Management Consulting/FINANCIAL MANAGEMENT


1. Select an organisation of your choice and discuss the cash Management system
in that organization. Give your Views or suggestions on the prevailing system of
cash management in that organization and any suitable changes to be brought
about, to improve the present system.
2. Discuss the critical decisions that you need to take in working capital
management. Emphasize the important ways in which these decisions differ
from those concerned with the management of the fixed capital of a business.
3. “High dividend payout ratio goes in hand with high price earnings ratio and low
dividend payout ratio goes hand in hand with low price earnings ratio.”
Comment your views on this statement elaborately.

1.   2. Discuss the critical decisions that you need to take in working capital
management. Emphasize the important ways in which these decisions differ
from those concerned with the management of the fixed capital of a business.

Working capital managementIntroduction
In a perfect world, there would be no necessity for current assets and liabilities because there would be no uncertainty, no transaction costs, information search costs,scheduling costs, or production and technology constraints. The unit cost of productionwould not vary with the quantity produced. Borrowing and lending rates shall be same.Capital, labour, and product market shall be perfectly competitive and would reflect allavailable information, thus in such an environment, there would be no advantage for investing in short term assets.However the world we live is not perfect. It is characterized by considerableamount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or sellinggoods or securities. Information is costly to obtain and is not equally distributed. there arespreads between the borrowings and lending rates for investments and finanancings of equal risks. Similarly each organization is faced with its own limits on the productioncapacity and technology it can employ there are fixed as well as variable costs associatedwith production goods. In other words, the markets in which real firm operated are not perfectly competitive.These real world circumstances introduce problem’s which require the necessityof maintaining working capital. For example,, an organization may be faced with anuncertainty regarding availability of sufficient quantity of crucial imputes in future atreasonable price. This may necessitate the holding of inventory., current assts. Similarlyan organization my be faced with an uncertainty regarding the level of its future cashflows and insufficient amount of cash may incur substantial costs. This may necessitatethe holding of reserve of short term marketable securities, again a short term capital asset.In corporate financial management, the term Working capital management” (net)represents the excess of current assets over current liabilities.1.2 WORKING CAPITALIn simple words working capital is the excess of current Assets over currentliabilities. Working capital has ordinarily been defined as the excess of current assets over current liabilities. Working capital is the heart of the business. If it is weak businesscannot proper and survives. Sit is therefore said the fate of large scale investment in fixedassets is often determined by a relatively small amount of current assets. As the workingcapital is important to the company is important to keep adequate working capital withthe company. Cash is the lifeline of company. If this lifeline deteriorates so des thecompanies ability to fund operation, reinvest do meet capital requitrents and payment.Understanding Company’s cash flow health is essential to making investment decision. Agood way to judge a company’s cash flow prospects is to look at its working capitalmanagement. The company must have adequate working capital as much as needed bythe company. It should neither be excessive or nor inadequate. Excessive working capitalcuisses for idle funds laying with the firm without earning any profit, where asinadequate working capital shows the company doesn’t have sufficient funds for financing its daily needs working capital management involves study of the relationship
between firm’s current assets and current liabilities. The goal of working capitalmanagement is to ensure that a firm is able to continue its operation. And that is hassufficient ability to satisfy both maturing short term debt and upcoming operationalexpenses. The better a company managers its working capital, the less the company needsto borrow. Even companies with cash surpluses need to manage working capital to ensurethe those surpluses are invested in ways that will generate suitable returns for investors.
The primary objective of working capital management is to ensure thatsufficient cash is available to ”
Meet day to day cash flow needs.Pay wages and salaries when they fall duePay creditors to ensure continued supplies of goods and services.Pay government taxation and provider of capital – dividends andEnsure the long term survival of the business entity.
1.3 need for working capital
the prime objective of the company is to obtain maximum profit thought the business.The amount of profit largely depends upon the magnitude of sales. However the sale doesnot convert into cash instantaneously. There is always a time gap between sale of goodsand receipt of cash. The time gap between the sales and their actual realization in cash istechnically termed as operating cycle. Additional capital required to have uninterrupted business operations, and the amount will be locked up in the current assets. Regular availability of adequate working capital is inevitable for sustained biasness orpations.if the proper fund is not provided for the purpose, the business operations will be effected.And hence this part of finance to be managed well.
1.4 working capital cycle.
Each component of working capital ( namely inventory, receivables and payables)has two dimensions TIME and MONEY . when the comes to managing working capitalTIME IS MONEY . if you can get money to move fester around the cycle ( collectmonies due from debtors more quickly) or reduce the amount of money tied up ( e.,reduce inventory level relative to sales). The business will generate more cash or it willreceivablesSALESOVERHEADSEtc.PAYABLESINVENTORYCASHEquity & loan

