Financial Accounting Project
Financial Accounting Project
Financial Accounting Project
FINANCIAL ACCOUNTING
PROJECT
ON
‘TOPIC: CASH MANAGEMENT’
TABLE OF CONTENTS
PAGE NO.
1. TABLE OF CONTENTS 2
2. INTRODUCTION 3
2.1 FINANCIAL ACCOUNTING 3
2.2 IMPORTANCE OF FINANCIAL ACCOUNTING 3
2.3 OBJECTIVES 3
3. CASH MANAGEMENT 4
3.1 TYPES 4
3.2 IMPORTANCE 4
3.3 OBJECTIVES 5
3.4 FUNCTIONS 5
3.5 DIFFERENT TYPES OF CASH MANAGEMENT TOOLS 6
3.6 CASH MANAGEMENT MODELS 7
3.6.1 BAUMOL’S EOQ MODEL 7
3.6.2 MILLER-ORR’ MODEL 7
3.7 CASH MANAGEMENT STRATEGIES 9
3.8 CASH FLOW MANAGEMENT TECHNIQUES 9
3.9 EXAMPLE 10
3.10 ADVANTAGES AND DISADVANTAGES 11
3.11 LIMITATIONS 11
4. CONCLUSION 11
5. REFERENCES 12
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INTRODUCTION
The purpose of this project is to study Cash Management which is a field in Financial
Accounting. Before looking into Cash Management and its types, uses, implementations, and
various aspects we need to know what Financial Accounting is? Prior knowledge of financial
accounting will help us in a better understanding of this concept.
FINANCIAL ACCOUNTING
The American Institute of Certified Public Accountants (AICPA) defines accounting as:
"The art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions, and events which are, in part at least of financial character, and
interpreting the results thereof."
Financial accounting is important for businesses because it helps them keep track of their
financial transactions. In turn, they can make sound decisions on how to allocate their
resources. In addition, financial accounting helps you communicate your business finances to
outside parties such as creditors and investors. The financial statements generated provide all
the necessary information to other parties, which will either encourage or discourage them from
partnering with your business.
Financial accounting makes a company’s financial standing available for people on many
different levels. Any company, but especially larger companies, has many different
transactions, gains, losses, and other monetary changes throughout a business period. Financial
accounting puts all of this information into one location and makes it easier to understand.
Financial accounting also includes performing essential calculations from this information.
CASH MANAGEMENT
Cash Management refers to the collection, handling, control, and investment of the
organizational cash and cash equivalents, to ensure maximum liquidity and maximum
profitability. It refers to the proper collection, disbursement, and investment of cash.
Money is the lifeline of the business, and therefore it is essential to maintain a sound cash flow
position in the organization.
TYPES
IMPORTANCE
Just like a ‘no cash situation’ in our day-to-day lives can be a nightmare, for a business it can
be devastating. Especially for small businesses, it can lead to a point of no return. It affects the
credibility of the business and can lead to them shutting down.
Hence, the most important task for business managers is to manage cash. Management needs
to ensure that there is adequate cash to meet the current obligations while making sure that
there are no idle funds. This is very important as businesses depend on the recovery of
receivables. If a debt turns bad (irrecoverable debt) it can jeopardize the cash flow.
Therefore, cash management is also about being cautious and making enough provision for
contingencies like bad debts, economic slowdown, etc.
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OBJECTIVES
Why do we need to manage cash flow in the organization? What is the use of cash management
in the business?
These are the main objectives of cash management that will resolve the above queries:
FUNCTIONS
Cash management is required by all kinds of organizations irrespective of their size, type, and
location. Following are the multiple managerial functions related to cash management:
1. Investing Idle Cash: The company needs to look for various short-term investment
alternatives to utilize surplus funds.
2. Controlling Cash Flows: Restricting the cash outflow and accelerating the cash inflow
is an essential function of the business.
3. Planning of Cash: Cash management is all about planning and decision-making in
terms of maintaining sufficient cash in hand and making wise investments.
4. Managing Cash Flows: Maintaining the proper flow of cash in the organization
through cost-cutting and profit generation from investments is necessary to attain a
positive cash flow.
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1. Checking Account: It can also be named transaction accounts because it is a tool used
to transfer funds deposited into the account to make a cash purchase. The funds are
easily accessed through a check, an automated teller machine (ATMs), a debit card,
telephone, or internet. They are available at depository institutions (traditionally called
banks).
2. Savings Account: They hold money not spent on consumption. It allows for frequent
deposits or withdrawals of funds, is easily accessible, and can be used as a place to store
money for emergencies or to temporarily hold money not needed for daily living
expenses. They are available at depository institutions. Savings accounts are more
liquid than everything except checking accounts because a person can easily get money
out of a savings account in a few minutes. They are accessible through ATMs,
telephones, or the internet. They are interest-bearing but have lower interest rates
compared to other cash management tools except checking accounts.
3. Short-term instruments such as Money Market instruments and mutual funds, Treasury
Bills, certificates of deposit (CD), etc.
