Cash Management and

Marketable Securities
TOPIC 8
BDPW3103 INTRODUCTORY FINANCE
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Cash Management and Marketable

Securities
In cash management and marketable securities, firms are in a dilemma of not
willing to hold on to too many assets due to unsatisfactory returns.
However, it needs to hold them for liquidity purposes. Good cash and marketable
securities management are important to achieve balance. Financial managers can
use excess cash for investments, which can give higher returns while at the same
time preserving the liquidity level needed.

Cash

Why Firm Holding Cash?

Cash Budget

Cash Budget

Cash Management Technique

Marketable Securities

Question

Question

In the process of preparing a cash budget, a financial manager

needs to obtain information from other departments such sales
forecast, inventory needs, payment of accounts receivable which
needs to be paid, a firms total fixed assets and so on.

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Question
(i) Payment Float
After a firm makes payment by issuing a cheque, several days are needed before the cheque is cleared by the
bank and the sum will be debited from the firms account. The firm can still use the balance in the account of the
bank to finance its daily expenditures from the time the cheque is issued till it is cleared. Thus, a firm can finance
its daily expenditures during the period the cheque is issued till it is cleared.
(ii) CollectionFloat
Collection float occurs when a firm receives payment by cheque. It needs several days before a cheque is cleared
and the amount credited into the firms account. A financial manager must make sure that cheques are collected
and quickly processed by his department so that the cheques can be entered into a bank account to quickly
receive payments. By making the process of receiving cheques faster, the firm will be able to use funds collected
to finance its operational expenditures and hence decrease the usage of bank overdrafts or bank loans which incur
interest payment and in turn would result in additional costs to the firm. The faster the collection is done, the
more effective is the firms cash management.
(iii) NetFloat
Net float is the difference between collection float and disbursement float. A firm which is efficient in cash
management will try to make the collection process as well as the clearance of cheques received faster. By this
way, a firm can attain funds to finance its expenditures. At the same time, firms will try to delay making
payments so that the cash for such payments can be used by the firm for several more days to finance its daily
operations.
Basically, floats exist because of the several reasons:
If payment is made through the mail, it needs a several days before the cheque is received;
A firm that receives a payment might take several days to process the payment received due to administrative
processes; and
Banks need several days to clear the cheque.

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