9-1
Chapter 9
Cash and Marketable
Securities
Management
9-2
Cash and Marketable
Securities Management
? Motives for Holding Cash
? Speeding Up Cash Receipts
? S-l-o-w-i-n-g D-o-w-n
Cash Payouts
? Electronic Commerce
9-3
Cash and Marketable
Securities Management
? Outsourcing
? Cash Balances to Maintain
? Investment in Marketable
Securities
9-4
Motives for Holding Cash
Transactions Motive -- to meet
payments arising in the ordinary
course of business
Speculative Motive -- to take
advantage of temporary opportunities
Precautionary Motive -- to maintain a
cushion or buffer to meet unexpected
cash needs
9-5
Cash Management System
Collections Disbursements
Marketable securities
investment
Control through information reporting
= Funds Flow = Information Flow
9-6
Speeding Up
Cash Receipts
Collections
? Expedite preparing and mailing the
invoice
? Accelerate the mailing of payments from
customers
? Reduce the time during which payments
received by the firm remain uncollected
9-7
Collection Float
Collection Float,total time between the mailing
of the check by the customer and the availability
of cash to the receiving firm.
Processing
Float
Availability
Float
Mail
Float
Deposit Float
9-8
Mail Float
Mail Float,time the check is in the mail.
Customer
mails check
Firm
receives check
9-9
Processing Float
Processing Float,time it takes a company
to process the check internally.
Firm
deposits check
Firm
receives check
9-10
Availability Float
Availability Float,time consumed in clearing
the check through the banking system.
Firm
deposits check
Firm’s bank
account credited
9-11
Deposit Float
Deposit Float,time during which the check
received by the firm remains uncollected funds.
Processing Float Availability Float
9-12
Earlier Billing
Accelerate preparation and
mailing of invoices
? computerized billing
? invoices included with shipment
? invoices are faxed
? advance payment requests
? preauthorized debits
9-13
Preauthorized Payments
Preauthorized debit
The transfer of funds from a payor’s
bank account on a specified date to
the payee’s bank account; the
transfer is initiated by the payee
with the payor’s advance
authorization.
9-14
Lockbox System
Lockbox
A post office box maintained by a
firm’s bank that is used as a
receiving point for customer
remittances.
9-15
Lockbox Process
? Customers are instructed to mail their
remittances to the lockbox location.
? Bank picks up remittances several times
daily from the lockbox.
? Bank deposits remittances in the customers
account and provides a deposit slip with a
list of payments.
? Company receives the list and any additional
mailed items.
9-16
Lockbox System
Advantage
Receive remittances sooner which
reduces processing float.
Disadvantage
Cost of creating and maintaining a
lockbox system,Generally,not
advantageous for small remittances.
9-17
Concentration Banking
Cash Concentration
The movement of cash from lockbox or field
banks into the firm’s central cash pool
residing in a concentration bank.
Compensating Balance
Non-interest-bearing demand deposits
maintained by a firm to compensate a bank
for services provided,credit lines,or loans.
9-18
Concentration Banking
? Improves control over inflows and
outflows of corporate cash.
? Reduces idle cash balances to a
minimum.
? Allows for more effective investments
by pooling excess cash balances.
Moving cash balances to
a central location:
9-19
Concentration Services
for Transferring Funds
Definition,A non-negotiable check
payable to a single company
account at a concentration
bank.
Funds are not immediately available upon
receipt of the DTC.
(1) Depository Transfer Check (DTC)
9-20
Concentration Services
for Transferring Funds
Definition,An electronic version of the
depository transfer check (DTC).
(1) Electronic check image version of
the DTC.
(2) Cost is not significant and is replacing
DTC.
(2) Automated Clearinghouse (ACH)
Electronic Transfer
9-21
Concentration Services
for Transferring Funds
Definition,A generic term for electronic
funds transfer using a two-
way communications system,
like Fedwire.
Funds are available upon receipt of the
wire transfer,Much more expensive.
(3) Wire Transfer
9-22
S-l-o-w-i-n-g D-o-w-n
Cash Payouts
? Delaying the Float
? Control of Disbursements
? Payable through Draft (PTD)
? Payroll and Dividend
Disbursements
? Zero Balance Account (ZBA)
? Remote and Controlled Disbursing
9-23
Delaying the Float
You write a check today,which is subtracted
from your calculation of the account balance,
The check has not cleared which creates float,
You can potentially earn interest on money that
you have spent.
