Cash Management and Working Capital Strategies

Cash Management Objectives

• Ensure sufficient liquidity
• Minimize borrowing costs
• Maximize return on investment
• Strengthen financial position
• Reduce cost of capital
• Enhance operational efficiency
• Prepare for uncertainty
• Maximize payment terms

Cash Flow Forecasting

• Estimating future cash inflows and outflows (e.g., daily, weekly, monthly, annually)
• Predicting future cash balances
• Ensuring enough cash for obligations while optimizing financial resources
• Key features include short-term and long-term forecasting, inflow/outflow estimations, and decision-making aid

Working Capital Management

• Managing short-term assets (cash, receivables, inventory) and liabilities (payables, short-term debts)
• Ensuring efficient operations, maintaining liquidity, and optimizing profitability
• Important for daily operations, short-term financial obligations, and maintaining liquidity during challenges

Optimizing Working Capital

• Managing cash inflows/outflows through improving accounts receivable collection, reducing inventory levels, better supplier terms, and cash outflow monitoring.
• Close monitoring of cash flow and liquidity.
• Seven ways to improve working capital management: monitor working capital ratio, optimize invoice issuance, incentivize receivables, automate business processes, improve inventory management, leverage supply chain financing, use tax incentives.

Excess Liquidity

• Amount of liquid assets exceeding needed amounts.
• Can be in a bank's portfolio or the economy in general.
• Excess cash in an account more than usual.
• Short-term investment options include marketable securities (highly liquid) and fixed deposits (predefined interest rates, short maturities). Repurchase agreements (repos) are agreements to sell and buy securities at a higher price later.

Investment Objectives

• Goals for investments, such as capital preservation, income generation, or capital appreciation.

Investment Policies and Guidelines

• Rules, principles, and frameworks guiding investment decisions (individuals, organizations, fund managers).
• Dictate strategies and approaches for investment portfolios.
• Types include risk tolerance, time horizon, and diversification policies.

Investment Decision Process

• Series of steps in investment decision making.
• Includes setting investment goals, assessing risk tolerance, and deciding on maturity structures.

Identifying Investment Options

• Types of available investments and matching them with goals and risk.
• Monitoring investment performance.
• Determining investment maturity structures, aligning debt maturity with asset lifespan (short-term debt for short-term assets, long-term debt for long-term assets) and managing liquidity needs. Consider interest rate risk and expectations.
• Rolling down the yield curve, gradually selling bonds moving towards maturity for potential price appreciation.

Short-Term Borrowing

• Loans repayable within a short period (usually one year).
• Meeting immediate financial needs, covering cash shortages, or financing operational expenses.
• Policy for short-term borrowing includes criteria such as borrowing limits, source selection, repayment guidelines, risk management, and approval process.
• Objectives include meeting immediate needs, supporting business continuity, and optimizing costs.