A STUDY ON CASH MANAGEMENT

OF
STEEL AUTHORITY INDIA LIMITED

SUMMER PROJECT REPORT

Submitted by
BHAVYE KUMAR SINGH

Under the Guidance of

Mr. MOHARKAR
(DEPUTY GENERAL MANAGER)

In partial fulfillment for the award of the degree

of
BACHELOR OF BUSINESS ADMINISTRATION

DELHI METROPOLITAN EDUCATION , SEC-62, NOIDA

(AFFILIATED TO GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY)
CONTENTS

CHAPTER TITLE PAGE NO

STUDENT’S DECLARATION
CERTIFICATE
ACKNOWLEDGEMENT
EXECUTIVE SUMMARY

I INTRODUCTION
1.1 Profile of an organization
II NEED FOR THE STUDY

III REVIEW OF LITERATURE

IV OBJECTIVES OF THE STUDY

V RESEARCH METHODOLOGY

VI DATA ANALYSIS AND INTERPRETATION

VII FINDINGS OF THE STUDY

VIII SUGGESTION & RECOMMENDATION

IX CONCLUSION

X LIMITATIONS OF THE STUDY

XI SCOPE FOR FURTHER STUDY

ANNEXURE
XII 1. Questionnaire
2. Bibliography
STUDENT’s DECLARATION

1. I, Bhavye Kr Singh Enrollment No. 40151101716 of BBA Batch (2016-19) of DME

Management School, hereby declare that the Summer Training Report entitled Cash
Management at Steel Authority India Limited is an original work and the same has not been
submitted to any other University/Organization for the award of any other degree.

2. A presentation of this Training Report was made on _________ and the suggestions as
approved by the mentor & peers have been duly incorporated.

Signature of the Candidate Presentation

In charge (Mentor)

Countersigned
Head, DME Management School
Seal
SEAL
CERTIFICATE

This is to certify that Bhavye Kr. Singh istudent of Delhi Metropolitan Education, Noida has
worked under my supervision and guidance on Cash Management by Steel Authority India
Limited. He was in constant touch with me and the matter embodied in this report is original and
authentic and same recommended for evaluation.

I wish him all the best in his entire future Endeavour.

Signature:
ACKNOWLEDGEMENT

With the divine blessing of God, I express my deep gratitude to

Mr. Moharkar. Deputy General Manager, Steel Authority India Limited.

My special thanks to our college HOD- Mr. Ravi Kant Swami for extending me moral
support during the course of this work.

I am also thankful to all other faculty members of the department for their constant
co-operations and encouragement in pursuing my project work.

At this turning point in my life, my profound thanks goes to my parents, my brothers and to my
friends who supported me by giving love and encouragement which I needed the most, I owe
deep sense of gratitude to all of them.
EXECUTIVE SUMMARY

The title of the project is “A study on cash management of Steel Authority India limited”.

The main objective is to ascertain the cash position of the SAIL.

The research is based on through secondary data.

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 their wealth. In its endeavor to do so, a firm should earn
sufficient return from its operation. 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.

The company goes in insufficient manner in the past five years. So the company takes steps to
improve the performance and concentrate in local areas. The company financial capacities are
low and borrow funds from the government and outsiders. It creates liabilities for the
company.The working capital is reducing from year to year. So they should take some necessary
steps for adding more amounts to working capital.
CHAPTER I
INTRODUCTION

1.1 COMPANY PROFILE

Steel Authority of India Limited (SAIL) is an Indian state-owned steel making

company based in New Delhi, India . It is a public sector undertaking, owned and
operated by the Government of India with an annual turnover of INR 44,452 Crore
(US$ 6.83 Billion) for fiscal year 2016-17. Incorporated on 24 January 1973, SAIL
has 76,100 employees (as of 01-Jun-2018). With an annual production of 14.38
million metric tons, SAIL is the largest steel producer in India and one of the
largest steel producers in the world .[2] The Hot Metal production capacity of the
Company will further increase and is expected to reach a level of 50 million tonnes
per annum by 2025.[3] Shri P.K Singh is the current Chairman of SAIL.