Net Float -- the dollar difference between
the balance shown in a firm’s (or
individual’s) checkbook balance and the
balance on the bank’s books.
9-24
Control of Disbursements
Solution:
Centralize payables into a single (smaller
number of) account(s),This provides better
control of the disbursement process.
Firms should be able to:
1,shift funds quickly to banks from which
disbursements are made.
2,generate daily detailed information on
balances,receipts,and disbursements.
9-25
Methods of Managing
Disbursements
? Delays the time to have funds on deposit
to cover the draft.
? Some suppliers prefer checks.
? Banks will impose a higher service charge
due to the additional handling involved.
Payable Through Draft (PTD):
A check-like instrument that is drawn against the
payor and not against a bank as is a check,After
a PTD is presented to a bank,the payor gets to
decide whether to honor or refuse payment.
9-26
Methods of Managing
Disbursements
? Many times a separate account is set up to
handle each of these types of disbursements.
? A distribution scheduled is projected based on
past experiences,[See slide 9-27]
? Funds are deposited based on expected needs.
? Minimizes excessive cash balances.
Payroll and Dividend Disbursements
The firm attempts to determine when payroll and
dividend checks will be presented for collection.
9-27
Percentage of Payroll
Checks Collected
F M T W H F M and after
(Payday)
Pe
rc
en
t o
f
Pa
yr
ol
l Co
lle
ct
ed
100%
75%
50%
25%
0%
The firm may plan on
payroll checks being
presented in a similar
pattern every pay period.
9-28
Methods of Managing
Disbursements
? Eliminates the need to accurately
estimate each disbursement account.
? Only need to forecast overall cash needs.
Zero Balance Account (ZBA):
A corporate checking account in which a zero
balance is maintained,The account requires a
master (parent) account from which funds are
drawn to cover negative balances or to which
excess balances are sent.
9-29
Remote and
Controlled Disbursing
Example,A Vermont business pays a Maine
supplier with a check drawn on a bank in Montana.
This may stress supplier relations,and raises ethical
issues.
Remote disbursement -- A system in which
the firm directs checks to be drawn on a bank
that is geographically remote from its customer
so as to maximize check-clearing time,
This maximizes disbursement float,
9-30
Remote and
Controlled Disbursing
Late check presentments are minimal,which
allows more accurate predicting of
disbursements on a day-to-day basis.
Controlled disbursement -- A system in
which the firm directs checks to be drawn
on a bank (or branch bank) that is able to
give early or mid-morning notification of
the total dollar amount of checks that will
be presented against its account that day,
9-31
Electronic Commerce
Messaging systems can be:
1,Unstructured -- utilize technologies
such as faxes and E-mails
2,Structured -- utilize technologies such
as electronic data interchange (EDI).
Electronic Commerce -- the exchange of
business information in an electronic
(non-paper) format,
9-32
Electronic Data
Interchange (EDI)
Electronic Data Interchange -- the
movement of business data electronically
in a structured,computer-readable format,
EDI
Electronic Funds Transfer (EFT)
Financial EDI (FEDI)
9-33
Electronic Funds
Transfer (EFT)
Electronic Funds Transfer (EFT) -- the electronic
movements of information between two
depository institutions resulting in a value
(money) transfer,
EDI
Subset
Electronic Funds Transfer (EFT)
Society of Worldwide Interbank
Financial Telecommunications (SWIFT)
Clearinghouse Interbank Payments
System (CHIPS)
9-34
Financial EDI (FEDI)
Financial EDI -- the movement of financially
related electronic information between a
company and its bank or between banks,
Financial EDI (FEDI)
Examples include:
Lockbox remittance information
Bank balance information
EDI
Subset
9-35
Costs and Benefits of EDI
Costs
?Computer hardware and
software expenditures
?Increased training costs
to implement and utilize
an EDI system
?Additional expenses to
convince suppliers and
customers to use the
electronic system
?Loss of float
Benefits
?Information and payments
move faster and with
greater reliability
?Improved cash
forecasting and cash
management
?Customers receive faster
and more reliable service
?Reduction in mail,paper,
and document storage
costs
9-36
Outsourcing
? Improving company focus
? Access to world-class capabilities
? Reducing and controlling operating
costs * The Outsourcing Institute
Outsourcing -- subcontracting a certain
business operation to an outside firm,
instead of doing it in-house.