need to borrow less money to fund working capital. As a consequences, you could reducethe cost of bank interest or you will have additional freee4 money available to supportaddition sales growth or investment. Similarly, if you can negotiate improved terms withsuppliers e.g. get longer credit or an increased credit limit, you festively create freedfinance to help fund future sales\a perusal of operational cycle reveals that the cash invested in operations arerecycled back in to cash. However it takes time to reconvert the cash. Cash flows in cycleinto around and out of a business it the business’s lifeblood and every manager’s primarytask to help keep it flowing and to use the cash flow to generate profits. The shorter the period of operating cycle. the larger will be the turnover of the funds invested in various purposes.
1.5 Determinants of working capital
Working capital requirements of a concern depends on a number of factors, each of whichshould be considered carefully for determining the proper amount of working capital. Itmay be however be added that these factors affect differently to the different units andthese keeps varying from time to time. In general, the determinants of working capitalwhich re common to all organization’s can be summarized as under:
Nature of business
Need for working capital is highly depends on what type of business, the firm in.there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cashetc. public utilities like railways, electricity, ete., need much less inventories and cash.Manufacturing concerns stands in between these two extends. Working capitalrequirement for manufacturing concerns depends on various factor like the products,technologies, marketing policies.
Production policies
Production policies of the organization effects working capital requirements veryhighly. Seasonal industries, which produces only in specific season requires moreworking capital . some industries which produces round the year but sale mainly done insome special seasons are also need to keep more working capital.
Size of business
Size of business is another factor to determines the need for working capital
Length of operating cycle.
Operating cycle of the firm also influence the working capital . longer the oratingcycle, the higher will be the working capital requirement of the organization.
Credit policy
Companies; follows liberal credit policy needs to keep more workingcapital with them. Efficiency of debt collecting machinery is also relevant in this matter.Credit availability form suppliers also effects the company’s working capitalrequirements. A company doesn’t enjoy a liberal credit from its suppliers will have tokeep more working capital
Business fluctuation
Cyclical changes in the economy also influancthe level of working capital. During boom period, the tendency of management is to pile up inventories of raw materials and
finished goods to avail the advantage of rising proves. This creates demand for morecapital. Similarly. During depression when the prices and demand for manufacturedgoods. Constantly reduce, the industrial and trading activities show a downward termed.Hence the demand for working capital is low.
Current asset policies.
The quantum of working capital of a company is significantly determined by itscurrent assets. Policies. A company with conservative assets policy may operate withrelatively high level of working capital than its sales volume. A company pursuing anaggressive amount assets policy operates with a relatively lower level of working capital.
Fluctuations of supply and seasonal variations
Some companies need to keep large amount of working capital due to their irregular sales and intermittent supply. Similarly companies using bulky materials alsomaintain large reserves’ of raw material inventories. This increase the need of workingcapital . some companies manufacture and sell goods only during certain seasons.Working capital requirements of such industries will be higher during certain season of such industries period.
Other factors.
Effective co ordination between production and distribution can reduce the need for working capital . transportation and communication means. If developed helps to reducethe working capital requirement/.
1.6 working capital concepts.
There are two thoughts that re currently accepted about working capital. They are
Gross working capital concept.Net working capital concept.Gross working capital concept
This thought says that total investment in current assets is the working capital of the company. This concepts does not consider current liabilities at all. Reasons given for the concept.1)when we consider fixed capital as the amount invested in fixed assets. Then theamount invested in current assets should be considered as working capital.2)current asset whatever my be the sources of acquisition, are used in activitiesrelated to day to day operations and their forms keep on changing. Therefore theyshould be considered as working capital.
Net working capital
it is narrow concept of working capital and according to this, current assets minuscurrent liabilities forms working capital. The excess of current assets over currentliabilities is called as working capital. This concept lays emphasis on qualitative aspect.
Which indicates the liquidity position of the concern/enterprise. The reasons for the networking capital method are:1)THE material thing in the long fun is the surplus of current assets over currentliability2)Financial health can easily be judged by with this concept particularly from theview point of creditors and investors.3)Excess of current assets over current liabilities represents’ the amount which isnot liable to be returned and which can be relied upon to meet any contingency.4)Inter company comparison of financial position may be correctly done particularly when both the companies have the same amount of current assets.If the current assets are higher than current liability it is considered the financial positionof the company is sound. If both current assets and liabilities are equal , the company hasresorted to short term funds for financing the working capital and long term sources of funds have been used to finance the acquisition of fixed assets. It doesn’t not indicate thefinancial soundness for the company. If the current assets are lesser than current liabilitiesthere is negative working capital which indicates financial crisis. Net working capital concept is more reasonable than the gross working capital concepts.The balance seet of the company includes group of liabilities such as bank overdraft,creditors, bills payables, outstanding expenses etc. if it is not deduct from current assets ,the concern may consider itself quite secured: while the reality is may be that the concernhas very little working capital or has no working capital . there fore it is reasonable todefine working capital as the excess of current assets over current liabilities.
1.7 kinds of working capital
Working capital can be put in two categories:1)fixed or permanent working capital and2)fluctuating or temporary working capital
fixed or permanent working capital
the volume of investment in current assets an change over a period of time. Butalways there is minimum level of current assets that must be kept in order to carry on the business. This is the irreducible minimum amount needed for maintaining the operatingcycle. It is the investment in current assets. Which is permanently locked up in the business, and therefore known as permanent working capital.
Variable/temporary working capital
It is the volume of working capital. Which is needed over and above the fixedworking capital in order to meet the unforced market changes and contingencies. In other words any amount over and about the permanent level of working capital is variable or fluctuating working capital . this type of working capital is generally financed from short
ter souse of finance such as bank credit because this amount is not permanently requiredand is usually paid back during off season or after the contingency.
1.8 Sources of working capital
The company can choose to finance its current assets byLong term sourcesShort term sourcesA combination of them.Long term sources of permanent working capital include equity and preferenceshares, retained earning, debentures and other long term debts from public deposits andfinancial institution. The long term working capital needs should meet through long termmeans of financing. Financing through long term means provides stability, reduces risk or payment. And increases liquidity of the business concern. Various types of long termsources of working capital are summarized as follow
Issue of shares
