CASH MANAGEMENT IN PRACTICE-1

Concentration banking is the most popular technique employed by business firms to intensify cash inflows. Usually the local sales office or branch of the company performs this function. Many of the firms which adopt concentration banking technique issue standing instructions to local banks that all funds above a certain limit be transferred to the centralized bank account of the company which is generally at the head office/registered office on the company. The management at the heal office utilized these funds on the basis of daily collection reports.

 

As regards the control of cash outflows, firms have a tendency to defer payment till the last moment. Funds are arranged only on the day cheques are expected to be presented by the payee and or the amount necessary to honor the cheques.  In the case of local payments, cheques are many a time handed over after the banking hours.

 

A wide variation in practice regarding the maintenance of minimum cash balance is observed. Some firms manage their cash needs within the predetermined limits of bank overdraft; some keep a minimum bank balance to need contingencies; some determine cash levels based on the information about daily cash requirements of all sections or divisions or units of the organization; some maintain cash balance of one month’s salary bills plus an amount to meet contingencies; and so on.

CASH MANAGEMENT IN PRACTICE

We now present some evidence with regard to cash management practices. This is based on few studies that been carried out in the Indian context.

 

The evidence suggest that the practices of cash inflows and outflows predictions remain much to be desired, The ‘gut feeling’ approach to cash flow forecasting is very much in vogue in Indian corporate sector; a few firms make use of quantitative forecasting models (including simulation technique). The sales price, production quantity, raw material cost, power and fuel costs, and credit collection are usually considered as critical variables fro cash flow forecasting. The most frequently cited causes of forecast errors are government control and regulations, internal management decision and the external causes like the change product demand, competitive pressure, actions of suppliers, etc.

Firms usually operate on the basis of cash budgets and most of them prepare cash flow statements separately for capital and revenue operations. Firms also prepare regular cash reports. Some prepare daily cash reports; others prepare it every month. Some of the firms prepare cash reports at more than one point of time, namely, daily as well as weekly and monthly. Utilizes these funds on the basis of daily collection reports