Why might a firm outsource?*
9-37
Cash Balances to Maintain
The optimal level of cash should
be the larger of
(1) the transaction balances required
when cash management is
efficient.
(2) the compensating balance
requirements of commercial
banks.
9-38
Investment in
Marketable Securities
Marketable Securities are shown
on the balance sheet as:
1,Cash equivalents if maturities are
less than three (3) months at the
time of acquisition.
2,Short term investments if remaining
maturities are less than one (1)
year.
9-39
The Marketable
Securities Portfolio
Ready Cash
Segment (R$)
Optimal balance of
marketable securities
held to take care of
probable deficiencies
in the firm’s cash
account.
R$
F$
C$
9-40
Controllable Cash
Segment (C$)
Marketable securities
held for meeting
controllable
(knowable) outflows,
such as taxes and
dividends.
The Marketable
Securities Portfolio
R$
F$
C$
9-41
Free Cash
Segment (F$)
Free marketable
securities (that is,
available for as yet
unassigned
purposes).
The Marketable
Securities Portfolio
R$
F$
C$
9-42
Variables in Marketable
Securities Selection
Marketability (or Liquidity)
The ability to sell a significant volume of
securities in a short period of time in the
secondary market without significant price
concession.
Safety
Refers to the likelihood of getting back the
same number of dollars you originally
invested (principal).
9-43
Variables in Marketable
Securities Selection
Maturity
Refers to the remaining life of the
security.
Interest Rate (or Yield) Risk
The variability in the market price of a
security caused by changes in
interest rates.
9-44
Common Money
Market Instruments
Treasury bills (T-bills),Short-term,
non-interest bearing obligations of
the U.S,Treasury issued at a discount
and redeemed at maturity for full face
value.
Money Market Instruments
All government securities and short-term
corporate obligations,(Broadly defined)
9-45
Common Money
Market Instruments
Treasury bonds,Long-term (more
than 10 years?original maturity)
obligations of the U.S,Treasury.
Treasury notes,Medium-term (2-10
years’ original maturity) obligations
of the U.S,Treasury.
9-46
Common Money
Market Instruments
Bankers acceptances (BAs),Short-
term promissory trade notes for
which a bank (by having accepted
them) promises to pay the holder the
face amount at maturity.
Repurchase agreements (RPs; repos),
Agreements to buy securities (usually
Treasury bills) and resell them at a
higher price at a later date.
9-47
Common Money
Market Instruments
Federal agency securities,Debt
securities issued by federal agencies
and government-sponsored
enterprises (GSEs).
Commercial paper,Short-term,
unsecured promissory notes,
generally issued by large corporations
(unsecured IOUs).
9-48
Common Money
Market Instruments
Negotiable certificate of deposit,A
large-denomination investment in a
negotiable time deposit at a
commercial bank or savings
institution paying a fixed or variable
rate of interest for a specified period
of time.
9-49
Common Money
Market Instruments
Money Market Preferred Stock,
Preferred stock having a dividend
rate that is reset at auction every 49
days.
Eurodollars (Euros),A U.S,dollar-
denominated deposit -- generally in a
bank located outside the United
States -- not subject to U.S,banking
regulations
9-50
Selecting Securities for
the Portfolio Segments
Ready Cash
Segment (R$)
Safety and ability to
convert to cash is
most important.
Select U.S,
Treasuries for this
segment.
R$
F$
C$
9-51
Controllable Cash
Segment (C$)
Marketability less
important,Possibly
match time needs.
May select CDs,
repos,BAs,euros for
this segment.
R$
F$
C$
Selecting Securities for
the Portfolio Segments
9-52
Free Cash
Segment (F$)
Base choice on yield
subject to risk-return
trade-offs.
Any money market
instrument may be
selected for this
segment.