It is the primary and most important sources of regular or permanent working capital .issuing equity shares as it does not create and burden on the income of the concern. Nor the concern is obliged to refund capital should preferably raise permanent workingcapital.
Retained earnings
Retain earning accumulated profits are a permanent sources of regular working capital. Itis regular and cheapest. It creates not charge on future profits of the enterprises.
Issue of debentures
It crates a fixed charge on future earnings of the company. company is obliged to payinterest . management should make wise choice in procuring funds by issue of debentures.
Long term debt
Company can raise fund from accepting public deposits, debts from financial institututionlike banks, corporations etc. the cost is higher than the other financial tools.Other sources sale of idle fixed assets , securities received from employees and customersare examples of other sources of finance.
Short term sources of temporary working capital
Temporary working capital is required to meet the day to day business expenditures. Thevariable working capital would finance from short term sources of funds. And only the period needed . it has the benefits of ,low cost and establishes closer relationships with banker.
Some sources of temporary working capital are given below;Commercial bank
A commercial bank constitutes a significant sources for short term or temporaryworking capital . this will be in the form of short term loans, cash credit, and overdraftand though discounting the bills of exchanges.
Public deposits
most of the companies in recent years depends on this sources to meet their short termworking capital requirements ranging fro six month to three years.
Various credits
trade credit, business credit papers and customer credit are other sources of short termworking capital. Credit from suppliers, advances from customers, bills of exchanges, promissnotes, etc helps to raise temporary working capital
Reserves and other funds
various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital.The company should meet its working capital needs through both long term and shortterm funds. It will be appropriate to meet at least 2/3 of the permanent workingcapital equipments form long term sources, whereas the variables working capitalshould be financed from short term sources. The working capital financing mixshould be designed in such a way that the overall cost of working capital is thelowest, and the funds are available on time and for the period they are really required.
Sources of additional working capital include the followingExisting cash reservesProfits(when you secure it as cash) payables(credit from suppliers)new equity or loans from shareholder bank overdrafts line of creditlong term loansif you have insufficient working capital and try to increase sales, you can easily over stretch the financial resources of the business. This is called overtrading. Earlywarning signs include pressure on existing cashexceptional cash generating activities. offering high discounts for clear cash payment bank overdraft exceeds authorized limitseeking greater overdrafts or lines of credit part paying suppliers or there creditor.Management pre occupation with surviving rather than managing.
1.9 adequate working capital
As I stated bout keeping adequate working capital is the mantas towards the successof financial management. The term adequate working capital refuters to the amount of working capital to be kept with the organization to met its daily operations. Largeinvestment in fixed assets not sufficient to run a business successfully. Adequateworking capital is equally important. Without working capita fixed assets are like agun, which cannot shoot, as there are no cartridges.It is said that “ inadequate working capital is a disastrous: where as redundantworking capital is a criminal waste.” It is clear that the company can’t invest all itsfunds in current assets to increase working capital . at the same time it requires tokeep sufficient funds with it. So a proper leverage between both ends is needed toassure proper running of the business . it needs to keep adequate working capital withit. Neither less nor more than needed.
1.9 (a) advantages of adequate working capital
Adequate working capital provides certain benefits to the company they are:1 increase in debt capacity and goodwillAdequate working capital represents the financial soundness of the company. If onecompany is financially sound it would be able to pay its creditors timely and properly.It will increase companies goodwill. It crests confidence among investors andcreditors. Thus a firm with adequate working capital can raise requisite funds frommarket , borrow short term credit form banks, and purchases inventories of rawmaterial etc., for the smooth operations of its business.
Increase in production inefficiency
With adequate working capital the firm can smoothly carryout research anddevelopment actives and thus adds to it production efficiency.
Exploitation of favorable opportunities
In the presence of adequate working capital , a company can avail the benefits of favorable opportunities. Adequate working capital will help the company to have bulk purchases, seasonal storage of raw material etc., which would reduce the cost of production, thus adds to its profit.
Meeting contingencies adverse changes:
A company can easily face certain business and economic crises a companyhaving adequate working capital can successfully meet contingencies such as business oscillations, financial crisis arising from heavy losses etc.,
Available cash discount
Maintenance of adequate working capital enables a company to avail the advantage of cash discount by making cash payment for to the suppliers of raw materials andmerchandise. Obviously it will reduce the cost of production and increase the profit of the company.
Solvency and efficiency fixed assets.
It helps to maintain the solvency of the company. So that payments could be made intime as and when they fall due. Like wise, adequate working capital also increases theefficiency for fixed assets insofar as their proper maintenance depends upon theavailability of funds.
Attractive dividend to shareholders
It enables the company to offer attractive dividend to the shareholders so that sense of security and confidence will increase among them . it also increases the market valuesof its shares.1.9 (b)
Dangers of inadequate working capital
Having inadequate working capital les to so many of dangers as it doesn’t fulfill its purpose. Some are given below:
Loss of goodwill and creditworthiness
As the firm fails to on or its current liabilities it loses it goodwill and creditworthinessamong its creditors. Consequently, the firm finds it difficult to procure the requisitefunds for its business operations on easy terms, which ultimately results in reduced profitability as well as production interruption.
Firm can’t make use of favorable opportunities
The firm fails to undertake the profitable projects, which not only prevent the fir fromavailing the benefits of favorable opportunities but also stagnate its growth.
Adverse effects of credit opportunities
The firm also fails to avail the attractive credit opportunities but also stagnate itsgrowth
Operational inefficiencies
In leads the company to operating inefficiencies, as day to day commitments cannot be met.
Effects on financial capacity
Inadequacy of working capital also weakness the shock absorbing capacity of the firm because it cannot meet the contingencies arising form business oscillations, financiallosses, due to shortage of working capital.
Non achievement of profit target
The firm cannot implement operational plans due to unavailability of fund. Whichwill lead to non achievement of profit margin.
1.10 Dangers of redundant working capital
As the inadequate working capital is dangerous to the firm, redundant working capitalalso brings hazardous condition in to the company. Let us discuss the dangers of redundant working capital to the company.
Low rate of return on capital
Excessive or redundant working capital implies the presence of idle funds that earnno profit to the firm. So it cannot earn a proper rate of return on its total investments,whereas profits are distributed on its total investment, whereas profits are distributedon the whole of its capital.
Decline in capital and efficiency
Since the rate of return on capital is low the company tempts to make someadjustment to inflate profit to increase the dividend. Some times these unearneddividend paid out of the company’s capital to keep up the show of prosperity bywindow dressing of accounts. Certain provision, such as provision for deprecation ,repairs and renewals are into made. This leads to decline in operating efficiency of thefirm.