SAIL operates and owns 5 integrated steel plants

at Bhilai, Rourkela, Durgapur, Bokaro and Burnpur(Asansol) and 3 special steel
plants at Salem, Durgapur and Bhadravathi. It also owns a Ferro Alloy plant
at Chandrapur. As a part of its global ambition, the company is undergoing a
massive expansion and modernisation programme involving upgrading and
building new facilities with emphasis on state of the art green technology.
According to a recent survey, SAIL is one of India's fastest growing Public Sector
Units. Besides, it has R&D centre for Iron & Steel (RDCIS), Centre for
Engineering and Technology (CET), Management Training Institute (MTI) and
SAIL Safety Organisation (SSO) located at Ranchi capital of Jharkhand.

SAIL, is in the process of modernising and expanding its production units, raw
material resources and other facilities to maintain its dominant position in the
Indian steel market. The aim is to increase the production capacity from the base
level production of 14.6 MT per annum (2006–07) to 26.2 MT per annum of Hot
Metal.

On 25 May 2012, Steel Authority of India Limited entered into a Memorandum of

Understanding with the Government of West Bengal and Burn Standard Company
Ltd. for setting up of a Railway Wagon factory of approximately ₹210
crore (US$31 million). This project will create an approximate 75,300 jobs. [16][17][25]
The company also looking to establish one full capacity integrated plant in Andhra
Pradesh or Telangana and surveying the possibilities to set up the plant. The plant,
which was proposed to be the first steel plant of such scale in the state, was
estimated to get an investment of Rs. 4,400 crore.

Future Plans
SAIL, is in the process of modernising and expanding its production units, raw
material resources and other facilities to maintain its dominant position in the
Indian steel market. The aim is to increase the production capacity from the
base level production of 14.6 MT per annum (2006–07) to 26.2 MT per
annum of Hot Metal.

1.4 Performance of AFT

In 1998-1999, the company accumulated loss of Rs. 105.93 crores by end of 99. In warded
18.44 crores loss during the year against 20.83 during 97-98. In 98-99 the loss was reduced by
about Rs.2.39 crores.

2000-2001 -- Accumulated loss of Rs. 122.70 cr by end of March 2001. During the year loss
incurred is 20.27 cr against Rs.18.44 during 98-99.

2001-2002 – Accumulated loss of Rs. 139.44 crore by end of 2002. Loss increased is Rs. 17.66
cr against the Rs. 20.27 cr during 1999-2000.

2002-2003 – Accumulated loss of Rs. 159.64 cr by end of 2003. During the year the Loss is
20.07 cr against 17.66 cr during 2001-2002
.
2003-2004 – Accumulated loss of Rs. 183.91 cr by end of 2004. During the year the loss
Incurred is Rs. 24.43 cr against Rs.20.07 cr during 2001-02.

2004-2005 – Accumulated loss of Rs. 222.55 cr by end of 2005. During the year the loss Rs.
183.91 cr in 2003-2004.
1.5 PRODUCTION

DEPARTMENT OF AFT
The various departments of AFT are viz:

PRODUCTION DEPARTMENT

1. Spinning department – blow, room, carding and spinning.

2. Weaving preparatory department – winding, warping and sizing.
3. Weaving department – loom shed
4. Processing department – bleaching, printing and dyeing
5. Warehouse department – examining, parking and baling

SERVICE DEPARTMENT

6. Marketing department
7. Finance and accounts department
8. Purchase and stores
9. Quality assurance
10. Engineering
11. Personnel
SERVICE SECTION

12. EDP 17. Internal audit

13. Costing 18. Canteen
14. Dispensary 19. Security
15. Horticulture 20. Garment Factory
16. Transport and Automobile

RAW MATERIALS
i) Cotton
ii) Nylon

ABOUT THE PRODUCTS

The following products are presently manufactured in AFT Ltd. (P.T.C.), Puducherry.
1. Cotton clothes 5. Pant and Shirt clothes
2. Towels 6. Screen clothes
3. Uniforms 7. Bed spread
4. Pillow covers

(AFT MANUFACTURING PROCESS)