R$
F$
C$
Selecting Securities for
the Portfolio Segments
Chapter 9
Cash and Marketable
Securities
Management
9-2
Cash and Marketable
Securities Management
? Motives for Holding Cash
? Speeding Up Cash Receipts
? S-l-o-w-i-n-g D-o-w-n
Cash Payouts
? Electronic Commerce
9-3
Cash and Marketable
Securities Management
? Outsourcing
? Cash Balances to Maintain
? Investment in Marketable
Securities
9-4
Motives for Holding Cash
Transactions Motive -- to meet
payments arising in the ordinary
course of business
Speculative Motive -- to take
advantage of temporary opportunities
Precautionary Motive -- to maintain a
cushion or buffer to meet unexpected
cash needs
9-5
Cash Management System
Collections Disbursements
Marketable securities
investment
Control through information reporting
= Funds Flow = Information Flow
9-6
Speeding Up
Cash Receipts
Collections
? Expedite preparing and mailing the
invoice
? Accelerate the mailing of payments from
customers
? Reduce the time during which payments
received by the firm remain uncollected
9-7
Collection Float
Collection Float,total time between the mailing
of the check by the customer and the availability
of cash to the receiving firm.
Processing
Float
Availability
Float
Float
Deposit Float
9-8
Mail Float
Mail Float,time the check is in the mail.
Customer
mails check
Firm
receives check
9-9
Processing Float
Processing Float,time it takes a company
to process the check internally.
Firm
deposits check
Firm
receives check
9-10
Availability Float
Availability Float,time consumed in clearing
the check through the banking system.
Firm
deposits check
Firm’s bank
account credited
9-11
Deposit Float
Deposit Float,time during which the check
received by the firm remains uncollected funds.
Processing Float Availability Float
9-12
Earlier Billing
Accelerate preparation and
mailing of invoices
? computerized billing
? invoices included with shipment
? invoices are faxed
? advance payment requests
? preauthorized debits
9-13
Preauthorized Payments
Preauthorized debit
The transfer of funds from a payor’s
bank account on a specified date to
the payee’s bank account; the
transfer is initiated by the payee
with the payor’s advance
authorization.
9-14
Lockbox System
Lockbox
A post office box maintained by a
firm’s bank that is used as a
receiving point for customer
remittances.
9-15
Lockbox Process
? Customers are instructed to mail their
remittances to the lockbox location.
? Bank picks up remittances several times
daily from the lockbox.
? Bank deposits remittances in the customers
account and provides a deposit slip with a
list of payments.
? Company receives the list and any additional
mailed items.
9-16
Lockbox System
Advantage
Receive remittances sooner which
reduces processing float.
Disadvantage
Cost of creating and maintaining a
lockbox system,Generally,not
advantageous for small remittances.
9-17
Concentration Banking
Cash Concentration
The movement of cash from lockbox or field
banks into the firm’s central cash pool
residing in a concentration bank.
Compensating Balance
Non-interest-bearing demand deposits
maintained by a firm to compensate a bank
for services provided,credit lines,or loans.
9-18
Concentration Banking
? Improves control over inflows and
outflows of corporate cash.
? Reduces idle cash balances to a
minimum.
? Allows for more effective investments
by pooling excess cash balances.
Moving cash balances to
a central location:
9-19
Concentration Services
for Transferring Funds
Definition,A non-negotiable check
payable to a single company
account at a concentration
bank.
Funds are not immediately available upon
receipt of the DTC.
(1) Depository Transfer Check (DTC)
9-20
Concentration Services
for Transferring Funds
Definition,An electronic version of the
depository transfer check (DTC).
(1) Electronic check image version of
the DTC.
(2) Cost is not significant and is replacing
DTC.
(2) Automated Clearinghouse (ACH)
Electronic Transfer
9-21
Concentration Services
for Transferring Funds
Definition,A generic term for electronic
funds transfer using a two-
way communications system,
like Fedwire.
Funds are available upon receipt of the
wire transfer,Much more expensive.
(3) Wire Transfer
9-22
S-l-o-w-i-n-g D-o-w-n
Cash Payouts
? Delaying the Float
? Control of Disbursements
? Payable through Draft (PTD)
? Payroll and Dividend
Disbursements
? Zero Balance Account (ZBA)
? Remote and Controlled Disbursing
9-23
Delaying the Float
You write a check today,which is subtracted
from your calculation of the account balance,
The check has not cleared which creates float,
You can potentially earn interest on money that
you have spent.
