Corporate Finance

Cash Management 
 321

QUESTIONS

1. Prepare a cash forecast. The sales forecasts for Jan, Feb and March are as shown:
   Jan: Rs 26 crore
   Feb: Rs 28 crore
   March: Rs 24 crore
   April: Rs 30 crore
   The company has historically experienced the following collection pattern: 50 percent in the month of sales, 30 percent in
   the following month, and 15 percent in the second month. Bad debt losses are 5 percent. Expenses for raw material are
   50 percent of the sales, with 40 percent paid in the month of consumption and the rest in the following month. Salaries and
   wages amount to Rs 1 crore per month. Expenses for selling, administration and general expenses are Rs 155 lac per month.


2. A company receives cheques worth Rs 8 lac every day, and it issues cheques for Rs 2 lac. If cheque realization periods are
   8 days and 5 days respectively, what will be the cash balance after 15 days? Assume that the initial cash balance is Rs 12 lac.


3. How would you quantify the benefits of operating a lock box system?


4. Explain the terms: deposit float, disbursement float, riding the float, and cash flow timeline.


5. How is a cash forecast different from a cash budget?


6. Explain the salient features of a lockbox system.


7. A company collects, on an average, Rs 80 lac every day. The company is contemplating on instituting a lock box system.
   The new system could reduce its overall collection time by 3½ days. The system costs Rs 2.4 lac. Would you recommend
   the implementation? What is the saving under the new system? The company can make 15 percent on its investment.


8. A company had sales of Rs 40,000 in February, and Rs 60,000 in March. Forecast sales for April, May and June are
   Rs 70,000, 100,000 and 90,000 respectively. The current cash balance as on April 1, is Rs 5,000. Estimate the ending cash
   balance after 3 months after referring to the following data:

• 10 percent sales is for cash, 60 percent receivables to be collected after 1 month and 30 percent after 2 months.


• Other income in each month is Rs 3,000


• Purchases were Rs 50,000, 80,000, 100,000, and 90,000 respectively for February through June. Thirty percent of
  purchase is for cash, 60 percent will be paid in the following month and 10 percent after two months.


• Wages and salaries represent 5 percent of the previous month’s sales.


• Monthly rent = Rs 2,500.


• Dividends amounting to Rs 3,400 to be paid in May.


• Taxes amounting to Rs 5,800 to be paid in April.


• Capital expenditure of Rs 500 to be incurred in June.
  Excellent Manufacturing receives cheques worth Rs 4 crore from its customers every day, and it takes about 3 days to clear
  the same. It pays out Rs 3 crore every day, and the customers take 4 days to clear them. Estimate processing and disbursement
  float for the company.