Loss of goodwill and confidence.
Lower rate of return leads to lower dividend available to share holder. This leads todown fall in market value of the company’s share and markets the shareholder losetheir confident in company.
Evils of over capitalization
Excessive working capital is often responsible for giving berth to the situation of overcapitalization in the company with all its evils. Over capitalizations is not onlydisastrous to the smooth survival of the company but also interests of those associatedwith the company.
Destruction of turnover ratio
It destructs the control over turnover ratio. Which is commonly used in the conduct of an efficient business.It is evident form the foregoing discussion that a company must have adequateworking capital pursuant to its requirements. It should neither be excessive notinadequate. Both situation are dangerous. While inadequate working capital adverselyaffects the business operations and profitability . excessive working capital remainsidle and earns no profits for the company. So company must assure its workingcapital is adequate for its operations.
1.11 Blueprint for a good working capital management policyGeneral action
Set planning standards for stock days. Debtor days and creditors days.Having set planning standards (as above) KEEP TO THEM. Impress on staff thatthese targets are just important operating budgets and standards cost.Instill an understanding amongst the staff that working capital management produces profits.
Action on stocks
Keep stock levels as low as possible, consistent with not running out of stock and notordering stock in uneconomically small quantities. “just in time” stock management isfine, as long as it is “just in time” and never fails to deliver on time.Consider keeping stock in suppliers warehouses drawing on its as needed and savingwarehousing cost.
Action on debtors /customers
Assess ALL significant new customers for their ability to pay. Take references,examine account , and ask around. Try not to take on new customers who would be poor payers.Re assess ALL significant customers periodically. Stop supplying existing customerswho are poor payers, you may lose sales, but you are after QUALITY of businessrather than QUANTITY of business. Sometimes poor paying customers suddenly(and magically!!) find cash to settle invoices if their supplies are being cut off. If customers can’t pay / won’t pay let your competitor have them. Give your competitor a few more problem.Consider factoring sales invoices the extra cost may be worth it in terms of quick payment of sales revenue, less debtor administration and more time to carry out your business (rather than spend time chasing debts)
Consider offering discounts for prompt settlement of invoices, but only if thediscounts are lower than the costs of borrowing the money owed from other sources.
Action on creditors
Do NOT pay invoices too early take advantage of credit offered by suppliers it’sfree!!Only pay early if the supplier is offering a discount. Even then, consider this to be aninvestment. Will you get a better return by using working capital to settle the invoiceand take the discount than by investing the working capital in some other way?Establish a register of creditors to ensure that creditors are paid on the correct date notearlier an not later.1.12
In today’s world of intense global competition , working capital management isreceiving increasing attention form managers striving for peak efficiency the goal of many leading companies today, is
zero working capital. Proponent of the zeroworking capital
concept claims that a movement toward this goal not only generatescash but also speeds up production and helps business make more timely deliveriesand operate more efficiently. The concept has its own definition of working capital :inventories+ receivables- payables. The rational here is (i) that inventories andreceivables are the keys to making sales , but (II) that inventories can be financed bysuppliers through account payables.Companies use about 20% of working capital for each sales. So , on average,working capital is turned over five times per year. Reducing working capital and thusincreasing turnover has two major financial benefits. First every money freed up byreducing inventories or receivables, by increasing payables, results in a one timecontribution to cash flow. Second, a movement toward zero working capital permanently raises a company’s earnings.The most important factor in moving toward zero working capital is increased speed.If the production process is fast enough, companies can produce items as they areordered rather than having to forecast demand and build up large inventories that aremanaged by bureaucracies. The best companies delivery requirements. This system isknown as demand flow or demand based management. And it builds on the just intime method of inventory control.Clearly it is not possible for most firm to achieve zero working capital and infinitelyefficient production. Still, a focus on minimizing receivables and inventories whilemaximizing payables will help a firm lower its investment in working capital andachieve financial and production economies.
ESTIMATION OF WORKING CAPITAL MANGEMENTAs discussed above a number of factors are responsible for determining the amount of working capital required by affirm . let us know discuss the various methods/technique used in assessment of firm’s working capital requirements. These methodsare.
1)estimation of components of working capital method.
This method is based on the basic definition of working capitalizes, excess of currentassets over the current liabilities . in other worked the amount of different constituent of the working capital such as debtors, cash inventories , creditors etc are estimatedseparately and the total amount of working capital requirement is worked outaccordingly.
(ii) percent sales method
This is the most simple and widely used method in combination with other scientificmethods. According to this methods a ratio is determined for estimating the futureworking capital requirement . this is the generally based on the past experience of management as the ratio varies from industry to industry. For example if the pastexperience shows that the amount of working capital has been 20% of sales and projected
amount of sales for the next year is Rs 10 lakes, the required amount of working capitalshall be Rs Two lakh.As seen from above the above method is merely an estimation based on pastexperience. Their fore a lot depends on the efficiency of decision maker, which may not be correct in all circumstances. Moreover the basic assumptions regarding linear relationship between sales and the working capital may not hold well in all the cases.Therefore this method is not dependable ands not universally acceptable. At best, thismethod gives a rough idea about the working capital.
(iii) operating cycle approach
The need of working capital arises mainly because of them gap between the production of goods and their actual realization after sales. this gap is technically referredas the “operating cycle” or the “cash cycle ” of the business. If it were possible tocomplete the entire job instantaneously, there would be no need for current asset(working capital). but since it is not possible, every business organization is forced tohave current asset and hence operating cycle. It may be divided into four stage.1.raw materials and stores storage in process stage.3.finished goods inventory stage.4.debtor’s collection stage,
duration of operating cycle
the duration of the operating cycle is equal to sum of the duration of these stages less thecredit period allowed by the suppliers of the firm. In symbolOC= R+W+F+D—CWHEREOC= Duration of the Operating CycleR= Raw materials and storage space periodsW= work in process periods.F= finished goods storage periodsD= debtor collection periodC= Creditors collection period.The component of the operating cycles has already been calculated in “ratioAnalysis” which is as follow.R = average stock of raw material---------------------------------Average raw material consumption per day
S = Average stock of stores---------------------------------------------Average stores consumption per dayW =average work in process inventory---------------------------------------------------Average cost of production per dayD =average book debts---------------------------------------------------Average credit sales per dayC =`average trade credit----------------------------------------------------Average trade credit purchase per day

