881243 2623459 2098945 2200701

ADD:
Sundry debtors 736292 293962
Prepaid Expenses 43200
Sundry creditors 4731130 1710210 10643203
Outstanding liabilities 1009534 91841
Bank O/D 2950464 10801353

LESS:
Stock 1497634 567073 1755576 1106913
Bank O/D 2950464
Outstanding liabilities 767131 334244
Sundry Debtors 9562393 910746
Sundry Creditors 1699354

CFO(CLO) 9854229 342963 1516020 8950797

5.2 CASH FLOW STATEMENT

Inflow 2003-2004 2004-2005 2005-2006 2006-2007
Opening balance 14564 64678 104545 63582
Cash from operation 9854229 342963 1516020 8950797
Increase in loan funds 2410798

Sales of Asset 797244

Increase in share 2800000
capital
Total 9868793 1204885 6831363 9014379

Outflows
Cash outflow from
operation
Purchase of Asset 9776411 6767781 7004825
Decrease in loan 27704 900340 1731144
funds
Decrease in share 200000
capital
Closing balance 64678 104545 63582 278410
Total 9868793 1204885 6831363 9014379

Inference:

This table shows that the cash flow statements of STANDARD POLYMERS are to be
efficient. The cash inflow of the company is to be increased for year after year. The fund from
operation is also to differ from every year. The company should increase their share capital from
2006-2007 for Rs. 28, 00,000. Its must be used as efficient for the next year for decrease their
loan amount.

5.3 TREND ANALYSIS

Y = a + bX

Where a = ∑Y ; b = ∑XY
n ∑X2

5.3.1 INVENTORIES

Inventories
YEAR X X2 (Rs in lakhs) XY
Y (Rs in lakhs)
’02 – ‘03 -2 4 27,76,072 -55,52,144
’03 – ‘04 -1 1 12,78,438 -12,78,438
’04 – ‘05 0 0 18,45,511 0
’05– ‘06 1 1 36,01,087 36,01,087
’06 – ‘07 2 4 47,08,000 94,16,000
TOTAL 10 1,42,09,108 61,86,505

a = 1, 42, 09,108 = 2, 84,182.6

 5

b = 61, 86,505 = 6, 18,650.5

10
Inference:

This table indicates that the volume of inventory has been increased every year. Its must
be increased for the last year 11, 06,913. Inventories value in 2008 will be about 21,

40,134.1
5.3.2 SUNDRY DEBTORS

Sundry
YEAR X X2 Debtors XY
(Rs) (Rs)
Y
’02 – ‘03 -2 4 20,69,513 -41,39,026
’03 – ‘04 -1 1 28,05,805 -28,05,805
’04 – ‘05 0 0 25,11,842 0
’05 – ‘06 1 1 1,20,74,236 1,20,74,236
’06 – ‘07 2 4 1,29,84,982 2,59,69,964
TOTAL 10 3,24,46,378 3,10,99,369

a = 3, 24, 46,378 = 64, 89,275.6

5

b = 3, 10, 99,369 = 31, 09,936.9

10

Inference:
 This table shows that the Sundry Debtors has been more every year. It must be increased
more than 6 times from the beginning of the period of the study. Sundry Debtors value in

2008 will be about 1, 58, 19,086.3.

5.3.3 CASH / BANK

Cash / Bank
YEAR X X2 (Rs) XY
Y (Rs)
’02– ‘03 -2 4 14,564 -29,128
’03 – ‘04 -1 1 64,679 -64,679
’04 – ‘05 0 0 61,858 0
’05 – ‘06 1 1 63,582 63,582
’06 – ‘07 2 4 2,78,410 5,56,820
TOTAL 10 4,83,093 5,26,593

a = 4, 83,093 = 96,618.6
5

b = 5, 26,593 = 52,659.3
10

Inference:

The cash value of the STANDARD POLYMERS has been increased and the estimated it
should be decreased for the previous year. Cash value in 2008 will be about 254596.5.

5.3.4 LOANS & ADVANCES

Loans &
YEAR X X2 Advances XY
 (Rs) (Rs)
Y
’02 – ‘03 -2 4 1,00,065 -2,00,130
’03 – ‘04 -1 1 8,26,377 -8,26,377
’04 – ‘05 0 0 3,60,138 0
’05 – ‘06 1 1 27,70,937 27,70,937
’06 – ‘07 2 4 5,62,837 11,25,674
TOTAL 10 46,20,354 28,70,104

a = 46, 20,354 = 9, 24,070.8

5

b = 28, 70,104 = 2, 87,010.4

10

Inference:

The table indicates that the loans and advances of STANDARD POLYMERS will be
reduced from the year 2006-2007. Loans & Advances value in 2008 will be about 17,

85,102.

5.3.5 CURRENT LIABILITIES

Current
YEAR X X2 Liabilities XY
(Rs) (Rs)
Y
’02 – ‘03 -2 4 22,58,576 -45,17,152
 ’03 – ‘04 -1 1 57,45,442 -57,45,442
’04 – ‘05 0 0 38,56,338 0
’05 – ‘06 1 1 1,44,73,102 1,44,73,102
’06 – ‘07 2 4 1,25,88,203 2,51,76,406
TOTAL 10 3,89,21,661 2,93,86,914

a = 3, 89, 21,661 = 77, 84,332.2

5

b = 2, 93, 86,914 = 29, 38,691.4

10

Inference:

The table shows that the company’s current liability will be increased from the every year.
Current Liabilities value in 2008 will be about 1, 66, 00,406.4.

5.3.6 CURRENT ASSET

Current asset
X X2 (Rs) XY

YEAR Y (Rs)
’02 – ‘03 -2 4 21,27,277 -42,54,554
’03 – ‘04 -1 1 41,48,921 -41,48,921
’04 – ‘05 0 0 59,74,933 0
’05 – ‘06 1 1 1,85,09,842 1,85,09,842
’06 – ‘07 2 4 2,03,50,240 4,07,00,480
 TOTAL 10 5,11,11,213 5,08,06,947

a = 5,11,11,213 = 1,02,22,242.6
5

b = 5,08,06,947 = 50,80,694.7
10

CONCLUSION

The Cash Management Analysis done on the financial position of the company
has provided a clear view on the activities of the company. The use of the ratio analysis, trend
analysis, Cash Flow Statement and other accounting and financial management helped in this
study to find out the financial soundness of the company.
This project was very useful for the judgment of the financial status of the
company from the management point of view. This evaluation proved a great deal to the
management to make a decision on the regulation of the funds to increase the sales and bring
profit to the company.