Chapter 19 - Cash and Marketable

Securities Management

2005, Pearson Prentice Hall

 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 firms 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 firms
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 firms 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
issuers 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
four 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.