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Management of Cash
FREQUENTLY ASKED QUESTION
TREASURY & CASH MANAGEMENT

Q.1.

Give Different kinds of float with reference to management of cash.
Ans. The term float is used to refer to the periods that affect cash as it moves through the different stages of the collection process. Four kinds of float with reference to management of cash are:
BILLING FLOAT:
An invoice is the formal document that a seller prepares and sends to the purchaser as the payment request for goods sold or services provided. The time between the sale and mailing of the invoice is the billing float.
MAIL FLOAT:
This is the time when a cheque is being processed by post office, messenger service or other means of delivery.
CHEQUE PROCESSING FLOAT:
This is the time required for the seller to sort, record and deposit the cheque after it has been received by the company.
BANKING PROCESSING FLOAT:
This is the time from the deposit of the cheque to the crediting of funds in the sellers account.

Q.2. Write short note on William J Baumal vs. Miller-Orr Cash Management Model.

Q.3. Discuss Miller-Orr Cash Management model.

Ans. Several types of cash management models have recently been designed to help in determining optimum cash balance. These models are interesting and are beginning to be used in practice. Two of such models are being given below:
BOUMOL MODELS:
This model was suggested by Willian J. Baumol. It is similar to the one used for determination of economic order quantity for inventories. According to this model, optimum cash level is that level of cash where the carrying costs and transactions costs are the minimum.


CARRYING COSTS
This refers to the cost of holding cash, namely, the interest foregone on Market able securities. They may also be termed as opportunity costs of keeping cash balance.

TRANSACTION COSTS
This refers to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and has to sell the securities resulting in clerical, brokerage, registration and other costs.
There is an inverse relationship between the two costs. When one increases, the other decreases. Hence, optimum cash level will be that point where these two costs are equal. Calculation of economic lot size by applying Baumol Model is as follows.
Where 
C = Optimal transaction size.
B = Fixed cost per transaction
T = Estimated annual requirement of cash
I = Interest earned on marketable securities

The limitations of this model are:
1. Cash payments are assumed to be steady over the period of time specified.
2. Cash payments are seldom predictable.

MILLER ORR MODEL
Boumol model is not suitable in those circumstances when the demand for cash is not steady and cannot be known in advance. Miller-orr Model helps in determining the optimum level of cash in such circumstances It deals with cash management problem under the assumption of random cash flows by laying down control limits for cash balances. These limits are upper limit (h), lower limit (o), and return point (z). When cash balance touched the upper limit, an amount equal to "h-z" is invested in the marketable securities and cash balance comes down to ‘Z’ level. When cash balance touches the lower limit, marketable securities of the value of "z-o" are sold and the cash balance again goes up to 'Z' level.
The Miller - Orr model has superiority over the Baumol's model. The latter assumes constant need and constant rate of use of funds, the Miller - Orr model, on the other hand, is more realistic and maintains that the actual cash balance may fluctuate between the higher and the lower limits.


Q.4.

Write short note on Concentration Banking.

Ans.

Procedure: 
This method of collection from customers operates as under:
1. Identify location or places where major customers are placed, e.g. a company with head Office at Chennai and customers based in Delhi, Kolkata and Mumbai.
2. Open a local Bank account in each of these location i.e. Delhi, Kolkata and Mumbai.
3. Open a local collection centre for receiving cheques from these customers at the respective places. A Branch office or even an Agent can perform the role of a Collection Centre.
4. Collect remittances from customers locally, either in person or through post.
5. Deposit the cheques received in the local bank account for clearing.
6. Transfer the funds to head-Office Bank Account, upon realization of cheques.

Advantages :
1. Reduction in Mailing Float : Since remittance from customers are collected locally either in person or by local post/courier, mailing float is reduced substantially.
2. Reduction in Banking processing Float: Cheques are cleared locally, and the funds are made available faster. There need not be any waiting time for clearance of outstation cheques.
3. Centralised Cash Management : As surplus funds are transferred to Head office Concentration Bank Account, idle funds in various locations are avoided. Centralised Cash management ensures optimum use of funds available to the company and enables payment planning.

Q.7. Write short note on Lock Box System.

Ans. Procedure: This method of collection from customers operates as under:
1. Identify location or places where major customers are placed, e.e. a company with head Office at Chennai and customers based in Delhi, Kolkata and Mumbai.
2. Open a local Bank account in each of these location i.e. Delhi, Kolkata and Mumbai.
3. Instruct customers to mail their payments to the Local bank.
4. Authorize the bank to pick up the remittances from the post box.
5. Authorize the bank to realize the cheques through local collection / clearing.
6. Transfer the funds to head Office Bank Account, upon realization of cheques.

Advantages :
1. Reduction in Mailing Float : Since remittance from customers are collected locally either in person or by local post/courier, mailing float is reduced substantially.

2. Reduction in cheque processing Float: The bank would prepare the list of remittances received & forward it to the company as a credit advice. This saves cheque processing float at the Company's office, prior to collection.

3. Reduction in Banking processing Float: Cheques are cleared locally, and the funds are made available faster. There need not be any waiting time for clearance of outstation cheques.

4. Centralised Cash Management : As surplus funds are transferred to Head office Concentration Bank Account, idle funds in various locations are avoided. Centralised Cash management ensures optimum use of funds available to the company and enables payment planning.

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