1.
Introduction
A. Concept: Concept
of cash management is not new but it has acquired a great amount of
significance over a period of time.
Cash is the most liquid form of an asset in a business.
So maintaining a good amount of cash is need of any business in order to stay
sound with its functionality that entails the concept of cash management. Cash
is both the beginning and end of working capital cycle - cash, inventories,
receivables and cash. It is the cash, which keeps the business going. Hence,
every enterprise has to hold necessary cash for its existence. Moreover, steady
and healthy circulation of cash throughout the entire business operations is
the basis of business solvency. Cash Management mainly comprises of two
processes cash inflow and cash outflow and these processes can never coincide
with each other. It is also affected by the time dimensions as at some point of
time inflow may be more than outflow whereas at some point of time outflow may
be more than inflow. It is a practice of effective utilization of the cash
available with any company or a corporate institution that also includes appropriate
reduction in the cost, facilitated by emphasis on right amount of cash on right
time at the right place.
Successful cash management involves
not only avoiding insolvency (and therefore bankruptcy), but also reducing days
in account receivables (AR), increasing collection rates, selecting appropriate
short-term investment vehicles, and increasing days cash on hand all in order
to improve a company's overall financial profitability
Cash can be interpreted in two
different ways- in a simple way it is an important business asset in the form
of coins and paper currency that can be easily inspected and handled and in the
form of bank checking account that is in turn claim to money rather than
tangible property. While in broader sense, "Cash consists of legal tender,
cheques, bank drafts, money orders and demand deposits in banks.
Definition:
The corporate process of collecting, managing and (short-term) investing
cash. A key component of ensuring a company's financial stability and
solvency. Frequently corporate treasurers or a business manager is
responsible for overall cash management
B. Purpose of Cash Management: Purpose of cash management
is to minimize unproductive cash balances and to plan in order to meet the
expected and unexpected demands of cash. It also aims at reducing required
level of cash, increasing liquidity position of the enterprise. Enhanced
mechanism of the cash management serves the purpose of minimizing the risk of
bankruptcy, risk of being unable to discharge the monetary claims rising
against the company. All these aims and purpose of cash management depend on
the efficient functioning of the cash management system of the company. Cash
itself is very important asset for any firm that is required to meet immediate
obligations i.e. payment of salary, rent, wages etc. Holding cash is important
for the firm but holding excessive also causes loss of interest that a firm
could earn by investing that excessive cash in any security. It also includes having funds immediately in
your account as soon as cheques are deposited in your account without waiting
for clearances. In short cash management refers to best possible utilization of
cash. It helps deposit collections timely. Having funds in-hand is better than
having accounts receivable. The cash is easier to convert immediately into
value or goods. A receivable, an item to be converted in the future, often is
subject to a transaction delay or a depreciation of value.
Purpose
of cash management can be summarized as:
I.
Profit maximization
II.
Wealth maximization
III.
Find out appropriate
sources of finances when a business needs to raise funds.
Reasons for holding cash: The need of holding cash arises from various reasons such
as;
a.
Transaction
Motives: Transaction motive refers to the cash
requirement for daily transactions. Requirement
of cash for payment of various obligations like purchase of raw materials, the
payment of usage and salaries, dividend, income tax, various other operating
expenses etc. Though there is inflow of cash in the form of revenue, return on
investments. But there may not be a perfect synchronization in inflow and
outflow of cash. In case of cash outflow exceeds cash inflow, company needs to
maintain an additional cash balance to meet the routine transactions.
b.
Precautionary Motive: This motive entails cash holding for any
unforeseen event or any unexpected disbursement. This cash holdings help meet
the requirement arising spontaneously or on a short notice. It may be because
of fire breaks out, employees go on strike. Companies usually maintain some
amount of cash to meet this kind of contingencies in order to minimize its
losses.
c.
Speculative Motive: Firms also
maintain cash balances in order to take advantage of opportunities that do not
take place in the course of routine business activities, for example,
opportunities like, a sudden decrease in the price of raw materials which is
not expected to continue for a long period. These transactions are of purely
speculative nature for which the firms need cash.
C. Functions of Cash Management: Purpose of cash management is served by following functions:
a.