Net Float -- the dollar difference between
the balance shown in a firm’s (or
individual’s) checkbook balance and the
balance on the bank’s books.
9-24
Control of Disbursements
Solution:
Centralize payables into a single (smaller
number of) account(s),This provides better
control of the disbursement process.
Firms should be able to:
1,shift funds quickly to banks from which
disbursements are made.
2,generate daily detailed information on
balances,receipts,and disbursements.
9-25
Methods of Managing
Disbursements
? Delays the time to have funds on deposit
to cover the draft.
? Some suppliers prefer checks.
? Banks will impose a higher service charge
due to the additional handling involved.
Payable Through Draft (PTD):
A check-like instrument that is drawn against the
payor and not against a bank as is a check,After
a PTD is presented to a bank,the payor gets to
decide whether to honor or refuse payment.
9-26
Methods of Managing
Disbursements
? Many times a separate account is set up to
handle each of these types of disbursements.
? A distribution scheduled is projected based on
past experiences,[See slide 9-27]
? Funds are deposited based on expected needs.
? Minimizes excessive cash balances.
Payroll and Dividend Disbursements
The firm attempts to determine when payroll and
dividend checks will be presented for collection.
9-27
Percentage of Payroll
Checks Collected
F M T W H F M and after
(Payday)
Pe
rc
en
t o
f
Pa
yr
ol
l Co
lle
ct
ed
100%
75%
50%
25%
0%
The firm may plan on
payroll checks being
presented in a similar
pattern every pay period.
9-28
Methods of Managing
Disbursements
? Eliminates the need to accurately
estimate each disbursement account.
? Only need to forecast overall cash needs.
Zero Balance Account (ZBA):
A corporate checking account in which a zero
balance is maintained,The account requires a
master (parent) account from which funds are
drawn to cover negative balances or to which
excess balances are sent.
9-29
Remote and
Controlled Disbursing
Example,A Vermont business pays a Maine
supplier with a check drawn on a bank in Montana.
This may stress supplier relations,and raises ethical
issues.
Remote disbursement -- A system in which
the firm directs checks to be drawn on a bank
that is geographically remote from its customer
so as to maximize check-clearing time,
This maximizes disbursement float,
9-30
Remote and
Controlled Disbursing
Late check presentments are minimal,which
allows more accurate predicting of
disbursements on a day-to-day basis.
Controlled disbursement -- A system in
which the firm directs checks to be drawn
on a bank (or branch bank) that is able to
give early or mid-morning notification of
the total dollar amount of checks that will
be presented against its account that day,
9-31
Electronic Commerce
Messaging systems can be:
1,Unstructured -- utilize technologies
such as faxes and E-mails
2,Structured -- utilize technologies such
as electronic data interchange (EDI).
Electronic Commerce -- the exchange of
business information in an electronic
(non-paper) format,
9-32
Electronic Data
Interchange (EDI)
Electronic Data Interchange -- the
movement of business data electronically
in a structured,computer-readable format,
EDI
Electronic Funds Transfer (EFT)
Financial EDI (FEDI)
9-33
Electronic Funds
Transfer (EFT)
Electronic Funds Transfer (EFT) -- the electronic
movements of information between two
depository institutions resulting in a value
(money) transfer,
EDI
Subset
Electronic Funds Transfer (EFT)
Society of Worldwide Interbank
Financial Telecommunications (SWIFT)
Clearinghouse Interbank Payments
System (CHIPS)
9-34
Financial EDI (FEDI)
Financial EDI -- the movement of financially
related electronic information between a
company and its bank or between banks,
Financial EDI (FEDI)
Examples include:
Lockbox remittance information
Bank balance information
EDI
Subset
9-35
Costs and Benefits of EDI
Costs
?Computer hardware and
software expenditures
?Increased training costs
to implement and utilize
an EDI system
?Additional expenses to
convince suppliers and
customers to use the
electronic system
?Loss of float
Benefits
?Information and payments
move faster and with
greater reliability
?Improved cash
forecasting and cash
management
?Customers receive faster
and more reliable service
?Reduction in mail,paper,
and document storage
costs
9-36
Outsourcing
? Improving company focus
? Access to world-class capabilities
? Reducing and controlling operating
costs * The Outsourcing Institute
Outsourcing -- subcontracting a certain
business operation to an outside firm,
instead of doing it in-house.
