Few Tips on Effective MANAGEMENT of business CASH..

Cash maintanence & management are the crusial consideration for every concerned undertakings. To continue the regular course of operation for a business unit adiquate maintanence of cash as well as effective utilisation of excessive or idle cash is essential. For any business undertakings, irrespective of self propritorship or partnership or a company, excessive funding over estimated project cost amounts in to loss of opportunity cost & also increases cost of capital. Henceforth, it is importent to evaluate the requirement of liquid cash or cash equvallent to carry on the business function in terms of adiquate provision for bad debt, relation with creditor, market stability for the products in process, availability of the factors of production, current economic condition & political situations etc. However, so far I have discussed upon effects of inefficient cash management. Let's find out few techniques of tactful cash management.

Firstly, if you find your business is fueled with excessive funding the easiest way for a self propritorship or partnership firm is to take out the excess amount on account of dreawings.However, for big corporate houses (private & public companies) this procedure is a bit complicated. Here disbursment of excessive fund is termes as capital reduction. It is commonly practised through buy back of shares in complience with the respective governing act.

Secondly, in most of the cases & mainly corporate houses maintain a portion of their liquid fund in relatively illliquid invesment portfolio. It also helps them to diversify their source of income as well as appreciate balance aheet figures. Another prospectful aspect of this practise is that it facilitates in quick availability of fund as per requirement. In many times, holding company's stake in subsuderies also comprise of these excess funds.

Thirdly & most commonly major corporate houses often discharged off excess liquidity in terms of higher divident payouts. It also helps in inflating the equity value in the capital market.

Lastly, excessive cash is favorable for a business to the extent of it's effective utilisation. Henceforth, additional fund can be deployed in to business diversifications. As such, in recent days business diversification is a quite handy tool for better business promotion.

If you are looking to fuel fresh finance in to your business…wait!!... take a wise look on the following factors..

Capital is the backbone of every business. Although, in all aspects capital doesn’t necessarily mean cash, it can be comprise of cash equivalent or fixed assets that we very often find in self proprietorship or partnership firms. Also in course of conversion of any self proprietorship in to a company we can observe personal assets of the proprietor invested in the business are either taken back by the proprietor or subsidized by equivalent amount of share in the capital & of course the ownership of the property is immediately transferred to the company. However, in general terms, capital forms in finance. Now if one needs to extend his capital base due to new undertakings or expansion of existing business, selection of the best source of finance out of several other alternatives is quite crucial. In this aspect, the decision should be rest in the respective cost of each source of capital & estimated return on investment (ROI) of the new as well as expansion of the existing business. As such, if the calculated ROI is higher than the cost of capital, financing decision should be made on fixed interest bearing securities i.e, term loans, debenture etc. Further, the rate of interest is to be settled upon a negotiation between the lender & borrower in terms of financial stability, future viability & past records etc. For a company, generally a syndication among all the representative of the financial institutions & authorized representative of the company are called in. Often this entire process is undertaken by a investment bank. However, for a unstable company looking for capital reconstruction, finance through fresh issue of equities will be ideal as for these companies very often cost of capital remains at a higher side than ROI, if any. Henceforth financing through fixed interest bearing securities can be prove critical in terms of future uncertainty. Although, as I have said if ROI is greater than Cost of Capital, we will prefer for fixed charge carrying financing option, however the theory has got certain amount of limitation in terms of unforeseeable future. As we can’t sure on future, one need to take maximum possible caution in calculating future estimated cash flows. On the other hand, the theory of financial leverages also proves the fact that in the favorable scenario, financing through fixed interest bearing securities indirectly helps the equity share holders by appreciating the net worth of the company.

How to adopt an appropriate venture out of several alternatives..??

Whenever we plan for opening up a new venture, initial study over feasibility of the projects is quite essential. In other words, project analysis is the main theme of a successful business. However, there are several capital budgeting techniques that will help you to find out the best option. Amongst all, financial analytic prefers mostly the discounted cash flow method (or Net Present Value method) of project analysis. It is an extended version of existing net cash flow approach. Here, initial cash outflow & future cash inflows are discounted with inflationary functions. Henceforth, an estimated figure of the net profit in future terms can be prescribed. Apart from NPV, now a days Internal Rare of Return also a crucial consideration in determining project viability. This approach is fixed upon a rate that will equalizes the initial cash outlay & future inflows. Accordingly, if such rate is more than the estimated discounting factor (or inflation rate) for a particular project, that project is said to have some profitability. However a project carrying highest IRR will earn higher priority. However, in present days more emphasize is placed upon NPV or more precisely Profitability Index is considered more comprehensive than IRR on account of certain limitations. Now what is Profitability Index? It is also known as benefit cost ratio. It is calculated by taking the total discounted cash flows( including inflow & outflow) divided by the initial investment. If the index shows positive, we will take up the project. Apart from all these, another vital concern in project evaluation is the pattern or trend of cash inflows. If the flows furnishes an descending order, in spite of having a good net return or greater IRR, that project should be avoided on anticipation of further decline.