Raw material

Blow room Carding Drawing

Warping Winding Spinning

Sizing Weaving Dying

Baling Examining Printing

Fabrics

1.6 OBJECTIVES OF THE COMPANY

 The main objective of the company can be generally stared as the manufacturing and
selling of cotton yard and cotton fabrics.
 To manufacture and market cotton years
 To manufacture and market cotton Fabrics
 To manufacturing garments and uniforms for various agencies and service organization
 To protect the interest of the employees through welfare measures
 To modernized the mills and its systems including computerization

1.7 SAFETY MEASURES

 AFT has a full fledged safety department to monitor the safety in the factory. The
Company has been recipient of the state industrial safety for many years for its excellent
in safety protection and preservation of environment.

1.8 QUALITY POLICY OF AFT LIMITED

 Anglo French Textile is committed to meet

 The requirement of its customers
 And to continually improve its
 Product and services by Technological
 Up gradation and enriching the resources
 With perpetual review of the
 Quality system
 Meeting Tomorrows
 Need Today

1.9 OBJECTIVES OF PERSONAL FUNCTION IN AFT LTD

1. The personnel office in AFT is fulfilling these objectives

2. Fuller utilization of human resources
3. Establish and an adequate organization structure
4. Secures integration
5. Maximum development
6. Compensation
7. Moral and human relation

1.10 FUNCTIONS OF PERSONNEL MANAGEMENT AND HRD DEVELOPMENT

1. Recruitment
2. Trainings and development
3. Wage and salary administration
4. Labour welfare measures
5. Health and safety management
6. Industrial relation management
7. Compliance of statutory requirement
8. Disciplinary proceedings

1.11 STRUCTURE OF THE PERSONNEL DEPARTMENT

Personnel Department

Deputy Manager Manager

(Personnel & HRD) (IR)

Assistant Manager Safety Manager Labour office Deputy Manager

(Canteen)
Supervisor Supervisor Assistant Labour Assistant Labour
(7) Officer (1) Welfare Officer (4)
Assistant Labour
Welfare Officer(2)

CHAPTER II

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 . 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 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 “A study on Cash
Management” has been taken up.
CHAPTER III

REVIEW OF LITERATURE

Meaning

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.

FACETS 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.

Cash management is also important because it is difficult to predict cash flows accurately,
particularly the inflows, and there is no prefect coincidence between the inflows and outflows of
cash. During some periods, cash outflows will exceed cash inflows, because payments for taxes,
dividends, or seasonal inventory build up. At other times, cash inflow will be more than cash
payments because there may be large cash sales and debtors may be realized in large sums
promptly. Further, cash management is significant because cash constitutes the smallest portion
of the total current assets, yet management’s considerable time is devoted in managing it. 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 planning protects the financial condition of the firm by developing a projected cash
statement from a forecast of expected cash inflows and outflows for a given period. The
forecasts may be based on the present operations or the anticipated future operations. Cash plans
are very crucial in developing the overall operating plans of the firm.
Cash planning may be done on daily, weekly or monthly basis. The period and frequency
of cash planning generally depends upon the size of the firm and philosophy of management.
Large firms prepare daily and weekly forecasts. Medium-size firms usually prepare weekly and
monthly forecasts. Small firms may not prepare formal cash forecasts because of the non-
availability of information and small-scale operations. But, if the small firms prepare cash
projections, it is done on monthly basis. As a firm grows and business operations become
complex, cash planning becomes inevitable for its continuing success.

OTHER FACTORS THAT AFFECT THE SIZE OF CASH BALANCE

1. Availability of short-term credit:

To avoid holding unnecessary large balances of cash, most firms attempt to make
arrangements at borrow money is case of unexpected needs. With such an agreement, the firm
normally pays interest only during the period that the money is actually used.

2. Money market rates:

If money will bring a low return a firm may choose not to invest it. Since the loss or profit
is small, it may not be worth the trouble to make the loan. On the other hand, if interest rates are
very high, every extra rupee will be invested.

3. Variation in cash flows:

Some firms experience wide fluctuation in cash flows as a routine matter. A firm with
steady cash flows can maintain a fairly uniform cash balance.

4. Compensating balance:
If a firm has borrowed money from a bank, the loan agreement may require the firm to
maintain a minimum balance of cash in its accounts. This is called compensating balance. In
effect this requires the firm to use the services of bank a guaranteed deposit on which it pays no
interest. The interest free deposit is the bank’s compensation for its advice and assistance.

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) Playing 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.

FLOW OF STATEMENTS

The funds flow statement analyses only the causes of changes in the firm’s working capital
position. The cash flow statement is prepared to analyze changes in the flow of each only. These
statements fail to consider the changes in the firm’s total financial resources. They do not reveal
some significant items which do not affect the firm’s cash or working capital position, but
considerably influence the financing position and asset mix of the firm. For example, ordinary
shares issued to acquire some asset, say land, affect the financing and asset mix of the firm. For
example, ordinary shares issued to statement will not include this transaction as it does not
involve any change in cash or working capital. A comprehensive statement of changes in
financial position would disclose or working capital. A comprehensive statement of changes in
financial position would disclose this information along with information on cash or working
capital changes.
The statement of changes in financial position is an extension of the funds flow statement
or the cash flow statement. It is more informative and com apprehensive in indicating the changes
in the firm’s financial position. However, the analysis of changes in the firm’s cash position or
working capital is still very significant. Therefore, to get better insights, a firm may prepare a
comprehensive, all – inclusive, statement of changes in financial position incorporating changes
in the firm’s cash and working capital positions. In the following sections, we illustrate the
preparation and use of the statement of changes in financial position involving:
 Changes in the firm’s working capital position
 Changes in the firm’s working capital position
 Changes in the firm’s total financial resources.
FUNDS FLOW STATEMENT

The statement of changes in financial position, prepared to determine only the sources and
uses of working capital between dates of two balance sheets, is known as the funds flow
statement. Working capital is defined as the difference between current assets and current
liabilities. Working capital determines the liquidity position of the firm. A statement reporting the
changes in working capital is useful in addition to the financial statements.

CASH FLOW STATEMENT

An analysis of cash flows is useful for short-run planning. A firm needs sufficient cash to
pay debts maturing in the future, to pay interest and other expenses and to pay dividends to
shareholders. The firm can make projections of cash inflows and outflows for the near future to
determine the availability of cash. This cash balance can be matched with the firm’s need for cash
during the period, and accordingly, arrangements can be made the deficit or invest the surplus
cash temporarily. A historical analysis of cash flows provides insight to prepare reliable cash flow
projections for the immediate future.

A statement of changes in financial position on cash basis. Commonly known as the cash
flow statement, summarizes the causes of changes in cash position between dates of the two
balance sheets. It indicates the sources and uses of cash. The cash flow statement is similar to the
funds flow statement except that it focuses attention on cash (immediate or near term liquidity)
instead of working capital or funds (potential or medium term liquidity). Thus, this statement
analyses changes in non-current accounts as well as current accounts (other than cash) to
determine the flow of cash.

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.

Measurement of Current Ratio

The current ratio is the ratio of total current assets to total current liabilities. It is
calculated by dividing current assets by current liabilities:

Current ratio = Current assets

Current liabilities
The current assets of a firm, as already stated, represent those assets which can be, in
ordinary course of business, converted into cash within a short period of time, normally not
exceeding one year and include cash and bank balances, marketable securities, inventory of raw
materials, semi-finished (work-in- progress) and finished goods, debtors net of provision for bad
and doubtful debts, bills receivable and pre-paid expenses. The current liabilities defined as
liabilities which are short-term maturing obligations to be met, as originally contemplated, within
a year, consist of trade creditors, bills payable, banks credit, provision for taxation, dividends
payable and outstanding expenses.

Acid-Test or Quick Ratio

As observed above, one defect of the current ration is that it fails to convey any
information on the composition of the current assets of a firm. A rupee of cash is considered
equivalent to be rupee of inventory or receivables. But it is not so. A rupee of cash is more readily
available (i.e. more liquid) to meet current obligations than a rupee of , say, inventory. This
impairs the usefulness of the current ratio. The acid-test ration is a measures of liquidity designed
to overcome this defect of the current ratio. It is often to convert its current assets quickly into
cash in order to meet its current liabilities. Thus, it is a measure of quick or acid liquidity.

