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Chapter

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CONTENT PAGE

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CERTIFICATE

DECLARATION CERTIFICATE

ACKNOWLEDEGEMENTEXECUTIVE SUMMERY

1 WORKING CAPITAL MANAGEMENT

1.1 INTRODUCTION

1.2 DEFINATION

1.3 NEEDS OF WORKING CAPITAL

1.4 TYPES OF WORKING CAPITAL

1.5 DETERMINANT OF WORKING CAPITAL

1.6 PARLE-G LTD

1.7 MISSION1.8 VISSION

1.9 MANDATE

1.10 STRATEGY

1.11 PRODUCT

1.12 PRODUCT PROFILE

1.13 BRAND

1.14 CSR

1.15 WORKING CAPITAL MAGEMENT IN PARLE-G

1.16 OBJETIVE OF STUDY1.17 METHODS OF DATA COLLECTION

1.18 LIMMITATION OF STUDY

2 WORKING CAPITAL ANALYSIS

1.1 WORKING CAPITAL TRENDS

1.2 WORKING CAPITAL ANALYSIS

1.3 CURRENT ASSETS ANALYSIS

1.4 COMPOSITION OF CUURENT ASSETS

1.5 CURRENT LIABILITY ANALYSIS1.6 OPRATING CYCLE

3 WORKING CAPITAL RATIO ANALYSIS

1.1 INTRODUCTION

1.2 ROLE OF RATIO ANALYSIS

1.3 LIMITAION OF RATIO ANALYSIS

1.4 WORKING CAPITAL TOR

1.5 INVENTORY TOR


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1.6 RECIVABLE TOR

1.7 CURRENT ASSETS TOR

1.8 LIQUIDITY RATIO

CURRENT RATIO

QUICK RATIOCASH RATIO

4 CASH MANAGEMET

5 NEGATIVE WORKING CAPITAL

1.1NEGATIVE WORKING CAPITAL

1.2SOURCE OF WORKING CAPITAL FINACE

TADE CREDIT

BANK FINACELETTER OF CREDIT

6 CONCLUSION AND RECOMMENDATION

1.1CONCLITION

1.2RECOMMENDATION

1.3BIBLOGRAPHY


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ACKNOWLEDGEMENT

It is a matter of great satisfaction and pleasure to present this report on Working Capital

Management of KIRLOSKAR PNUEMATIC CO. LTD. (KPCL), Pune 411013. I take this

opportunity to owe my thanks to allthose involved in my training.

This project report could not have been completed without the guidance of our director,

Dr. SHARAD L. JOSHI & project guide Prof. SMITA SOVANI. Their timely help &

encouragement helped me to complete this project successfully.

I thank Mrs. VINEETA KAPOOR (SR. OFFICER HRD) for giving

me opportunity to work at KPCL, as a FINANCE TRAINEE.

I am thankful to Mr. R.B. SHALIGRAM (SR. FINANCE MANAGER) and MR. R.R.

TAVERGIRI (DGM, FINANCE) for their encouragement and able guidance at every stage

of my training work.

I express my gratitude towards staff of KPCL, those who have helped me directly

or indirectly in completing the training.


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EXECUTIVE SUMMARY

Company being established as Kirloskar pneumatic company limited in 1958,

made an entry with manufacture of air compressor and pneumatic tools & soon diversified

by including air conditioning & transmission equipments.

At Kirloskar Pneumatic up to date manufacturing facilities, including CNC machines,

Stringent quality control procedures and systems, research & development, foundry, heat

treatment facilities, screw rotor machines, gear grinding machines, metallurgical laboratories,

tool room and integrated computer system, have all been set up with sole idea of achieving the

highest standards of quality & performance.

My Project is the study of working capital management.

The study was conducted at the head office of Kirloskar Pneumatic Co. Ltd. Pune.

The project was of 2 months duration. During the project I interviewed the executives

& staff to collect the data, & also made use of company records & annual reports. The data

collected were then compiled, tabulated and analyzed.

Working Capital Management is a very important facet of financial management due

to:

Investments in current assets represent a substantial portion of total investment.

Investment in current assets & the level of current liabilities have to be geared quickly

to change sales.

Some the points to be studied under this topic are: How much cash

should a firm hold?

What should be the firms credit policy?

How to & when to pay the creditors of the firm? How much to

invest in inventories?

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By studying about the company s different areas I came to know certain things

like:

Acid test ratio is more than one but it does not mean that company has

excessive liquidity.

