According to you what are the reasons that have contributed to the present state of cash management in that organisation. Give your views or suggestions on the prevailing system of cash management in that organisation.

Select any organisation of your choice and discuss the cash management system in that organization.  According to you what are the reasons that have contributed to the present state of cash management in that organisation.  Give your views or suggestions on the prevailing system of cash management in that organisation.

Ans.  The working capital requirement of a firm depends largely upon the operating cycle of the firm.  The operating cycle can be defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization.  The length and nature of the operating cycle may differ from one concern to another depending upon their size and nature.

The working capital needs of a firm are determined and influenced by various factors.  In trading concerns, there is a series of activities that starts from procurement of goods and ends with the realization of sales revenues.

Similarly in case of manufacturing concern, this series starts from the procurement of raw material and ending with the sales realization of the finished goods.  In both the cases, however there is a time gap between the happening of the first event and the happening of the last event.  This gap is called operating cycle.

Thus the operating cycle of a firm consists of the time required for the completion of the chronological sequence of some or all of the following in my organisation (Wipro India Ltd.)

a)                 Procurement of raw materials.

b)                 Conversion of raw material into work-in-process.

c)                 Conversion of work-in-progress into finished goods.

d)                 Sales of finished goods.

e)                 Conversion of receivables into cash.

These activities create and necessitate cash flows which are neither synchronized nor certain.  The relevant cash flows are not synchronized because of the cash disbursement.  This requirement of funds depends upon the operating cycle period of the firm and is also denoted as the working capital needs of the firm.  The length or time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivable conversion period.

a)                 Inventory conversion period:  It is duration in which raw materials are procured and converted into finished goods.

b)                 Receivables conversion period:  It is the duration in which finished goods are sold out and converted into cash with the firm.

Cash budget takes into account operating cash flows only.  It is an estimate of cash receipts and disbursements for a future period of time.  It is a comparison of estimated cash inflow and outflow for a particular period such as a day, a week, a month and so on.  Its object is to guarantee the availability of cash at all times when it is needed.  It proves the solvency of the firm.  It helps in identifying the duration alongwith the amount when it will have excess or short of cash.  Cash inflows include all cash receipt such as cash sales, collection of accounts receivables and disposal of fixed assets.  Similarly cash outflows include all disbursements such as accounts payable, purchase of raw materials, wages and expenses and purchases of fixed assets. The terms of credit and the speed with which the customers pay would determine the lag between the creation of the accounts receivable and their collection.  The cash budget has been a management tool to get net cash position of the firm.  The higher the cash turnover the less cash the firm requires.  It must maintain a minimum amount of operating cash balance so that it does not run out of cash.