Cash Management PDF

CASH MANAGEMENT Excess Liquidity Cash management objectives: refers to the amount of liquid assets in a bank's portfolio or in the economy as a whole that Ensur...

CASH MANAGEMENT Excess Liquidity Cash management objectives: refers to the amount of liquid assets in a bank's portfolio or in the economy as a whole that Ensuring Sufficient Liquidity exceeds what is needed. It can also refer to the Minimizing Borrowing Costs amount of cash in an account that is more than Optimizing the Return on Investment what is usually required Strengthening the Financial Position Reducing the Cost of Capital Short term investment options: Enhancing Operational Efficiency Preparing for Uncertainty MARKETABLE SECURITIES Maximizing Payment Terms highly liquid financial instruments that can be quickly Cash Flow Forecasting converted to cash. refers to the process of estimating the expected FIXED DEPOSITS (SHORT-TERM) inflows (revenues) and outflows (expenses) of cash within a specific time period, such as daily, weekly, bank deposits with fixed interest rates and short monthly, or annually. The goal is to predict future maturities (30 days to 1 year). cash balances and ensure that a business has enough cash to meet its obligations while optimizing its REPURCHASE AGREEMENTS (Repos) financial resources. agreements to sell securities with the promise to buy Key Features of cash flow Forecasting: them back at a higher price - Short-term Forecasting Investment objective - Long-term Forecasting - Estimation of Inflows An investment objective is the goal or purpose that - Estimation of Outflows an investor aims to achieve with their investments. - Helps in Decision Making - Identifying Cash Gaps Types of Investment Objective: Working Capital Management Capital Preservation Income Generation refers to the process of managing a company's Capital Appreciation short-term assets (such as cash, receivables, and inventory) and liabilities (such as payables and Investment policies and guidelines short-term debts) to ensure efficient operations, maintain liquidity, and optimize profitability. Investment policies and guidelines are a set of rules, principles, and frameworks established by an Importance: it allows a company to fund its day- individual, organization, or fund manager to direct to-day operations, meet short-term financial the investment decisions and strategies of their obligations like paying employees and suppliers, financial assets. and maintain enough liquidity to weather cash flow challenges. Types of Investment Policies and Guidelines: HOW WORKING CAPITAL CAN BE Risk tolerance OPTMIZED? Time horizon Diversification a company can focus on managing the balance between cash inflows and outflows by improving Investment decision process accounts receivable collection, reducing inventory levels, negotiating better terms with The investment decision process is a series of steps suppliers, managing cash outflows, and closely that an individual or organization follows to make monitoring cash flow and liquidity decisions about where and how to invest money. seven ways to improve working capital Process management: Setting investment goals Monitor your working capital ratio Optimize invoice issuance process What do you want to achieve with your investment? Incentivize receivables Automate business processes Assessing risk tolerance Improve inventory management Leverage supply chain financing How much risk are you willing to take? Utilize tax incentives Identifying investment options How it works? What types of investment are available? As the bond gets closer to its maturity date, its price naturally moves towards its face value, generating a Making the investment decision positive return for the investor if the yield curve is upward sloping. Which option aligns best with your goals and risk tolerance? Short-term borrowing refers to loans or credit obtained by an individual or organization that must Monitoring and Reviewing be repaid within a short period, typically one year or less. It is often used to meet immediate financial How are your investment performing? needs, cover cash flow shortages, or finance operational expenses. Deciding on the maturity structures Policy for short term borrowing it refers to determining the appropriate timeline or duration for liabilities or investments, typically in the Borrowing limits context of finance or corporate strategy. Source selection Approval selection Key Points: Repayment guidelines Approval process Matching assets and liabilities Risk management Compliance and reporting Generally, companies aim to match the maturity of their debt to the lifespan of their assets; meaning Objectives for short term borrowing: short-term debt for current assets like inventory and long-term debt for fixed assets like buildings. Meet Immediate Financial Needs Liquidity Needs Support Business Continuity Companies with volatile cash flows might prefer a Optimize Cost of Capital higher proportion of short-term debt to access liquidity easily, while stable cash flow companies Manage Cash Flow Gaps can utilize more long-term debt. Finance Short-Term Opportunities Interest rate risk Preserve Creditworthiness Choosing a maturity structure can also be influenced by interest rate expectations, where a company might Short term borrowing instruments opt for fixed-rate long-term debt if they anticipate rising interest rates. Short-term borrowing instruments are financial tools that allow individuals, businesses, or governments to raise Rolling down the yield curve funds for a short period, typically less than one year. These instruments are designed to meet immediate an investment strategy where an investor buys a liquidity needs, finance working capital, or address longer-dated bond and then gradually sells it as it temporary cash flow gaps. approaches maturity, essentially "rolling down" the yield curve to benefit from the price appreciation that Bank overdraft occurs as the bond gets closer to its maturity date, Short-Term Loans especially if the yield curve is upward sloping; this Trade Credit strategy is most effective when interest rates are Promissory Notes expected to remain stable or decline. Lines of Credit Long dated instrument it refers to buying a bond with a longer time to maturity, which typically offers a higher yield compared to shorter-term bonds. Yield curve A graphical representation showing the relationship between interest rates and time to maturity for bonds of similar credit quality.