Standard current ratio is 2:1 and for industry it is 1.33:1. KPCL s ratios

satisfactory.

Debtors of the company were high; they were increasing year by year, so more

funds were blocked in debtors. But now recovery is becoming faster.

Working capital turnover ratio is continuously increasing that shows

increasing needs of working capital.


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WORKING CAPITAL MANAGEMENT

INTRODUCTION:

Working Capital is the key difference between the long term financial

management and short term financial management in terms of the timing of cash.

Long term finance involves the cash flow over the extended period of time i.e 5 to

15 years, while short term financial decisions involve cash flow within a year or

within operating cycle.

Working capital management is a short term financial management.

Working capital management is concerned with the problems that

arise in attempting to manage the current assets, the current liabilities & the inter

relationship that exists between them. The current assets refer to those assets which

can be easily converted into cash in ordinary course of business, withoutdisrupting the operations of the firm.

Composition of working capital

Major Current Assets

1) Cash

2) Accounts Receivables

3) Inventory

4) Marketable Securities

Major Current Liabilities

1) Bank Overdraft

2) Outstanding Expenses

3) Accounts Payable

4) Bills Payable

The Goal of Capital Management is to manage the firm s current assets &liabilities, so that the satisfactory level of working capital is maintained.

If the firm can not maintain the satisfactory level of working capital, it is likely to

become insolvent & may be forced into bankruptcy. To maintain the margin of

safety current asset should be large enough to cover its current assets.

Main theme of the theory of working capital management is interaction

between the current assets & current liabilities.


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CONCEPT OF WORKING CAPITAL:

There are 2 concepts:

Gross Working Capital

Net Working Capital

Gross working capital: - It is referred as total current assets.

Focuses on,

Optimum investment in current assets:

Excessive investments impairs firm s profitability, as idle investment earns

nothing. Inadequate working capital can threaten solvency of the firm because of

its inability to meet its current obligations. Therefore there should be adequate

investment in current assets.

The gross working capital is the capital invested in the total current assets of the

enterprises current assets are those assets which can convert in to cash within a

short period normally one accounting year.

The gross working capital concept is financial or going concern concept whereas

net working capital is an accounting concept of working capital. Both the concepts

have their own merits.The gross concept is sometimes preferred to the concept of

working capital for the following reasons:

Financing of current assets:

Whenever the need for working capital funds arises, agreement should be made

quickly. If surplus funds are available they should be invested in short term

securities.

Net working capital (NWC) defined by 2 ways,

Difference between current assets and current liabilities

Net working capital is that portion of current assets which is financed

with long term funds.

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES

If the working capital is efficiently managed then liquidity and profitability both

will improve. They are not components of working capital but outcome of working

capital. Working capital is basically related with the question of profitability versus

liquidity & related aspects of risk.Implications of Net Working Capital:


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Net working capital is necessary because the cash outflows and inflows do not

coincide. In general the cash outflows resulting from payments of

current liability are relatively predictable. The cash inflows are however

difficult to predict. More predictable the cash inflows are, the less NWC will be

required. But where the cash inflows are uncertain, it will be necessary to maintain

current assets at level adequate to cover current liabilities that are there must be

NWC.

For evaluating NWC position, an important consideration is trade off between

probability and risk.The term profitability is measured by profits after expenses.

The term risk is defined as the profitability that a firm will become technically

insolvent so that it will not be able to meet its obligations when they become due

for payment. The risk of becoming technically insolvent is measured by NWC.

If the firm wants to increase profitability, the risk will definitely increase.

If firm wants to reduce the risk, the profitability will decrease.


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DEFINITIONS OF WORKING CAPITAL:

The following are the most important definitions of Working

capital:

Working capital is descriptive of that capital which is not

fixed, but that more common use of working capital is to

consider it has the difference between value of the current asset

and the current liabilities. (Hoagland).

1) Working capital is the difference between the inflow and

outflow of

funds. In other words it is the net cash inflow .

2) Working capital represents the total of all current assets. Inother

words it is the Gross working capital , it is also known as

Circulating capital or Current capital for current assets are

rotating

in their nature

.

3) Working capital is defined as The excess of current assets

over

current liabilities and provisions . In other words it is the Net

Current

Assets or Net Working Capital .


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IMPORTANCE OF WORKING CAPITAL

Working capital may be regarded as the lifeblood of the business. Without

insufficient working capital, any business organization cannot run smoothly or

successfully.