management of the fixed capital
The amount of fixed capital required varies from business to business because of the following factors: (1) Nature of industry business, (2) Kinds of products, (3) Size of the business unit, (4) Methods of handling production, (5) Mode of acquiring fixed assets, (6) Diversity of manufacturing lines
(1) Nature of industry business:
The business enterprises engaged in rendering personal services, merchandise, commerce and trade may need very little fixed investment, while industries manufacturing heavy and capital goods are likely to invest a major part of their funds in fixed assets.
Similarly, a public utility undertaking (say, an electricity supply company, water supply undertaking or a railway company) would need heavy investment in fixed assets and equipment. Thus the nature of business determines the amount of fixed capital to a large extent.
(2) Kinds of products:
If the company is engaged in the manufacture of complicated goods like refrigerators, T.V. sets, motor vehicles, engines etc., it may need large amount of fixed capital than a business enterprise which produces simple consumer items like powder, cream, toothpaste etc. Thus the type of product manufactured also governs the amount of fixed capital.
(3) Size of the business unit:
A large scale firm requires more fixed capital than a small enterprise. The bigger the size of plant, the larger would be the amount of fixed investment. For instance, capital-intensive companies require huge amount to be invested in fixed assets as compared to labour-intensive companies.
(4) Methods of handling production:
If a company is manufacturing all parts of a product, its fixed capital needs will be more, in comparison to an enterprise which is assembling parts produced by other concerns. For example, a bicycle factory which manufactures its own parts and then assembles them into a bicycle, needs huge amount of fixed capital. On the other hand, if a company assembles the parts manufactured by other firms, it will require small amount of fixed capital. Thus, the method of handling production also affects the magnitude of fixed capital.
(5) Mode of acquiring fixed assets:
Fixed assets can be either purchased or acquired on lease basis or taken on rent. In the first case, the requirement of fixed capital will be very high.
(6) Diversity of manufacturing lines:
If a company manufactures and markets its goods itself, it needs more fixed capital than a company engaged only in manufacturing a product. A trading concern buying and selling the goods produced by others will need very little fixed capital. Thus diversity of production lines also determines the fixed capital requirements.
Factors Affecting Requirement of Fixed Capital:
Investment in fixed assets is for longer duration and is called fixed capital. Fixed capital is financed through long term sources of finance such as equity shares, preference shares, debentures, long term loans, etc.
The requirement of fixed capital depends upon various factors which are explained below:
1. Nature of Business:
The type of business Co. is involved in is the first factor which helps in deciding the requirement of fixed capital. A manufacturing company needs more fixed capital as compared to a trading company, as trading company does not need plant, machinery, etc.
2. Scale of Operation:
The companies which are operating at large scale require more fixed capital as they need more machineries and other assets whereas small scale enterprises need less amount of fixed capital.
3. Technique of Production:
Companies using capital-intensive techniques require more fixed capital whereas companies using labour-intensive techniques require less capital because capital-intensive techniques make use of plant and machinery and company needs more fixed capital to buy plants and machinery.
4. Technology Up-gradation:
Industries in which technology up-gradation is fast need more amount of fixed capital as when new technology is invented old machines become obsolete and they need to buy new plants and machinery whereas companies where technological up-gradation is slow they require less fixed capital as they can manage with old machines.
5. Growth Prospects:
Companies which are expanding and have higher growth plan require more fixed capital as to expand they need to expand their production capacity and to expand production capacity companies need more plant and machinery so more fixed capital.
6. Diversification:
Companies which have plans to diversify their activities by including more range of products require more fixed capital as to produce more products they require more plants and machineries which means more fixed capital.
7. Availability of Finance and Leasing Facility:
If companies can arrange financial and leasing facilities easily then they require less fixed capital as they can acquire assets on easy installments instead of paying huge amount at one time. On the other hand if easy loan and leasing facilities are not available then more fixed capital is needed as companies will have to buy plant and machinery by paying huge amount together.
8. Level of Collaboration/Joint Ventures:
If companies are preferring collaborations, joint venture then companies will need less fixed capital as they can share plant and machinery with their collaborators but if company prefers to operate as independent unit then there is more requirement of fixed capital.