The acid-test ratio is the ratio between quick current assets and current assets by the
current liabilities:

Quick assets_____
Acid-test ratio= Current liabilities

The term quick assets refers to current assets which can be converted into cash
immediately or at short notice without diminution of value.

Inventory Turnover Ratio

It is computed by dividing the cost of goods sold by the average inventory. Thus,

Cost of goods sold

Inventory turnover ration = Average inventory

The cost of goods sold means, sale minus gross profit, the average inventory refers to the
simple average of the opening and closing inventory. The ration indicates how fast inventory is
sold. A high ratio to good from the view point of liquidity and vice versa. A low ratio would
signify that inventory does not sell fast and stays on the shelf or in the ware-house for a long
time.

Management of Cash

Introduction

Cash management is one of the key areas of working capital management. Apart from the
fact that it is the most liquid current asset, cash is the common denominator to which all current
assets can be reduced because the other major liquid assets, i.e. receivables and inventory get
eventually converted into cash. This underlines the significance of cash management.

The present chapter is concerned with a detailed account of the problems involved in
managing cash. The main coverage of this chapter is as follows. The first section outlines the
motives for holding cash followed in section two by the objectives of cash management. The next
section presents an in-depth discussion of the methods to plan and determine the cash needs
through cash budgets. The basic strategies for efficient management of cash are the subject’s
matter of the subsequent section. We then explain specific techniques to manage cash. The
remainder of the chapter is devoted to the discussion of marketable securities. The chapter
concludes with the major points.

MOTIVES FOR HOLDING CASH

The term cash with reference to cash management is used in two senses. In a narrow sense
it is used broadly to cover currency and generally accepted equivalents of cash such as cheques,
drafts and demand deposits in banks. The broader view of cash also includes near-cash assets,
such as marketable securities and time deposits in banks. The main characteristics of these is that
they can be readily sold and converted into cash. They serve as a reserve pool of liquidity that
provides cash quickly when needed. They also provide a short-term investment outlet for excess
cash and are also useful for meeting planned outflow of funds. We employ the term cash
management in the broader sense. Irrespective of the form in which it is held, a distinguishing
feature of cash, as an asset, is that it has no earning power. If cash does not earn any return, why
is it held by firms? There are four primary motives for maintaining cash balances: (i) Transaction
motive; (ii) Precautionary motive; (iii) Speculative motive; and (iv) Compensating motive

Transaction Motive

An important reason for maintaining cash balances is the transaction motive. This refers
to the holding of cash, to meet routine cash requirements to finance the transaction which a firm
carries on in the ordinary course of business. A firm enters into a variety of transactions to
accomplish its objectives which have to be paid for in the form of cash. For example, cash
payments have to be made for purchases, wages, operating expenses, financial charges, like
interest, taxes, dividends, and so on. Similarly, there is a regular inflow of cash to the firm from
sales operation, returns on outside investments, etc. these receipts and payments constitute a
continuous two-way flow of cash. But the inflows (receipts) and outflows (disbursements) do not
perfectly coincide or synchronise, i.e. they do not exactly match. At times, receipts coincide or
outflows while, at other times, payments exceed inflows. To ensure that situation in which
disbursements are in excess of the current receipts, it must have and adequate cash balance. The
requirement of cash balances to meet routine cash needs is known as the transaction motive and
such cash balances are termed as transaction balances. Thus, the transaction motive refers ot the
holding of cash to meet anticipated obligations whose timing is not perfectly synchronized with
cash receipts. If the receipts of cash and its disbursements could exactly coincide in the normal
course of operation, a firm would not need cash for transaction purposes. Although a major part
of transaction balances are held in cash, a part may also be in such marketable securities whose
maturity conforms to the timing of the anticipated payments, such as payment, of taxes,
dividends, etc.

Precautionary Motive

In addition to the non-synchronizations of anticipated cash inflows and outflows in the

ordinary course of business, a firm may have to pay cash for purposes which cannot be predicted
or anticipated. The unexpected cash needs at short notice may be the result of:
(i) floods, strikes and failure of important customers;
(ii) Bills may be presented for settlement earlier than expected;
(iii) Unexpected slow down in collection of accounts receivable;
(iv) Cancellations of some order for goods as the customer is not satisfied;
(v) Sharp increase in cost of raw materials.