In the business the Working capital is comparable to the blood of the

human body. Therefore the study of working capital is of major importance to the

internal and external analysis because of its close relationship with the current day

to day operations of a business. The inadequacy or mismanagement of working

capital is the leading cause of business failures.

To meet the current requirements of a business enterprise such as the

purchases of services, raw materials etc. working capital is essential. It is also

pointed out that working capital is nothing but one segment of the capital structure

of a business.

In short, the cash and credit in the business, is comparable to the blood in thehuman body like finance s life and strength i.e. profit of solvency to the business

enterprise. Financial management is called upon to maintain always the right cash

balance so that flow of fund is maintained at a desirable speed not allowing slow

down. Thus enterprise can have a balance between liquidity and profitability.

Therefore the management of working capital is essential in each and every

activity.

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining

the solvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt

payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing

can arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cash

discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular

supply of raw material and continuous production.


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Regular Payment Of Salaries, Wages And Other Day TO Day

Commitments: It leads to the satisfaction of the employees and raises the

morale of its employees, increases their efficiency, reduces wastage and

costs and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having adequate

working capital then it can exploit the favorable market conditions such as

purchasing its requirements in bulk when the prices are lower and holdings its

inventories for higher prices.

Ability to Face Crises: A concern can face the situation during the depression.

Quick And Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence

of the investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities,

confidence, high morale which results in overall efficiency in a business.


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TYPES OF WORKING CAOITAL


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Determinant of Working Capital

This concept is also useful in determining the rate of return on investments in

working capital. The net working capital concept, however, is also important for

following reasons:

It is qualitative concept, which indicates the firms ability to meet to its

operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital requirement out of

the permanent sources of funds.


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PARLE-G COMPANY LTD

INTRODUCTION OF THE COMPANY

ABOUT PARLE

Parle-G or Parle Glucose biscuits are one of the most popular confectionary

biscuits in India. Parle-G is one of the oldest brand names in India and is the

largest selling brand of biscuits in India.

For decades, the product was instantly recognized by its iconic white and yellowwax paper wrapper with the depiction of a young girl, Sonam (Calgary) covering

the front. The company's slogan is popular among the Indian consumer population,

reading G means Genius. The name, "Parle-G", is derived from the name of the

Indian rail station, Vile Parle, where the Parle production factory is based.

"Parle-G" boasts of being the largest selling biscuit in the world. It enjoys 70%

market share in India in the glucose biscuit category followed by Britannia Tiger

(17-18%) and ITC's sunfeast (8-9).

The brand is estimated to be worth over Rs 2,000 crore (Rs 20 billion),and

contributes more than 50 per cent of the company's turnover (Parle Products is an

unlisted company and its executives are notcomfortable disclosing exact numbers).

Last fiscal, Parle had sales of Rs 3,500crore (Rs 35 billion).

HISTORY OF PARLE:

In 1929 a small company by the name of Parle products emerged in British

dominated India. The intent was to spread joy and cheer to children and adults

alike, all over the country with its sweets and candies. The company knew that it

wouldnt be an easy task, but they decided to take the brave step. A small factorywas set up in the suburbs of Mumbai, to manufacture sweets and toffees. A decade

later it was upgraded to manufacture biscuits as well. Since then, the Parle name

has grown in all directions, won international fame and has been sweetening

people s lives all over India and abroad.


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Apart from the factories in Mumbai and Bangalore Parle also has a factory in

Bahadurgarh in Haryana and Neemrana in Rajasthan, which are the largest biscuit

and confectionery plants in the country. Additionally, Parle Products also has 7

manufacturing units and 51 manufacturing units on contract.

India's largest manufacturer of biscuits and confectionery for almost 80

years.

Established in 1929 by manufacturing of sweets and toffees...

Makers of the world's largest selling biscuit, Parle-G, and a host of other

very popular brands.

Currently, Parle Products has over 33, 00,000 distribution outlets.

40% share of the total biscuit market.

15% share of the total confectionary market in India.

1st brandsParle Glucose and Parle Monaco Market leader in many products Won acclaim at the Monde selection since 1970 35% share of the total biscuit market 15% share of the total confectionery market 14 manufacturing units for biscuits & 5 manufacturing units force on

fectioneries

Parle has largest such manufacturing units in India Annual turnover 2000 crores It has provided its products to the mass with the affordable range.

Mission & Vision Statement

Mission statement

To help enrich the quality of life of the community and preserve

ecological balance and heritage through a strong environment conscience.


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Parle-G is consumed by people of all ages, from the rich to the poor, living in cities

& in villages.

While some have it for breakfast,

For others it is a complete wholesome meal.

For some it's the best accompaniment for tea,

While for some it's a way of getting charged whenever they are low on energy.

Parle Company practices mass marketing for Parle- G which appeals to masses. It

is a product liked by everyone and does not cater only to a specific group or part of

the whole market. Thus it is mass production, mass distribution and masspromotion of Parle- G for all buyers.

PARLE PRODUCTS

Parle-G Magix.

Parle-G Milk Shakti.

Krackjack.


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Monaco.

Marie Choice.

Hide & Seek.

Fun Centre.

Monaco Bites.

Melody.

Poppins.

Mango Bite.

Kismi Bar.

Rol-a-Cola.

Toffees.

Orange.

CandyChox.


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Brand

The brand is associated with the positive values of life likehonesty, sharing and caring.

The incredible demand led Parle to introduce the brand inspecial branded packs and in larger festive tin packs.

It is synonymous to energy & nutrition.

It has become a part of the daily lives of many Indians. Itwasn't a biscuit any more. It had become an icon.

Parle G conjures up fond memories across the length andbreadth of the country.

Be it a big city or a remote village of India, the Parle

G symbolizes quality, health and great taste.


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Corporate social Responsibilities

CSR is cornerstone of success right from inception in this

company.

SUSTAINABILITY & BRAND EQUITY

Automation is the key factor to brilliant brand equity and a

great sustainability in this organisation.

Customer Loyalty is achieved through Brand Equity in this

organization.


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Parle - G and Challenges

Increasing prices of basic Raw material like , Sugar,

Wheat, Milk, Milk powder. This leading to increase in manufacturing cost of the

biscuits.Parle G very price sensitive product.

Small increase in price (by 50 paise) in past had seen high

decline in sales.

Parle - G and Group suggestions

Should keep the price of Parle G same and increase price

of other high end variant products like, Milano; Hide n

Seek, and Bourbon.

High end products can absorb the increased production

cost,

This will help to cater to existing market without price

change.

Parle - G and Challenges

Even though the Parle is market leader in the segment,

others are also trying to capture the chunk of market

share. Fake brands like Parel G, Parle Jee tried to extract market

share. However only serious competition faced by Parle G is

from Britannia Tiger biscuit.


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Comparative Analysis of Parle - G and Britannia Tiger

Nearest competitors in Glucose Category.

Tiger gained 28 % Market Share in 100 gram Glucose biscuitsegment in a short span of 7 years (19972004)

VERSUS ParleG established since 60 years 57 % Market

Share in this segment. , In 200607 Parle G raised price for its

100 gram pack by 50 paise (i.e. Rs. 4.50), while Tiger

maintained its price at Rs. 4/-.

As a result sales of Parle G dipped to Tiger. Customers of Parle

G tended to switchover to Tiger. PARLE G is highly price

sensitive since it caters to the bottom of the pyramid.


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Objective of studies


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METHODS OF DATA COLLECTION


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LIMITATION OF STUDY


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WORKING CAPITAL ANALYSIS

SOURCES OF WORKING CAPITAL

Long-term source Short-term source

(Fixed working capital) (Temporary working capital)a) Loan from financial institution a) Factoringb) Floating of Debentures b) Bill discountingc) Accepting public deposits c) Bank overdraftd) Issue of shares d) Trade credit

e) Cash creditf) Commercial paper

Sources of additional working capital include the following:Existing cash reservesProfits (when you secure it as cash!)Payables (credit from suppliers)New equity or loans from shareholdersBank overdrafts or lines of creditTerm loans

If you have insufficient working capital and try to increase sales, you caneasily over-stretch the financial resources of the business. This is calledovertrading. Early warning signs include:Pressure on existing cash37

Exceptional cash generating activities e.g. offering high discounts forearly cash paymentBank overdraft exceeds authorized limitSeeking greater overdrafts or lines of creditPart-paying suppliers or other creditorsPaying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managingFrequent short-term emergency requests to the bank (to help paywages, pending receipt of a cheque).LONG TERM SOURCESISSUE OF SHARESOrdinary shares are also known as equity shares and they are the mostcommon form of share in the UK. An ordinary share gives the right to itsowner to share in the profits of the company (dividends) and to vote at


