Principles of Cash Management from Indian Management Thought: Thirukkural

Transcription

1 Principles of Cash Management from Indian Management Thought: Thirukkural Dr C Chendroyaperumal Professor and Head Department of Management Studies, Saveetha Engineering College, Chennai Ccp_dr@yahoo.co.in Key words: Cash Management, Working Capital, Financial Management, Thirukkural ABSTRACT Wise management of cash is essential for the survival and success of any business organization. Textbooks prescribe a set of principles for successful management of cash, a key component of working capital but the least productive for the firm holding it. This paper attempts to highlight the principles of cash management propounded in Thirukkural an Indian work on management written more than 2000 years ago but very relevant, practicable and consistent with that of the modern thought! 1 CASH MANAGEMENT Cash is the most liquid, significant and the least productive asset a firm holds. Large holding of current assets, especially cash, strengthen the firm s liquidity and reduced the risk of default but also reduces the profitability of the firm by foregoing the earning capacity of cash in investment opportunities. Cash is the basic input needed to keep the business on a continuous basis without disruptions. Therefore the firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm s business operations while excessive cash will simply remain idle, without contributing anything towards the firm s profitability. Thus the role of the finance manager is to maintain a sound cash position. 2 MODERN PRINCIPLES OF CASH MANAGEMENT Cash management is concerned with managing (i) cash inflows and cash outflows of the firm, (ii) cash flows within the firm, and (iii) the cash balances held by the firm at any point of time by financing the deficiency or investing the surplus cash. The modern principles of cash management can be summarized as below: 1 (1) Maintain adequate liquidity, (2) Ensure uninterrupted functioning of operations (i.e., operating cycle), (3) Maintain balanced working cash position, (4) follow a policy of level production irrespective of seasonal changes in order to utilize its resources to the fullest extent, (5) Improve operating efficiency to reduce the pressure on working capital and to increase profitability, (6) accelerate cash inflows, (7) decelerate cash outflows using floats, (8) Set upper and lower limits of cash balances, (9) invest excess cash on marketable securities to earn a return to add to the profitability, and (10) make cash plans (i.e., cash budget). Electronic copy available at:

2 3 PRINCIPLES OF CASH MANAGEMENT FROM THIRUKKURAL 2000-year-old Indian principles of cash management for all organizations are found in Thirukkural. These principles are presented below followed by the couplet. Principle-1: Study and evaluate the cash capability of sources and uses. Thirukkural states that before acting one should evaluate or measure and study the cash capability (of both cash inflows and cash outflows) of (i) work (i.e. business operations), (ii) internal capability (i.e., organizational), (iii) others (i.e., third parities who are not associated to the business operations, e.g., lenders, banks, government, etc), (iv) the associated (i.e., those who are associated with the business operations of the firm, e.g., suppliers, vendors, customers, etc) thus: Vinai valiyum thanvaliyum maatraanvaliyum Thunaivaliyum thookki cheyal. (Kural-471) This couplet implies the sources of cash inflows and cash outflows namely (i) operating income and operating expenditures, (ii) receipts and payments internal to the organization, (iii) borrowings, repayment, tax, subsidy, etc and (iv) accounts receivables and accounts payables. Principle-2: Synchronize cash outflows with cash inflows. Thirukkural advises that there is nothing that will not work out if knowable (listed in Principle- 1) and those that are synchronizing (or matching) are known and proceeded on this basis thus: Olvadhu arivadhu arindhu adhankannthanki Chelvaarku chelladhadhu ill. (Kural-472) This couplet implies that the firm should study and try to synchronize the cash outflows or uses with the cash inflows or sources. Principle-3: Do pace within own cash capacity. Do not increase the pace without knowing own capacity. Thirukkural prescribes that the firm should never increase the pace (of payments) without knowing the firm s cash capacity since many have broken down (i.e., bankruptcy) in the middle by increasing the pace (of payments) out of enthusiasm without knowing one s own (cash) capacity thus: Vudaitham valiariyaar ookaththin ooki Idaikann murindhaar palar. (Kural-473) This couplet implies the default risk due to liquidity problem resulting in insolvency due to poor cash management. Hence it prescribes that the firm should maintain the pace (of payments) within the firm s cash capacity to sustain. It also suggests that the finance manager should act rationally rather than emotionally (enthusiastically!). Electronic copy available at:

3 Principle-4: Do establish limits and practice it. Thirukkural prescribes that the firm should study and establish limits (the maximum and the minimum) and should function within these limits since it warns that those who do not study, know and establish limits and function within these limits but over estimates (the firm s) capacity will go insolvent quite fast thus: Amainhu aangu olugaar alavuariyaan thunnai Viyandhaan viraindhu kedum. (Kural-474) This couplet refers to the need for setting accurate limits and adhering to these limits. This resembles the maximum and minimum limits for required cash balances of Miller-Orr Model! Principle-5: Do not operate (or produce) very excessively. Thirukkural prescribes that the firm should not indulge in overly excess production of goods (even if cheaper) since that will break the production cycle (or operation cycle or cash cycle), for, it cautions, using a simile that excessive load (excessive operations or production) of even the light pea-cock feather (lighter in weight) will break the axle pin of the cart s wheel (the operation or cash cycle) resulting in break down of the cart (cash cycle) thus: Peelipei sakaadum achu irum appandum Chaala miguthu peyin. (Kural-475) This couplet refers to the significant impact of the quantum of operations or production on the cash cycle. Prinicple-6: Set limits and do not increase operations (or production) beyond the upper limit of the capacity. Thirukkural prescribes that the firm should not increase the operations or production beyond the upper limit of the capacity since it will (in conjunction with Principle-5) become the end of the life of the firm thus: Nuni kombar aerinaar ahadhu irandhu ookin Vuyirkku irudhi aagi vidum. (Kural-476) This couplet implies that the firm should study and know the maximum operational capacity or the upper limit and cautions all firms not to exceed the upper limit. Principle-7: Disburse in accordance with the cash inflows (Disbursement Method). Thirukkural defines the method of disbursement for increasing the cash (money) level as disbursement should be in accordance to the quantum of inflows thus:

4 Aatrin avalarindhu eega adhuporul Potri valangum neri. (Kural-477) This couplet also implies the modern strategy of hedging or matching the cash outflows with the cash inflows! Principle-8: Monitor cash flows and especially Control cash outflows. Thirukkural advises that the firm should carefully monitor cash flows and control the cash outflow to avert insolvency, for, it states that it is not disastrous in the end even if the level of cash inflow has narrowed down or thinned but if the cash outflows does not widen (than the cash inflow) thus: Aaguaaru alavu ittidhy aayinum kaedillai Poguaaru agalaa kadai. (Kural-478) This couplet implies the following: (i) it is not dangerous for a firm even if the cash inflow is slow provided the cash outflow is not wise and fast; (ii) it is a real disaster when the rate of cash outflow is more than the rate of cash inflow; (iii) therefore the firm should strive to monitor and control both the rate of cash inflow (accelerate the receipts) and the rate of cash outflow (decelerate payments) with more emphasis on the latter; (iv) the rate of cash inflow and the rate of cash outflow determine the risk of failure of the firm. Principle-9: Set and Live within the cash limits. Thirukkural cautions that the firm should live (i.e. operate) within the cash limits else the life will end like a mirage thus: Alavarindhu vaalaadhaan vaalkai vulapola Illaagi thoandra kedum. (Kural-479) This couplet again reiterates the importance of knowing (setting) the limits of cash level and operating within these limits. Operations beyond the cash limits will create an illusion of cash balance but in fact (money) will be lost without making appearance. Principle-10: Adapt to seasonality. Thirukkural s strategy to tie up and retain cash (money) is by adapting or synchronizing the operations according to the seasonality thus: Paruvathodu vottavolugal thiruvinai Theeraamai aarkum kayiru. (Kural-482) The modern principles of cash management are presented along with the Indian principles of cash management as in Thirukkural in Table-1.

5 Table-1: Principles of Cash Management: Modern Vs Thirukkural. S No Modern Principles of Cash Management Maintain adequate liquidity. Ensure smooth operating cycle. Maintain balanced cash position. Follow a policy of level production. Improve operating efficiency. Accelerate cash inflows. Decelerate cash outflows. Determine and maintain optimum cash balance. Invest excess cash in marketable securities. Thirukkural s Principles of Cash Management Evaluate the sources and the respective uses of cash. (Kural-471) Synchronize cash outflows with cash inflows. (Kural-472) Pace within the firm s capacity. (Kural-473) Set limits and practice it. (Miller-Orr Model!) (Kural-474) Do not operate / produce excessively. (Kural-475) Do not operate / produce beyond the upper limit. (Kural-476) Disburse in accordance with the receipts. (Kural-477) Monitor cash flows and especially control cash outflows. (Kural-478) Live within the cash limits. (Kural-479) Set upper and lower limits of cash balance. (Miller-Orr Model) Prepare cash budget. Monitor the sources and uses of cash. Synchronize payments with receipts. Adapt to seasonality. (Kural-482) 4 Concluding Remarks It can be seen from the above that the Indian principles of cash management written in Thirukkural more than 2000 years ago is very much relevant, practicable even today and consistent with the modern principles of cash management of the 21 st Century.

6 NOTES 1 These principles of cash management are based on two textbooks namely Pandey (2006) and Khan and Jain (2005) REFERENCE: 1 Drew, W.H., and Lazarus, J., Thirukkural, Asian Educational Services, Madras, Khan, M. Y., and Jain, P. K., Financial Management: Texts, Problems and Cases, 4 th Edn., Tata McGraw Hill Pub., New Delhi, Pandey, I.M., Financial Management, 9 th Edn., Vikas Publishing House, New Delhi, 2005.