Cash Planning: cash planning in
simple terms is planning for cash inflow and out flow. Cash planning is a
technique comprising of planning for cash in order to control its flow. It’s a
process to forecast the future needs of the cash and use of various resources
available with the company thus it requires formulation of various policies and
procedures to manage and control the expenditure. Good cash planning includes
provision for regular and expected demands as well as for irregular and
unexpected demands of cash or resources. So it refers to identifying the major
expenditures in future and making planned investment.
b.
Managing the Cash Flows: managing cash flow is simply dealing
with the amount of cash moving in the business i.e. cash inflow and the amount
of cash moving out of the business i.e. cash outflow. Cash flow is said to be
appropriate if firm manages to increase the rate of inflow and to minimize the
rate of outflow. It can be supported by expediting collection, avoiding the
unnecessary inventories, improving control over payments.
c.
Controlling the Cash Flow: Cash Flow Forecast is perhaps the most
important forecast ever done in a business. It is an estimation of the cash
received and cash disbursed. Forecast is never exact as
it is based on assumptions made on certain past events therefore control over
the cash flow is unavoidable. The more the cash controlling is efficient, the
more available is the usable cash with the company.
d.
Optimizing
the Cash Level: A manager tends to maintain
a sound liquidity position. All the activities such as cash planning, managing
and controlling the cash flow should lead to an optimum level of cash in the
company. The requirement of maintaining the optimum amount of cash is to meet necessary
requirements and settle obligations well in time.
e.
Investing
the Idle Cash: Idle cash refers to cash
available with the company but is not in use may also be termed as cash surplus
accumulated due to excess of cash inflow over cash outflow. A firm is required
to hold a good amount of cash to meet working needs. Need of investing this
idle cash arises because it does not add to profitability of the company. But
it can also not be disposed permanently as concerns may arise even after a
short while. So the amount available
with the firm as idle cash may be deposited in any bank that will earn the firm
some returns.
2.
Cash
Management
A. In Indian Context: Traditionally
India was totally dependent on paper based clearing system causing not only
higher risk but also higher security concerns. But these practices have
undergone a paradigm change. As far as banking is concerned the product centric
approach has transformed into customer centric approach. Banks are important
part in cash management of any corporate institution. In rapidly transforming
world of business banks need to cop-up with newly arising needs of companies
regarding their cash management. Technology has been a key driving force in
this transformation. Objective of cash management is to improve revenue,
maximize profit and to establish a system to assist and accelerate the growth.
Reserve
Bank of India (RBI) also emphasizes on upgrade of the technological
infrastructure i.e. electronic banking, cheque imaging, and enterprise resource
planning (ERP).
In
addition to this there are some policies and regulatory amendments that
facilitate efficiency in cash management system. For example-
a. Enactment of Information Technology Act gives legal
recognition to electronic record and digital signatures.
b. Establishment of clearing corporation of India in order to
regulate and manage clearing and settlement of trade in foreign exchange.
c. Introduction
of the Centralized Funds Management Service to facilitate better management of
fund flows.
d. Structured
Financial Messaging Solution, a communication protocol for intra-bank and
interbank messages.
Payment outsourcing is one of
the emerging services of cash management. Though cheques and drafts are a
popular mode of payment in India. These are time consuming as these require
manual work, moreover there are security concerns, therefore payment
outsourcing may replace this kind of payment modes s it is comparatively more
secured and less time consuming. This also allows corporate to reduce some
overheads and focus on their core competencies. As banks and corporate have
added technology to their processes, it has enhanced the cash management
system.
B. Cash Management Practices: Following
are some cash management practices performed worldwide and in India.
a. Account Reconcilement Service: It is difficult for very large companies to balance the
chequebooks, as it issues so many cheques that requires so much human
monitoring to check whether a cheque has been cleared or not. So banks provide
them a service called Account reconcilement service that allows the company to
upload the list of all the cheques that company has issued on daily basis and
at the end of the month bank statement shows which cheque has been cleared and
which one has not.
Account reconcilement within financial institutions is a key
regulatory and compliance function, and it is a primary focus for outside
regulators in their routine audits of the firm. Customers of these firms
should also keep an accurate record and report discrepancies promptly. It can
defined as:
The process of confirming that two
separate records of transactions in an account are equal. This can happen
internally with a bank or broker, such as between general ledger
entries and individual account records. Reconcilement also
occurs when a customer of a bank or broker confirms that his or
her personal records match what is reported on periodic statements. There
term can also refer to balancing the books and records of a business with
software programs and data entries.