2.   Select an organistion of your choice and discuss the cash Management system
in that organization. Give your Views or suggestions on the prevailing system of
cash management in that organization and any suitable changes to be brought
about, to improve the present system.
of the fixed capital of a business.

Traditionally, businesses have believed that
profits indicate success. While it is true that
profits are one of the key indicators of success,
many are now starting to realize that there is
something more fundamental to their very
survival; and that is ‘cash’. ‘Cash is King’- And
this holds true for every business irrespective
of its size. The availability of cash balances is a
key determinant of a company’s competitive
ability, because it provides the means to invest in
people, technology, and other assets. Efficient
Cash Management is therefore indispensable.
Cash Management comprises of a series of
activities aimed at efficiently handling the inflow
and outflow of cash. This mainly involves
diverting cash from where it is to where it is
needed. In other words, cash management is the
optimization of cash flows, balances and shortterm
‘Cash’ in this context, may refer either to cash in
the form of currency, or to other equivalents such
as cheques, drafts, deposits, among others.
While organizations may hold other assets
which can potentially be converted to cash,
cash management essentially deals with the
management of liquid cash and near-cash assets
such as marketable securities and time deposits,
which can be readily converted to cash. The
primary feature of such cash balance is that it
has no earning power. Nonetheless, it is crucial
to organizations for three main reasons:
1. Transaction: Ready cash balances are vital
for routine transactions including purchases,
operating expenses, wages, and other
payments such as dividends, taxes and so on.
2. Precaution: There may be unanticipated
cash requirements as a result of sudden
increase in inventory costs, delay in
collection of receivables, among others. And
maintaining ready cash balances is essential
to deal with such unforeseen expenses.
3. Speculation: Reserving cash balances is
also crucial when firms anticipate decline in
prices of raw materials, reduction in interest
rates for buying securities, availing early
payment discounts, among others.
What is Cash Management?
Why Cash Management?
Components of Cash Management
Lack of control over cash flows and inefficient
cash management can be very harmful to
business. More often than not, it is the improper
management of cash that has caused businesses
to fail. Effective cash management is therefore a
necessity for businesses.
Companies heavily rely on knowing their cash
position to manage working capital requirements
such as ordering inventory, raw material, or
acquisitions/expansion program, for which
they need a clear idea of how much cash is
required, and when. This is enabled by efficient
cash management.
Moreover, a company’s cash position is said to
be a better indicator of the health of its
business, rather than its profit and loss statement.
Hence knowing the cash position is crucial for
every business to:
• forecast when, how, and where cash needs
may arise
• determine which would be the best source
for additional cash needs, and
• be prepared to meet cash needs when
they arise
And for better visibility into the cash position
across banks, across borders, cash management
is crucial. It empowers businesses with the ability
to forecast cash flows, plan future business
strategies, and manage cash accordingly.
Businesses commonly face issues with slow
movement of funds, long-drawn reconciliation
processes, locked working capital, and loss of
float income. Hence there are certain fundamental
requirements for efficient cash management,
including control over receivables and payables,
visibility on cash positions, among others. And to
address these needs of corporate customers,
banks widely offer cash management services
comprising the following:
1. Account Reconciliation: Managing
cheques, monitoring their clearance, and
keeping track of the true cash balance can
be an overwhelming task for businesses
because of the huge number of cheques that
are processed on a daily basis. Hence
banks offer account reconcilement services
wherein corporate customers can upload
details about the cheques issued on a daily
basis. And at the end of the month, the bank
statement shows information on cheques
which have been cleared and those which
have not. This system is also helpful in the
process known as ‘positive pay’, used by
banks to prevent cheques from being
fraudulently cashed if they are not on the list.
2. Cash Concentration: This is a quick and
cost-effective method of moving funds from
different accounts spread across the country
to a single monitored and managed account.
This allows businesses to maximize the use
of available cash, and to optimize returns on
consolidated balances.
3. Financial Risk Management: Risk
management is the process of measuring
risk, and developing and implementing
strategies to manage and mitigate risk.
Financial risk management plays an important
role in cash management, because it focuses
on managing risks in relation to changes in
interest rates, commodity prices, stock prices,
exchange rates, among others.
4. Liquidity Management: Forecasting the
cash needs of a business is essential for
managing cash flows, short-term borrowings,
among others. in an efficient manner, in
order to ensure that such cash needs can
be met if and when they arise. This
requirement is addressed through liquidity
management services offered by banks.
Liquidity management comprises of activities
that release the investments locked in
working capital, enabling it to contribute to
higher profits. It also refers to the specific
services provided by banks to enable their
customers optimize their interest revenues
and reduce interest costs.
With growing recognition of the need to adopt
cash management strategies, companies are
Cash Management: Corporate Expectations and
Consequent Trends
expecting solutions around standardization,
reconciliation, integrated banking systems with
corporate systems, and real-time reporting for
overall view of the existing cash position. And
the current trends in cash management
emerge from banks catering to these needs of
corporate customers:
Complete Visibility: Corporate customers
increasingly expect superior cash forecasting
ability, for which they need complete enterprise
level visibility into cash balances and movement
of cash. This is provided by banks in the form of
status reports, direct enquiry, and through
consolidated view of accounts held with
branches/banks across the globe.
Rich Reporting Modules: In order to make
corporate customers understand the need to
adopt cash management services, banks are
showing cost-benefit analysis reports, and
demonstrating the benefits offered by cash
management using graphs and illustrations.
Integrated Services: Corporate customers prefer
a single platform for all their financial needs in
place of disparate systems. Hence the focus is
on integrating cash management systems with
other activities involving the bank. For example,
linking of ERP solutions with banking systems
facilitates cash management by enabling
effective trade finance process and investment
management, among others.
Remote Deposit Capture and Straight-Through
Processing (STP): In order to accelerate
transactions businesses are looking for solutions
that offer straight through processing capability.
For example, corporate customers are trying
to streamline their transactions and reduce
downtime, for which banks offer STP services
which enable businesses to conduct entire trade
processes and payments electronically.
And to better serve the needs of corporate
customers, banks look to technology vendors
who offer optimal solutions that can enable more
efficient cash management.
Cash management solutions are not new. The
market is mature and many banks offer efficient
The Role of Technology in Optimizing Cash
Cash management solutions are not new. The
market is mature and many banks offer efficient
cash management solutions. But market forces,
economic conditions, and changing corporate
trends have generated opportunities for further
innovations in this space.
Although traditionally a large number of these
solutions have been windows-based, with many
corporate customers embracing internet banking,
several banks are now migrating to browserbased
solutions. Technology has been the driving
force in optimizing cash management solutions
for corporate customers:
• Browser-based solutions facilitate
centralization of cash management thereby
enabling better accessibility by users across
the organization thereby having a better
control of cash flows
• Online banking and STP help quicken
payments, thereby accelerating business
and streamlining processes by eliminating
redundant manual processes
• 360 degree view of accounts offers greater
visibility on cash position thereby improving
the forecasting ability.
All these facilities help businesses optimize cash
management and consequently help improve their
cash position.
Cash management solutions are now widely
being adopted, and hence there is likely
to be an increase in the number of vendors
offering these solutions. Correspondingly,
corporate customers are also likely to become
more demanding, thereby promoting more
intense competition amongst vendors. Here are
some areas with scope for improvement which
vendors can focus on, to provide better services
than their competitions.
Eliminating Disparate Systems: Different cash
management solutions are being offered for
diverse segments. And as businesses grow,
managing these disparate systems is increasingly
becoming a challenge. Hence vendors should
come up with a single platform which can
support various cash management products and
services as the business grows.
Customizable Solutions: Banks today offer
similar solutions to all corporate customers
irrespective of their size and business. Hence
vendors should try to come up with a
customizable platform which can cater to the
specific needs of different businesses.
Unified System: Integration of corporate
customer systems with banking systems can be
very helpful in reconciliation of internal systems
with banking systems, and can support account
management between the bank and customer.
And this offers great scope for vendors.
Today, banks are leveraging cash management
systems as a tool to build long-term trust with
corporate customers, because these systems
will empower bank’s customers to be empowered
and manage their liquidity position at any given
time, thus building a trust and strengthening the
relationship that goes beyond transaction banking.  
analytical power needed to streamline operations and raise returns, making it the ideal solution for  treasury and cash management activities.
Managing corporate treasury functions is a complex undertaking involving:
• Cash management
• Reconciliation
• Cash pooling
• Funds transfer
• Debt/Investment support
• Cash forecasting
Efficiently handling each function is vital to maximizing overall financial performance, especially when it comes to liquidity and investment. SmartTreasury is the ideal cash management solution, as it centralizes all of these functions into one system that can offer timely, comprehensive views of corporate cash flow. The SmartTreasury workstation automates most routine tasks, such as data collection, which can reduce errors and streamline operations.
Chesapeake’s SmartTreasury performs as an integrated workstation designed to handle wide-ranging corporate treasury functions. SmartTreasury also offers built-in accounting and auditing functions, accommodating both daily processing needs and regulatory compliance requirements.
Why SmartTreasury®?
There are a number of reasons why Chesapeake’s SmartTreasury® is the ideal solution for cash management and controlling your organization’s treasury activities, including:
•   With more than 20 years of industry experience, Chesapeake a wealth of knowledge, as well as a proven reputation for exceptional customer service.
•   SmartTreasury has all of the functionality you need in a treasury workstation without the superfluous features you don’t need (and don’t want to pay for).
•   Updates and enhancements to the system are driven by customer feedback and requests.
•   The implementation process is driven by close involvement from Chesapeake, with continued assistance as required.
•   SmartTreasury offers the look and feel of Excel, but with the enhanced database and filtering capabilities of a high-end treasury workstation.
Key Features
•   Provides end-to-end treasury functionality
•   Reduces manual data entry
•   Improves short and long-term liquidity through automatic update of treasury worksheets
•   Provides complete auditing and tracking
•   Assures timely and consistent wire, ACH, and SWIFT initiation across bank accounts
•   Centralizes cash management, debt and investment data
•   Minimizes the opportunity for fraud
•   Enforces compliance with current regulations
•   Automates high-volume operations in organizations with complex legal entity structures
Data Importing
SmartTreasury works with Chesapeake’s Internet Data Manager (IDM™)—the innovative way to collect data.