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general meetings of the company.Since the profits of companies can vary wildly from year to year, so can thedividends paid to ordinary shareholders. In bad years, dividends may benothing whereas in good years they may be substantial.The nominal value of a share is the issue value of the share - it is the value

written on the share certificate that all shareholders will be given by thecompany in which they own shares.The market value of a share is the amount at which a share is being sold onthe stock exchange and may be radically different from the nominal value.When they are issued, shares are usually sold for cash, at par and/or at apremium. Shares sold at par are sold for their nominal value only - so ifRs.10 share is sold at par, the company selling the share will receive Rs. 10for every share it issues.If a share is sold at a premium, as many shares are these days, then theissue price will be the par value plus an additional premium.38

DEBENTURESDebentures are loans that are usually secured and are said to have eitherfixed or floating charges with them.A secured debenture is one that is specifically tied to the financing of aparticular asset such as a building or a machine. Then, just like a mortgagefor a private house, the debenture holder has a legal interest in that assetand the company cannot dispose of it unless the debenture holder agrees.If the debenture is for land and/or buildings it can be called a mortgagedebenture.Debenture holders have the right to receive their interest payments beforeany dividend is payable to shareholders and, most importantly, even if acompany makes a loss, it still has to pay its interest charges.If the business fails, the debenture holders will be preferential creditors andwill be entitled to the repayment of some or all of their money before theshareholders receive anything.LOANS FROM OTHER FINANCIAL INSTITUTIONSThe term debenture is a strictly legal term but there are other forms of loanor loan stock. A loan is for a fixed amount with a fixed repayment scheduleand may appear on a balance sheet with a specific name telling the readerexactly what the loan is and its main details.SHORT TERM SOURCESFACTORINGFactoring allows you to raise finance based on the value of youroutstanding invoices. Factoring also gives you the opportunity to outsource39

your sales ledger operations and to use more sophisticated credit ratingsystems. Once you have set up a factoring arrangement with a Factor, itworks this way:Once you make a sale, you invoice your customer and send a copy of theinvoice to the factor and most factoring arrangements require you to factor


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all your sales. The factor pays you a set proportion of the invoice valuewithin a pre-arranged time - typically, most factors offer you 80-85% of aninvoice's value within 24 hours.The major advantage of factoring is that you receive the majority of thecash from debtors within 24 hours rather than a week, three weeks or even

longer.INVOICE DISCOUNTINGInvoice discounting enables you to retain the control and confidentiality ofyour own sales ledger operations.The client company collects its own debts. 'Confidential invoicediscounting' ensures that customers do not know you are using invoicediscounting as the client company sends out invoices and statements asusual. The invoice discounter makes a proportion of the invoice available toyou once it receives a copy of an invoice sent.Once the client receives payment, it must deposit the funds in a bankaccount controlled by the invoice discounter. The invoice discounter will

then pay the remainder of the invoice, less any charges.The requirements are more stringent than for factoring. Differentinvoice discounters will impose different requirements.OVERDRAFT FACILITIESMany companies have the need for external finance but not necessarily ona long-term basis. A company might have small cash flow problems from40

time to time but such problems don't call for the need for a formal long-termloan. Under these circumstances, a company will often go to its bank andarrange an overdraft. Bank overdrafts are given on current accounts andthe good point is that the interest payable on them is calculated on a dailybasis. So if the company borrows only a small amount, it only pays a littlebit of interest. Contrast the effects of an overdraft with the effects of a loan.TRADE CREDITThis source of finance really belongs under the heading of working capitalmanagement since it refers to short-term credit. By a 'line of credit' theymean that a creditor, such as a supplier of raw materials, will allow us tobuy goods now and pay for them later. Why do they include lines of creditas a source of finance? They ll, if they manage their creditors carefully theycan use the line of credit they provide for us to finance other parts of theirbusiness.Take a look at any company's balance sheet and see how much they haveunder the heading of Creditors falling due within one year' - let's imagine itis Rs. 25,000 for a company. If that company is allowed an average of 30days to pay its creditors then they can see that effectively it has a shortterm loan of Rs. 25,000 for 30 days and it can do whatever it likes with that

money as long as it pays the creditor on time.


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CASH MANAGEMENT:Cash management is one of the key areas of WCM. Apart from the factthat it is the most liquid asset, cash is the common denominator to which allcurrent assets, that is, receivables & inventory get eventually converted intocash.