4. Long-term low-risk savings instrument.
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Cash management requires a practical approach and a strong base to determine the requirement
of cash by the organization to meet its daily expenses. For this purpose, some models were
designed to determine the level of money on different parameters.
➢ Based on the Economic Order Quantity (EOQ), in the year 1952, William J. Baumol
gave Baumol’s EOQ model, which influences the cash management of the company.
➢ This model emphasizes maintaining the optimum cash balance in a year to meet the
business expenses on the one hand and grab the profitable investment opportunities on
the other side.
➢ The following formula of Baumol’s EOQ Model determines the level of cash which is
to be maintained by the organization:
where,
‘C’ is the optimum cash balance;
‘F’ is the fixed transaction cost;
‘T’ is the total cash requirement for that period;
‘i’ is the rate of interest during the period.
➢ According to Merton H. Miller and Daniel Orr, Baumol’s model only determines the
cash withdrawal; however, cash is the most uncertain element of the business.
➢ There may be times when the organization will have surplus cash, thus discouraging
withdrawals; instead, it may require making investments. Therefore, the company
needs to decide the return point or the level of money to be maintained, instead of
determining the withdrawal amount.
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➢ This model emphasizes withdrawing the cash only if the available fund is below the
return point of money whereas investing the surplus amount exceeds this level.
➢ Given below is the graphical representation of this model:
where,
‘Z’ is the spread of cash;
‘UL’ is the upper limit or maximum level;
‘LL’ is the lower limit or the minimum level;
‘RP’ is the Return Point of cash.
➢ We can see that the above graph indicates a lower limit which is the minimum cash a
business requires to function. Adding up the spread of cash (Z) to this lower limit gives
us the return point or the average cash requirement.
➢ However, the company should not invest the sum until it reaches the upper limit to
ensure maximum return on investment. This upper limit is derived by adding the lower
limit to the three times of spread (Z). The movement of cash is generally seen across
the lower limit and the upper limit.
➢ The formula of the Miller – Orr’ model to find out the return point of cash and the
spread across the minimum level and the maximum level:
where,
‘Return Point’ is the point at which money is to be invested or withdrawn;
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Cash management involves decision-making at every step. It is not an immediate solution but
a strategical approach to financial problems. Following are the strategies of cash management:
1. Business Line of Credit: The organization should opt for a business line of credit at an
initial stage to meet the urgent cash requirements and unexpected expenses.
2. Money Market Fund: While carrying on a business, the surplus fund should be
invested in the money market funds. These are readily convertible into cash whenever
required and yield a considerable profit over the period.
3. Lockbox Account: This facility provided by the banks enable the companies to get
their payments mailed to their post office box. This lockbox is managed by the banks
to avoid manual deposit of cash regularly.
4. Sweep Account: The organizations should avail the facility of sweep accounts which
is a mix of savings and fixed deposit account. Thus, the minimum balance of the savings
account is automatically maintained, and the excess sum is transferred to the fixed
deposit account.
5. Cash Deposits (CDs): If the company has a sound financial position and can predict
the expenses well along with availing of a lengthy period, it can invest the surplus cash
in the cash deposits. These CDs yield good interest, but early withdrawals are liable to
penalties.
Managing cash flow is a contemplative process and requires a lot of analytical thinking. The
various techniques or tools used by the managers to practice cash flow management are as
follows:
2. Stretching of Accounts Payable: On the other hand, the company should try to extend
the payment of dues by acquiring an extended credit period from the creditors.
3. Regular Cash Flow Monitoring: Keeping an eye on the cash inflow and outflow,
prioritizing the expenses, and reducing the debts to be recovered, makes the
organization’s financial position sound.
4. Cost Cutting: The company must look for ways of reducing its operating cost to main
a good cash flow in the business and improve profitability.
5. Wisely Using Banking Services: The services such as a business line of credit, cash
deposits, lockbox account, and sweep account should be used efficiently and
intelligently.
6. Upgrading with Technology: Digitalization makes it convenient for organizations to
maintain the financial database and spreadsheets to be assessed from anywhere
anytime.
Using this, the company will manage the cash of its business.
Advantages:
1. Cash management allows estimating the cash profits and not just profits from
outstanding incomes and credit sales.
2. It helps in detecting cash embezzlement.
3. It allows for speeding up the working capital cycle.
4. It helps in rewarding such debtors that make quicker payments.
5. It speeds up the operations of an organization.
Disadvantages:
1. Management of the cash requires the specified skills of the person managing it.
2. It is a time-consuming process.
LIMITATIONS
CONCLUSION
It is also better known as treasury management. A treasurer of an organization looks after the
overall cash management for the same. It helps in estimating the cash profits instead of profits
earned through credit sales. It can also help in tracing cash embezzlement.
It solves all the problems about the deficiency in working capital. It also ensures that a
company’s solvency is not impacted and the current value of money is more effectively taken
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into use, along with speeding up the company’s operational activities. However, it must be
noted that it is not a substitute for profit and loss statements.
REFERENCES
WEBSITES:
➢ www.investorsbook.com
➢ www.cleartax.in
➢ www.educba.com
BOOKS: