Question

You have recently been appointed by Hilkon Manufacturing to work in the newly established treasury
department. Hilkon Manufacturing is a small company that produces cardboard boxes in a variety of
sizes for different purchasers. Samesh Hilkon, the owner of the company, works primarily in the sales
and production areas of the company. Currently, the company puts all receivables in one box and all
payables in another. Because of the disorganized system, the finance area needs work, and that’s what
you have been brought in to do.
The company has a beginning cash balance of Rs 190,000 in first quarter and it plans to purchase new
box-folding machinery in the fourth quarter at a cost of Rs 30,000. The machinery will be purchased
with cash because of a discount offered. The company’s policy is to maintain a minimum cash balance
of Rs 100,000 on each quarter. Interest will be paid at 9% in case of borrowing. The borrowings are
made in the multiple of Rs 1000 at the beginning of any quarter and the interest is paid at the end of
the quarter itself. All sales and purchase are made on credit.
Samesh Hilkon has projected the following sales for each of the next four quarters:
Q1 Q2 Q3 Q4
Sales 905,000 1,030,000 1,160,000 1,240,000
Also sales for the last quarter of last year was Rs 806,000 and first quarter of next year is projected Rs
1010,000.
Consider the following information:
- Cash sales are 40 per cent of the current sales and remaining 60 per cent are collected from the
following month sales.
- Cost of goods manufactured is 80 per cent of sales. 75 per cent of this cost is paid in the same
month and the balance is paid during the following month of costs.
- General and administrative salaries will amount to approximately Rs 105,000 on each quarter,
depreciation charge of Rs 40,000, and miscellaneous expenses of Rs 30,000 on each quarter. Tax
payment of Rs 55,000 will be due in fourth quarter.
The extent of Hilkon’s efficiency of cash management depends on its ability to forecast cash inflow
and outflow more accurately. You as an expert in managing cash management techniques, you are
required to answer the following queries: [2+2+5+1]
a. Facets of cash management.
b. Reasons for holding cash by Hilkon Manufacturing
c. Cash budget for the year from quarter 1 to quarter 4
d. You are also required to answer whether borrowing will be necessary during the quarter and if yes,
when and for how much.

Answer 1

a. Cash management, also known as treasury management, is a process that involves collecting and managing cash flows from operating, investing and financing activities of a company.There are 4 facets to cash management. They are-

1. Cash Planning-There should be proper planning of cash inflows and outflows for a company at a given period of time.This helps estimation of possible surplus and deficits.Cash budgets are necessary for the purpose.
2. Management of Cash flows:- Proper cash management is necessary for an entity to have a smooth functioning. Methods should be undertaken to increase and accelerate cash inflows and to decelerate cash outflows.
3. Optimum Cash Level:-An optimum cash level is necessary for a business. Excess cash balance and deficit cash balance both are not good for a concern and hamper its growth.
4. Investment of surplus cash:- Any cash surplus which is not required by the business in the immediate future should be invested to earn profits. Proper alternatives for investment should be wisely chosen.

b. As per Keynes, there are three motives for holding cash in a business. They are-

1. the transactions-motive i.e. the need of cash for the current transaction of personal and business exchanges
2. the precautionary-motive, i.e. the desire for security as to the future cash equivalent of a certain proportion of total resources
3. the speculative-motive, i.e. the object of securing profit from knowing better than the market what the future will bring forth

Hilkon manufacturing, holds a minimum cash balance of Rs 100,000 each quarter for the above stated motives.As the cash system followed is quite disorganized so urgent need of cash may crop up.

c.

d. Borrowing is necessary for Q3 of amount Rs 57000 and in Q4 for Rs 165000 to maintain min balance of Rs 100000.