Chapter 16 The Management of Cash and Marketable
Chapter 16 The Management of Cash and Marketable Securities © 2001 South-Western College Publishing
Cash and Marketable Securities u. Are the most liquid of a firm’s assets u. Cash consists of currency and deposits in checking accounts u. Marketable securities consist of S-T investments made with idle cash 2
Cash Management Function Determining u. The optimal size of a firm’s liquid asset balance u. The most efficient methods of controlling the collection and disbursement of cash u. The appropriate types and amounts of S-T investments Consider risk versus expected return trade-offs from alternative policies 3
Reasons for Holding Liquid Assets u. Transactions u. Precautionary u. Future requirements u. Speculative u. Compensating balances 4
Cash Budget u. Required because cash inflows and outflows are seldom synchronized u. First step in cash management u. Show forecasted receipts and disbursements u. Show forecast of any cumulative shortages or surpluses u. Series of cash budgets Daily Weekly Monthly 5
Bank Services u Maintenance of disbursement and payroll accounts u Collection of deposits u Lines of credit u Term loans u Handling of dividend payments u Registration and transfer of stock u Supply credit information u Consulting advice 6
Cash Management u Determination of the optimal size u Compensating balance requirements establish lower limit u Holding excess liquid assets results in an opportunity cost u Inadequate liquid balances result in shortage costs O Missing cash discounts O Deterioration of the firm’s credit rating O Higher interest costs O Risk of insolvency 7
Cash Collection Opportunities to increase the available cash balance u Float u Decentralized collection system u Lock -box u Wire transfers u Depository transfer check ( DTC ) u Electronic depository transfer check ( EDTC ) u Courier service u Preauthorized check ( PAC ) 8
Float u Positive - balance at bank > firm’s balance u Negative - firm shows a higher balance than bank’s u Management's goal - speed collection / slow disbursements u Components of float Mail float ä Processing float ä Check clearing float ä u A number of systems can be used to reduce the float 9
Lock Box System u Local bank Empties the box ä Deposits payments in the firm’s account ä Makes a report of the payments ä u Firm makes disbursements of funds in excess of compensating balances u Involve significant fees u More beneficial for small number of larger deposits u Evaluation involves comparison of costs versus benefits of faster collection 10
Slowing Cash Disbursements u. Zero-balance system ä Transfers cash in the exact amount required for the cleared checks u. Drafts ä Deposit funds only after the draft is presented for payment u. Synchronize deposits with check clearings ä Requires accurate estimates of float 11
Cash Management for Small Firms u. Less extensive access to capital markets u. Cash shortage may be more expensive to rectify u. Many small businesses are rapidly growing u. May have low balances of cash resources 12
Choosing Marketable Securities u Default risk Lowest on U. S. Treasury securities ä Risk and expected return inversely related ä u Marketability ä Sold quickly without significant price concession u Maturity ä Shorter maturities have less risk of price fluctuation u Rate of return ä Least important consideration 13
Marketable Securities 14
Multinational Corporation ( MNC ) u Difficult and costly currency transactions u Cash transfer facilities u Greater variety of investment opportunities u Usually have centralized cash management u Tracks cash balances around the world u Identifies best sources of S-T borrowing/ lending u Use Multilateral netting ä Cross-border transactions are netted off to minimize costly transactions and misdirected funds 15
- Slides: 15