(Definition
source:http://www.investopedia.com/terms/a/account-reconcilement.asp#axzz1y2K3XBQi)
b. Advanced Web Service: Most
of the banks have an advanced internet system that allows managers to create
logon credentials, allowing consumers sending their wires and access their cash
management features that are usually not available on consumer website. It
avail them comparatively a better way to enhance the efficiency.
c. Positive Pay: It is a service that allows any company to electronically
share its cheques registers written with a particular bank. The bank therefore
will only pay for all these cheques by matching the information uploaded or
contained by the cheques such as- payee, serial number, amount etc. This
service helps banks and companies reduce the fraudulent in processing cheques.
Moreover it is more secure way to perform the transactions. It can be defined as:
A cash-management service
employed to deter check fraud. Banks use positive pay to match the checks
a company issues with those it presents for payment. Any check considered to be
potentially fraudulent is sent back to the issuer for examination.
(Definition
Source:http://www.investopedia.com/terms/p/positive-pay.asp#axzz1y2K3XBQi)
d. Balance Reporting System: Corporate clients who are frequently involved in managing
their cash. They subscribe to a sophisticated web based reporting of their
account in their leading bank in order to fetch their transaction information.
This sophisticated system may include information about balances in foreign
currency and those in other banks. They also provide information about cash
position and float i.e. cheques under process of collection. Moreover they
offer transaction specific details on all forms of payment activities i.e.
deposits, cheques, wire transfers in and out, ACH (Automated Clearing Houses
credit or debit), investments. Balance reporting used to be done on a daily
basis, but now companies can often access their current account
information at any time. Customers can also now export the data for
queries in other applications.
It can b defined as:
A report by a bank to a
customer, normally a company or organization, informing the
customer of the balances in their accounts. These real-time
reports are key to the customer's cash-management program, especially for
companies with far-flung operations and banking relationships in many
countries.
(Definition
Source:http://www.investopedia.com/terms/b/balance-reporting.asp#axzz1y2K3XBQi)
e.
Lockbox: It is a service offered by commercial banks to their clients
in order to simplify the process of account receivables. In this process
concerned bank gets corporate clients customers’ payment mailed in to an
account that is accessible by the bank. That account is called as lockbox.
In
general lockbox is a Post Office Box (P.O. Box). That is used by the bank’s
clients to receive their payments in account, accessible by the bank. Bank in
turn collects, processes and deposits that amount in concerned client’s bank
account. Lockbox services are also called as Remittance Services or Remittance
Processing. As benefits go, lockbox banking provides companies with a very
efficient way of depositing customer payments. This is beneficial if a company
is unable to deposit checks on a timely basis and it is constantly
receiving customer payments through the mail. It can be defined as:
A service provided by banks
to companies for the receipt of payment from customers. Under the
service, the payments made by customers are directed to a special post office
box, rather than going to the company. The bank will then go to the box,
retrieve the payments, process them and deposit the funds directly into the
company bank account.
Lockbox can be maintained in two different
ways:
Wholesale Lockbox: This
service is for large companies with large numbers of payments, usually with a
standardized payment coupon. These are usually utilities companies such as,
electricity, gas, water etc.
Retail
Lockbox: Retail lockbox service is for
small companies with comparatively small number of payments. It may be for
small manufacturing companies, any doctor’s office etc.
f.
Armored Car Services: Large corporate houses that collect great amount of cash can
have a service of armored car service by the bank that entails bank to pick the
cash from company by armored car service instead of having it deposited by the
company officials. It prevents the risk of carrying such large amount of cash
to the bank thus it is a security service.
g.
Automated Clearing House:
Automated Clearing House is a service
usually offered by a bank to their corporate clients. It is an electronic
system that allows fund transfer among various banks that is used by the
companies in order to pay other generally employees. Moreover companies also
use this service to collect the funds from various customers through different
banks. The use of electronic clearing houses to facilitate electronic transfers
of money has increased efficiency and timeliness of government and
business transactions. It can be
defined as:
An
electronic funds-transfer system runs by the National Automated Clearing House
Association. This payment system deals with payroll, direct deposit, tax
refunds, consumer bills, tax payments and many more payment services.
h.