SmartTreasury® Functionality
•   Automatic bank import
•   Cash position worksheets
•   Cash pooling
•   Comprehensive treasury reports
•   Funds transfer, including wire, ACH, SWIFT, and EDI
•   Cash forecasting worksheets
•   Reconciliation
•   SWIFT reconciliation
•   Debt and investment management
•   Foreign exchange
•   General ledger interface
SmartTreasury® Strengths
•   Dynamic user interface
•   Event-driven eNotification
•   User-friendly visual workflows
•   Intercompany netting and settlement
•   Enhanced security controls
•   Browser-based security administration
•   Comprehensive debt & investment management
•   Import and export processing
•   Online help
•   “Export to spreadsheet” capabilities
•   Superior system performance
•   Inclusive document management
Advantages of the SmartTreasury® Solution
•   Modular system
•   Automated internet data collection (using Chesapeake IDM)
•   Ease of use, easy to maintain
•   Vendor expertise
•   Import more accurate information through automated bank polling
•   Experience faster processing through the sharing of data
•   Improve your forecasting efforts, leading to better planning and decision making
•   Centralized cash management, debt, and investment data for greater financial control
•   Improve productivity by eliminating manual and time consuming activities
•   Reduce errors through automation
•   Familiar spreadsheet look and feel with database power and control

