? 2002,Prentice Hall,Inc,
Ch,19,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,
Cash Management
CASH,
Cash Management
CASH,
? Trade Off,cash decreases risk of
insolvency,but earns no returns!
Cash Management
CASH,
Cash Management
CASH,
? Objectives,
Cash Management
CASH,
? Objectives,
? have enough cash on hand to meet
disbursal needs,
Cash Management
CASH,
? Objectives,
? have enough cash on hand to meet
disbursal needs,
? Minimize investment in idle cash
balances,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
? Mail Float,length of time from the
moment a customer mails a check until the
firm begins to process it,
? Processing Float,the time required by a
firm to process a check before it can be
deposited in a bank,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
? Transit float,time required for a check to
clear through the banking system and
become usable funds,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
? Transit float,time required for a check to
clear through the banking system and
become usable funds,
? Disbursing float,occurs because funds are
available in a firm’s bank account until its
payment check has cleared through the
banking system,
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,
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
Lockbox System benefits,
? Increased working cash - reduces
time required to convert receivables to
cash,
? Elimination of clerical functions - bank
handles receiving,endorsing,totaling
and depositing,
? Early knowledge of dishonored checks -
firm learns of customers’ bad checks
faster,
Cash Management
Managing Cash Inflow
? Preauthorized Checks (PACs)
Arrangement that allows firms to create
checks to collect payments directly from
customer accounts,
Cash Management
Managing Cash Inflow
? Preauthorized Checks (PACs)
Arrangement that allows firms to create
checks to collect payments directly from
customer accounts,
This reduces mail float and processing float,
Cash Management
PAC System benefits,
? Highly predictable cash flows,
? Reduced expenses - eliminates billing
and postage costs; reduces clerical
processing costs,
? Customer preference - eliminates
regular billing for customers,
? Increased working cash - dramatically
reduces mail float and processing float,
Cash Management
Managing Cash Inflow
? Depository Transfer Checks
(DTCs)
Cash Management
Managing Cash Inflow
? Depository Transfer Checks
(DTCs)
– Moves cash from local banks to
concentration bank accounts,
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
DTC System benefits,
? Lower levels of excess cash -
? Reduced expenses - eliminates billing
and postage costs; reduces clerical
processing costs,
? Customer preference - eliminates
regular billing for customers,
? Increased working cash - dramatically
reduces mail float and processing float,
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,
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,
(Discouraged by the Federal Reserve
System)
Marketable Securities
Considerations
? Financial Risk - uncertainty of
expected returns due to changes in
issuer’s ability to pay,
? 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 U.S,government,
Marketable Securities
Types
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
– Federal Land Banks
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
– Federal Land Banks
– Federal Intermediate Credit Banks
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
– Federal Land Banks
– Federal Intermediate Credit Banks
– Banks for the Cooperatives
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 of $100,000,
$500,000 and $1 million,
Marketable Securities
Types
? Commercial Paper - short-term
unsecured,IOUs” sold by large
reputable firms to raise cash,
? Repurchase Agreements - an
investor acquires short-term
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,
Ch,19,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,
Cash Management
CASH,
Cash Management
CASH,
? Trade Off,cash decreases risk of
insolvency,but earns no returns!
Cash Management
CASH,
Cash Management
CASH,
? Objectives,
Cash Management
CASH,
? Objectives,
? have enough cash on hand to meet
disbursal needs,
Cash Management
CASH,
? Objectives,
? have enough cash on hand to meet
disbursal needs,
? Minimize investment in idle cash
balances,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
? Mail Float,length of time from the
moment a customer mails a check until the
firm begins to process it,
? Processing Float,the time required by a
firm to process a check before it can be
deposited in a bank,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
? Transit float,time required for a check to
clear through the banking system and
become usable funds,
Cash Management
Managing Cash Inflow
? Reducing Float can speed up cash receipts,
? Transit float,time required for a check to
clear through the banking system and
become usable funds,
? Disbursing float,occurs because funds are
available in a firm’s bank account until its
payment check has cleared through the
banking system,
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,
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
Lockbox System benefits,
? Increased working cash - reduces
time required to convert receivables to
cash,
? Elimination of clerical functions - bank
handles receiving,endorsing,totaling
and depositing,
? Early knowledge of dishonored checks -
firm learns of customers’ bad checks
faster,
Cash Management
Managing Cash Inflow
? Preauthorized Checks (PACs)
Arrangement that allows firms to create
checks to collect payments directly from
customer accounts,
Cash Management
Managing Cash Inflow
? Preauthorized Checks (PACs)
Arrangement that allows firms to create
checks to collect payments directly from
customer accounts,
This reduces mail float and processing float,
Cash Management
PAC System benefits,
? Highly predictable cash flows,
? Reduced expenses - eliminates billing
and postage costs; reduces clerical
processing costs,
? Customer preference - eliminates
regular billing for customers,
? Increased working cash - dramatically
reduces mail float and processing float,
Cash Management
Managing Cash Inflow
? Depository Transfer Checks
(DTCs)
Cash Management
Managing Cash Inflow
? Depository Transfer Checks
(DTCs)
– Moves cash from local banks to
concentration bank accounts,
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
DTC System benefits,
? Lower levels of excess cash -
? Reduced expenses - eliminates billing
and postage costs; reduces clerical
processing costs,
? Customer preference - eliminates
regular billing for customers,
? Increased working cash - dramatically
reduces mail float and processing float,
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,
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,
(Discouraged by the Federal Reserve
System)
Marketable Securities
Considerations
? Financial Risk - uncertainty of
expected returns due to changes in
issuer’s ability to pay,
? 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 U.S,government,
Marketable Securities
Types
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
– Federal Land Banks
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
– Federal Land Banks
– Federal Intermediate Credit Banks
Marketable Securities
Types
? Federal Agency Securities - Debt
issued by agencies,including,
– Federal National Mortgage Association
(Fannie Mae)
– Federal Home Loan Banks
– Federal Land Banks
– Federal Intermediate Credit Banks
– Banks for the Cooperatives
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 of $100,000,
$500,000 and $1 million,
Marketable Securities
Types
? Commercial Paper - short-term
unsecured,IOUs” sold by large
reputable firms to raise cash,
? Repurchase Agreements - an
investor acquires short-term
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,