Cash is oil of lubricate the ever-turning wheels of business: without it theprocess grinds to a shop.Motives for holding cashCash with reference to cash management is used in two senses:It is used broadly to cover currency and generally accepted equivalentsof cash, such as cheques, drafts and demand deposits in banks.It includes near-cash assets, such as marketable securities & timedeposits in banks.The main characteristic of these is that they can be readily sold & convertedinto cash. They serve as a reserve pool of liquidity that provides cashquickly when needed. They provide short term investment outlet to excess

cash and are also useful for meeting planned outflow of funds.CASH IS MAINTAINED FOR FOUR MOTIVES:A. Transaction motive:Transaction motive refer to the holding of cash to meet routine cashrequirements to finance the transactions which a firm carries on in a varietyof transactions to accomplish its objectives which have to be paid for in theform of cash. E.g. payment for purchases, wages, operating expenses,financial charges like interest, taxes, dividends etc. Thus requirement ofcash balances to meet routine need is known as the transaction motive andsuch motive refers to the holding of cash to meet anticipated obligationswhose timing is not perfectly synchronized with cash receipts.

43B. Precautionary motive:A firm has to pay cash for the purposes which can not be predicted oranticipated. The unexpected cash needs at the short notice may be due to:Floods, strikes & failure of customerSlow down in collection of current receivablesIncrease in cost of raw materialCollection of some order of goods as customer is not satisfiedThe cash balance held in reserves for such random and unforeseenfluctuations in cash flows are called as precautionary balance. Thus,precautionary cash provides a cushion to meet unexpected contingencies.

The more unpredictable are the cash flows, the larger is the need for suchbalance.

C. Speculative motive:It refers to the desire of the firm to take advantage of opportunities whichpresent themselves at unexpected moment & which are typically outsidethe normal course of business. If the precautionary motive is defensive innature, in that firms must make provisions to tide over unexpectedcontingencies, the speculative motive represents a positive and aggressive


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approach. The speculative motive helps to take advantages of:An opportunity to purchase raw material at reduced price on paymentof immediate cash.A chance to speculate on interest rate movements by buying securitieswhen interest rates are expected to decline.

Make purchases at favorable price.Delay purchase of raw material on the anticipation of decline in prices.44

OBJECTIVES OF CASH MANAGEMENT:I. To meet the cash disbursement needsIn the normal course of business firms have to make payment ofcash on a continuous and regular basis to the supplier of goods,employees and so son. Also the collection is done from thede4btorw. Basic objective is to meet payment schedule that is tohave sufficient cash to meet the cash disbursement needs of thefirm.

II. To minimize the funds committed to cash balancesFirst of all if we keep high cash balance, it will ensure prompt paymenttogether with all the advantages. But it also implied that the large funds willremain idle, as cash is the non-earning asset and firm will have to foregoprofits. On the other hand, low cash balance mean failure to meet paymentschedule. Therefore we should have optimum level of cash balance.

FACTORS DETERMININING CASH NEEDS:1) Synchronization of cash - need for the cash balances arises from thenon-synchronization of the inflows & outflows of cash. First need indetermining cash needs is, the extent of non-synchronization of cashreceipts & disbursements. For this purpose cash budget is to be

prepared. Cash budget point out when the firm will have excess orshortage of cash.2) Short cash Cash period reveals the period of cash shortages. Everyshortage of cash whether expected or unexpected involves a costdepending upon the security, duration & frequency of shortfall & howthe shortage is covered. Expenses incurred as a shortfall are calledshort costs.There are following costs included in the short cash45

Transaction cost: this is usually the brokerage incurred in relation tothe some short-term near-cash assets like marketable securities.

Borrowing costs: these include interest on loan, commitment charges& other expenses relating to loan.Loss of cash discount: that s a loss because of temporary shortage ofcash.Cost associated with deterioration of credit rating.Penalty rates: By a bank to meet a shortfall in compensating balances.1) Excess cash balance - cost associated with excessively large cashbalances is known as excess cash balance cost. If large funds are


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idle the implication is that the firm has missed the opportunity toinvest those funds and has thereby lost interest. This loss of interestis primarily the excess cost.2) Procurement & Management cost cost associated with establishingand operating cash management staff and activities. They are

generally fixed and accounted for by salary, handling of securitiesetc.3) Uncertainty the first requirement in cash management isPrecautionary cushion to cope with irregularities in cash flows,unexpected delays in collection &disbursements, defaults andunexpected cash needs.Impact can be reduced through:Improved forecasting of tax payments, capital expenditure, dividendsetc.Increased ability to borrow through overdraft facility.