Cash Concentration Services: Large or national chain retailer that also operate
in the areas where their prime banks do not have branches therefore they open
their account in the banks having branches in those areas. Usually in these
local bank accounts there’s not much interest or cash may remain idle. To
prevent the cash from being idle or to earn sufficient interest companies have
tie ups with their primary banks, which in turn by ‘Automated Clearing House’
service pull the money electronically from these local banks into a single
interest bearing bank account where companies can earn sufficient amount of
interest. So cash concentration service is cash management technique that
improves the flow of cash, reduce excess balances and increase the interest
earned. This service allows the prime bank of any particular company to collect
all the cash receivables into a single account. It can be defined as:
A type of electronic payment used
to transfer funds between remote locations and so called- concentration (i.e.,
collection) accounts. It is also used between businesses. Cash concentration and disbursement accounts
are tools in cash management that separate funds collections and disbursement.
Transfers are cleared overnight through the Automated Clearing House system.
(Definition
Source:
www.investopedia.com/terms/c/cash/cash-concentration-and-disbursement.asp)
i.
Sweep Accounts: This service is typically offered by cash management
division of a bank. Under this service excessive cash amount of any client
company is automatically moved into a money market, mutual fund overnight and
then moved back into the bank account of that particular company that in turn
helps the company earn interest overnight. This is one of the primary uses of
the money market mutual funds. Therefore in a sweep account a bank’s automatic
system analyses the customer’s account and automatically sweeps the funds into
money market deposit accounts. This is done to provide the customer with the
greatest amount of interest with minimum amount of personal intervention. It
can be defined as:
A bank account that automatically
transfers amount that exceeds a certain level into a high interest earning
investment option at close of each business day.
Commonly, the excess cash is swept
into money market funds.
(Definition Source:
www.investopedia.com/term/s/seep-account.asp)
j.
Zero Balance Accounting: Companies with large number of stores or branches needs to collect cash
inflow. It would be very confusing if all the branches are depositing the funds
into a single bank account. It would to lead confusion that how much amount was
deposited by which particular branch without seeking the image. This
inconvenience can be handles by Zero Balance Account Service provided by banks.
In this service firm bank provides each branch or sore of the client company
with their individual account but the amount is automatically moved into the
main account of the company. This allows the company to look and verify the
individual account of its stores. It can be defined as:
A checking account in which a
balance of zero is maintained by automatically transferring funds from a master account in an amount only
large enough to cover checks presented.
k. Wire Transfer: It is an electronic transfer of funds. It can be
done either by a simple bank account transfer or by a cash transfer at cash
office. Bank wire is most expedient method of transfer of funds between bank
accounts. A bank wire transfer is message to the receiving bank requesting them
to effect payment in accordance with the instructions given. The message also includes settlement instructions.
The actual wire transfer itself is virtually instantaneous, requiring no longer
for transmission than a telephone call. Wire transfer allows people to in
various geographic locations to easily transfer the money to financial
institutions around the globe. Usually for this service banks charge a
particular fee in general based on the size of the amount being transferred. It
can defined as:
An electronic fund transfer
across a network administered by hundred of banks around the world. Wire
transfers allow for individualized transfers of funds from single individuals
or entities to other individuals or entities, while still maintaining
efficiencies of fast and secure movement of funds.
l.
Controlled Disbursement: It is a product offered by the banks under cash management. The bank provide a daily report usually early
in the day, which provides with the disbursement amount to be charged from
customer’s account. This early knowledge of daily funds requirements allows the
customer to invest any surplus in intraday investment opportunities, typically
money market investments. This is different from delayed disbursements, where
payments are issued through a remote branch of a bank and customer is able to
delay the payment due to increased float time. Controlled disbursement is
generally employed to maximize an institution's available cash for
investment or debt payments. This allows for excess funds to be invested in the
money market for as long as possible. it can be defined as:
A technique commonly
employed in corporate cash management. Controlled disbursement is used to
regulate the flow of checks through the banking system on a daily basis,
usually by mandating once-daily distributions of checks (usually
early in the day.) This is done in order to meet certain investment or fund
management objectives.
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