The cash balances hold in reserve for such random and unforeseen fluctuations in cash
flows are called as precautionary balances. In other words, precautionary motive of holding cash
implies the need to hold cash to meet unpredictable obligations. Thus, precautionary cash balance
serves to provide a cushion to meet unexpected contingencies. The more unpredictable the cash
flows, the larger the need for such balances. Another factor which has a bearing on the level of
such cash balances is the availability of short-term credit. If a firm can borrow at short notice to
pay for unforeseen obligations, it will need to maintain a relatively small balance and vice-versa.
Such cash balances are usually held in the form of marketable securities so that they earn a
return.

Speculative Motive

It refers to the desire of a firm to take advantage of opportunities which present

themselves at unexpected moments and which are typically outside the normal course of
business. While the precautionary motive is defensive in nature, in that, firms must make
provisions to tide over unexpected contingencies, the speculative motive represents a positive and
aggressive approach. Firms aim to exploit profitable opportunities and keep cash in reserve to do
so. The speculative motive helps to take advantage of:
(i) an opportunity to purchase raw materials at a reduced price on payment of
immediate cash;
(ii) a chance to speculate on interest rate movements by buying securities when
interest rates are expected to decline;
(iii) delay purchases of raw materials on the anticipation of decline in prices; and
(iv) to make purchases at favorable prices.

Compensation Motive

Yet another motive to hold cash balances is to compensate banks for providing certain
services and loans.

Banks provide a variety of services to business firms, such as clearance of cheque, supply
of credit information, transfer of funds, etc. while for some of the services banks charge a
commission or fee, for others they seek indirect compensation. Usually clients are required to
maintain a minimum balance of cash at the bank. Since this balance cannot be utilized by the
firms for transaction purposes, the banks themselves can use the amount to earn a return. To be
co,pensated for their services indirectly in this form, they require the clients to always keep a
bank balance sufficient to earn a return equal to the cost of services. Such balances are
compensating balances.

Compensating balances are also required by some loan agreements between a bank and its
customers. During periods when the supply of credit is restricted and interest rate during the
period when the loan will be pending.

The compensating cash balances can take either of two forms: (i) an absolute minimum,
say, Rs. 5 lakhs, below which the actual bank balance will never fall; (ii) a minimum average
balance, say, Rs. 5 lakhs over the month. The first alternative is more restrictive as the average
amount of cash held during the month must be above Rs.5 lakhs by the amount of transaction
balance. From the firm’s view point this is obviously dead money. Under the second alternative,
the balance could fall to zero one day provided it was Rs. 10 lakhs some other day with the
average working to Rs. 5 lakhs.

Of the four primary motives of holding cash balances the two most important are the
transactions motive and the compensation motive. Business firms normally do not speculate and
need not have speculative balances. The requirement of precautionary balances can be met out of
short –term borrowings.

CASH MANAGEMENT: TECHNIQUES/ PROCESSES

The basic strategies of cash management have been outlined in the preceding section. It
has been shown that the strategic aspects of efficient cash management are: (1) efficient inventory
management, (2) speedy collection of accounts receivable, and (3) delaying payments on
accounts payable. The main elements of an efficient management of inventory are discussed in
some detail. There are some specific techniques and processes for speedy collection of
receivables from customers and slowing disbursements. We discuss them in the present section.

Speedy Cash Collections

In managing cash efficiently, the cash inflow process can be accelerated through
systematic planning and refined techniques. There are two broad approaches to do this. In the
first place, the customers should be encouraged to pay as quickly as possible. Secondly, the
payment from customers should be converted into cash without any delay.
CHAPTER IV

OBJECTIVES OF THE STUDY

 To meet the Cash Disbursement needs

 To know the sources of Cash Inflow and uses of Cash Outflow in

 To determine how short term / current obligations of the Company are met
by the Liquidity Ratio.

 To know the short term Solvency Position and the trend