Cash Management

Cash and Marketable Securities Management

Liquid Asset Management

CASH- motives for holding cash: • Transactions: to meet cash needs that arise from doing business. • Precautionary: having cash on hand for unexpected needs. • Speculative: to take advantage of potential profit-making situations.

Liquid Asset Management Cash

• Trade Off: cash decreases risk of insolvency, but earns no returns!

Cash Management Managing Cash Inflow • Lockbox System Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box. A commercial bank collects and deposits the checks. This reduces mail float, processing float and transit float.

Cash Management Managing Cash Inflow • Preauthorized Checks (PACs) Arrangement that allows firms to create checks to collect payments directly from customer accounts

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This reduces mail float and processing float.

Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs)

Moves cash from local banks to concentration bank accounts. Firms avoid having idle cash in multiple banks in different regions of the country.

Cash Management

Managing Cash Inflow

• Wire Transfers

Moves cash quickly between banks. Eliminates transit float.

Cash Management Managing Cash Outflow • Zero Balance Accounts (ZBAs) Different divisions of a firm may write checks from their own ZBA. Division accounts then have negative balances. Cash is transferred daily from the firm’s master account to restore the zero balance.

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Allows more control over cash outflows

Cash Management Managing Cash Outflow • Payable-Through Drafts (PTDs) Allows the firm to examine checks written by the firm’s regional units. Checks are passed on to the firm, which can stop payment if necessary.

Cash Management Managing Cash Outflow Remote Disbursing Firm writes checks on a bank in a distant town. This extends disbursing float.

Marketable Securities

Considerations

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Financial Risk - uncertainty of expected returns due to changes in issuer’s ability to pay.

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Interest rate risk - uncertainty of expected returns due to changes in interest rates.

Marketable Securities Considerations • Liquidity - ability to transform securities into cash. • Taxability - Taxability of interest income and capital gains. • Yield - Influenced by the previous 4 considerations.

Marketable Securities Types • Treasury Bills - short term securities issued by the government.

Marketable Securities Types • Bankers’ Acceptances - short term securities used in international trade. Sold on discount basis.

• Negotiable CDs - short-term securities issued by banks, with typical deposits

Marketable Securities Types

• Commercial Paper - short-term unsecured “IOUs” sold by large reputable firms to raise cash. • Repurchase Agreements - an investor acquires shortterm securities subject to a commitment from a bank to repurchase the securities on a specific date.

Marketable Securities Types

• Money Market Mutual Funds - a pool of money market securities, divided into shares, which are sold to investors.

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