3. “High dividend payout ratio goes in hand with high price earnings ratio and low
dividend payout ratio goes hand in hand with low price earnings ratio.”
Comment your views on this statement elobrately.

The percentage of earnings paid to shareholders in dividends.
Calculated as:

- A reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend-paying stocks.
- A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors.
The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio.
High dividend payout ratio goes in hand with high price earnings ratio and low
dividend payout ratio goes hand in hand with low price earnings ratio
Benefits of Low Payout Ratios
In many situations, you should be happy to find low payout ratios. If you’re investing in a company, you’ll want its leaders to make wise decisions with the company’s profits. When a company pays a dividend, the profits are no longer at the disposal of the company. Holding on to some cash, instead of paying everything out, allows a business to:
•   Invest in more efficient technology and machinery
•   Hire additional staff and expand skill sets
•   Prepare for economic uncertainty
•   Operate effectively in bad economic environments
•   Maintain consistent, stable dividend payments over short- and long-term periods
•   Take advantage of high-growth opportunities like new product lines
•   Consider attractive acquisition properties
•   Invest in affordable real estate or new facilities
When a company retains a large percentage of quarterly or yearly earnings and uses the money to invest in growth, you can expect the value of the stock to climb. And that increased value will be more lucrative than a slightly higher dividend payment. But companies that have a policy of overpaying dividends don’t have enough liquidity to take advantage of such opportunities. A low payout ratio, therefore, saves the company from these undesirable options:
•   Passing up valuable opportunities and losing out on the potential gains
•   Selling debt bonds, which the company would need to repay along with any accrued interest
•   Selling more equity shares, which lowers the value of your shares
•   Raising capital by suspending dividends altogether
In short, lower payout ratios allow companies to consistently reward investors and maintain valuable growth. In the end, this business practice should lead to a continually rising stock price, providing more long-term value than quick bursts of higher dividend payments. Plus, you won’t be subject to fluctuation – or cancellation – of your dividend payments.
If you want your dividend-yielding company to have enough money to reinvest for decent growth and to maintain a stable dividend, look for payout ratios less than 50%.
Benefits (and Cautions) of High Payout Ratios
Of course, a high payout ratio seems to have an obvious benefit: a nice big check one to four times per year. And that payout is a more legitimate cause for celebration if it doesn’t come at the expense of hindering growth. What if you invested in a large and efficient company that generated huge piles of cash, but the business had already achieved market saturation? The company won’t benefit as much from hoarding cash when no further growth opportunities exist, so large-value stocks with little expected growth opportunities are good candidates for a high payout ratio.
A large-value company should still exhibit some discretion to avoid trouble in a recession or from an unexpected hit to its business model, but these businesses can still afford a much higher payout ratio than comparably smaller companies.
High payout ratios have more obvious benefits, making due diligence more crucial. If you see a large-value company that has significant cash reserves but doesn’t have room for growth, make sure they either maintain a high dividend payment ratio or have a reason to hold on to that cash. If they don’t justify the cash reserves, be wary about investing in that company. It’s possible that management has insider knowledge of some future turbulence that will hurt the company, or perhaps management wants to pay its cash out to themselves in the form of higher bonuses.

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Leo Lingham


management consulting process, management consulting career, management development, human resource planning and development, strategic planning in human resources, marketing, careers in management, product management etc


18 years working managerial experience covering business planning, strategic planning, corporate planning, management service, organization development, marketing, sales management etc


24 years in management consulting which includes business planning, strategic planning, marketing , product management,
human resource management, management training, business coaching,
counseling etc




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