Why might a firm outsource?*
9-37
Cash Balances to Maintain
The optimal level of cash should
be the larger of
(1) the transaction balances required
when cash management is
efficient.
(2) the compensating balance
requirements of commercial
banks.
9-38
Investment in
Marketable Securities
Marketable Securities are shown
on the balance sheet as:
1,Cash equivalents if maturities are
less than three (3) months at the
time of acquisition.
2,Short term investments if remaining
maturities are less than one (1)
year.
9-39
The Marketable
Securities Portfolio
Ready Cash
Segment (R$)
Optimal balance of
marketable securities
held to take care of
probable deficiencies
in the firm’s cash
account.
R$
F$
C$
9-40
Controllable Cash
Segment (C$)
Marketable securities
held for meeting
controllable
(knowable) outflows,
such as taxes and
dividends.
The Marketable
Securities Portfolio
R$
F$
C$
9-41
Free Cash
Segment (F$)
Free marketable
securities (that is,
available for as yet
unassigned
purposes).
The Marketable
Securities Portfolio
R$
F$
C$
9-42
Variables in Marketable
Securities Selection
Marketability (or Liquidity)
The ability to sell a significant volume of
securities in a short period of time in the
secondary market without significant price
concession.
Safety
Refers to the likelihood of getting back the
same number of dollars you originally
invested (principal).
9-43
Variables in Marketable
Securities Selection
Maturity
Refers to the remaining life of the
security.
Interest Rate (or Yield) Risk
The variability in the market price of a
security caused by changes in
interest rates.
9-44
Common Money
Market Instruments
Treasury bills (T-bills),Short-term,
non-interest bearing obligations of
the U.S,Treasury issued at a discount
and redeemed at maturity for full face
value.
Money Market Instruments
All government securities and short-term
corporate obligations,(Broadly defined)
9-45
Common Money
Market Instruments
Treasury bonds,Long-term (more
than 10 years?original maturity)
obligations of the U.S,Treasury.
Treasury notes,Medium-term (2-10
years’ original maturity) obligations
of the U.S,Treasury.
9-46
Common Money
Market Instruments
Bankers acceptances (BAs),Short-
term promissory trade notes for
which a bank (by having accepted
them) promises to pay the holder the
face amount at maturity.
Repurchase agreements (RPs; repos),
Agreements to buy securities (usually
Treasury bills) and resell them at a
higher price at a later date.
9-47
Common Money
Market Instruments
Federal agency securities,Debt
securities issued by federal agencies
and government-sponsored
enterprises (GSEs).
Commercial paper,Short-term,
unsecured promissory notes,
generally issued by large corporations
(unsecured IOUs).
9-48
Common Money
Market Instruments
Negotiable certificate of deposit,A
large-denomination investment in a
negotiable time deposit at a
commercial bank or savings
institution paying a fixed or variable
rate of interest for a specified period
of time.
9-49
Common Money
Market Instruments
Money Market Preferred Stock,
Preferred stock having a dividend
rate that is reset at auction every 49
days.
Eurodollars (Euros),A U.S,dollar-
denominated deposit -- generally in a
bank located outside the United
States -- not subject to U.S,banking
regulations
9-50
Selecting Securities for
the Portfolio Segments
Ready Cash
Segment (R$)
Safety and ability to
convert to cash is
most important.
Select U.S,
Treasuries for this
segment.
R$
F$
C$
9-51
Controllable Cash
Segment (C$)
Marketability less
important,Possibly
match time needs.
May select CDs,
repos,BAs,euros for
this segment.
R$
F$
C$
Selecting Securities for
the Portfolio Segments
9-52
Free Cash
Segment (F$)
Base choice on yield
subject to risk-return
trade-offs.
Any money market
instrument may be
selected for this
segment.
R$
F$
C$
Selecting Securities for
the Portfolio Segments