DETERMINING THE CASH NEEDS:

Cash needs can be determined though preparing cash budget, for year,month, week etc.46

Cash reports, providing a comparison of actual development with forecastfigures, are helpful in controlling and revising cash forecasts on a continualbasis The important cash reports areThe daily cash reportsDaily treasury reportsThe monthly cash reportMonitoring collection and receivables:The Finance Manager must control the levels of cash balance at various

points in the organization. This task assumes special importance onaccount of the fact that there is generally tendency amongst divisionalmanager to keep cash balance in excess of their needs. Hence a financemanager must devise a system whereby each division of organizationretains enough cash to meet its day-to-day requirements without havingsurplus balance on hand. For this methods have to be employed to:Speed up the mailing time of payment from customersReduce the time during which payments received by the firm remainuncollected and speed up the movement funds to disbursement banks.For this purpose following can be helpful:1 Prompt billing often there is time lag between the disptachof goods

or provision of service and the sending of bills. By preparing andsending the bills promptely, a firm can esure earlier remittance. Itshould be realized that it is in the area of billing that the companycontrol is high and there is a sizeable opporltunity to free up cash.For this treasure should work with controller and others in :Accelerating invoice dataMailing bills promptlyIdentifying payment locations.


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2 Expeditious collection of cheques - expediting collecgion of chequesis important and there are to methods 1. Concentration banking, 2.Lock box method47

Concentration banking : (decentralized collection) key

elements are,The major bank account of the company is wetup with a concentration bank, generally situated in the sameplace where the company is head quartered. Customers areadvised to mail their remittances to collection centre close tgothem. Payments collected in different collection centres aredeposited in local banks which in turn transfer them to theconcentration banksLock box method: Silent features are as followsA number of post office boxes are rented by the companyin different locations.lCustomersare advised to mail there remittances to the

lock boxes.Banks are authosized to picked up the cheques from thelock boxes and depositthem in the companies account.Controlling payables/disbursements: by proper control ofpayables company can manage cash resources. This involvesPayment should be made as and when it fall due.Centralized disbursement payables and theirdisbursements may be centralized. This helps inconsolidating the funds at head office schedulingpayments, reducing unproductive bank balance andinvesting surplus funds more effectively.Proper synchronization of inflows and outflows helps acompany to get greater mileage from cash resources.Float: when firm issues cheques they reduce the balance intheir books, but balance in banks book is not reduced till thepayment is made by bank. This amount of cheques issued bythe firm but not paid for by the bank is referred to as payment48

float . When the cheques are deposited with bank the firmincreases the balance in its books. The balance in the bank sbook however is cleared. The amount of cheques depositedby the firm in the bank but not cleared is referred to ascollection float . Difference between payment float andcollection float is called as net float . When the net float ispositive the balance in the books of bank is higher than thebalance in the books of firm. When the firm enjoys the positivefloat (net) it may issue cheques even if it have an overdrawnbank account in its books. Such an action is referred to asplaying the float It is considered risky.Accruals: accruals can be defined as current liabilities that


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represent a service or goods received by a firm but not yetpaid for. For example remuneration to employee s that renderservices in advance and receive payment later. In a way, theyextend credit to the firm for a period at the end of which theyare paid. Weekly is more important as compared to monthly.

Other examples, rent to lessors, taxes to government.OPTIMAL CASH BALANCEIt a firm maintains a small cash balance, it has to sell its marketablesecurities more frequently than if it holds a large cash balance. Hencetrading or transaction costs will tend to diminish if cash balance becomeslarger. However, the opportunity costs of maintaining cash rise as the cashbalance increases.From the figure, the total costs of holding cash are at a minimum when thesize of the cash balance is C . This represents optimal cash balance.Deployment of surplus funds:Company s often have surplus funds for short period of time before they are

required for capital expenditure, loan repayment or some other purposes. At49the one end they are invested in term deposit in bank and on other end areinvested in equity shares. They can be invested in several options likeUnits of the unit 1964 scheme: This is the most important mutual fundscheme in India. It has the following features-It is a open ended scheme as it accepts funds from investors & also permitsto withdraw their investments.The units have face value of Rs. 10.00/- The sale & purchase price of unitsare not squarely based on the net asset per unit, as should be the case fora truly open ended scheme.


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