Cash And Marketable Securities Management

Cash and Marketable Securities Management

Cash - A Definition In a narrow sense, cash includes coins, currency notes, cheques, bank drafts & demand deposits. In a broad sense, cash includes “near-cash assets” such as marketable securities & time deposits with banks.

Motives For Holding Cash 

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Transaction Motive: To meet cash needs that arise from doing business. Precautionary Motive: Having cash on hand for unexpected purposes.

Motives For Holding Cash 

Speculative Motive: To take advantage of potential profit-making situations.

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Compensating Motive: To maintain a minimum balance of cash at banks to compensate for providing services & loans.

Objectives of Cash Management 

To meet cash disbursement needs of the firm on a continuous & regular basis.

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To minimize funds in the form of cash balance which remains idle.

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To prevent bankruptcy

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Good relation with bank

Objectives of Cash Management 

Good relation with trade creditors & suppliers.

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To lead strong credit rating

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To meet unexpected cash expenditure

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To maintain balance level

Importance of Cash Management 

To maintain adequate cash balance

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Helps in identifying surplus cash & investing them in marketable securities.

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Helps in identifying the points of shortfalls & to plan & arrange adequate cash

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Improves the profitability of the firm

Importance of Cash Management 

Keeps the bank overdraft limit under control

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Strike a balance between liquidity & profitability

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Make instant cash payments & avail of the facilities of cash discounts.

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To take advantage of speculative opportunities

Cash Management Models Baumol’s Model Baumol suggested that cash may be managed in the same way as any other inventory & stated that the Economic Order Quantity (EOQ) could be applied to cash management.

Cash Management Models Miller- Orr Model The Miller- Orr Model specifies the following 2 limits: d) Upper Control Limit (UCL) Marketable securities are sold f) Lower Control Limit (LCL) Marketable securities are bought

Ways of Improving Cash Flow 

Increase sales (particularly cash sales)

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Reduce direct & indirect costs & overhead expenses

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Increase prices specially to slow payers

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Become more selective when granting credit

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Reduce the amount/time of credit given to customers

Ways of Improving Cash Flow 

Improve systems for billing & collection

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Improve systems for paying suppliers

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Use the 80/20 rule to control inventories, receivables & payables

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Add late payment charges or fees where possible

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Use more pro-active collection techniques

Marketable Securities Meaning: Marketable securities consist of investments that are both readily marketable & are expected to be converted into cash within a year. They should possess 2 basic characteristics:  Ready market & safety of principal  Little or no loss in the value over time.

Types of Marketable Securities        

Term deposits with scheduled banks Treasury Bills Certificates of deposit Commercial papers Bill discounting Mutual Fund Scheme Municipal Bonds Inter-Corporate Deposits

Cash Budget 

Cash Budget is the most important tool in cash management

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It is a device to help a firm to plan & control the use of cash

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Cash Budget may be prepared annually, halfyearly, quarterly, monthly, fortnightly, weekly or even on a daily basis

Purpose of Cash Budget 

To co-ordinate the timings of cash needs

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It pinpoints the period when there is likely to be excess cash

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It enables a firm to take advantage of excess cash available

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It helps to arrange needed funds on the most favorable terms

Thank You….