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Cash Management
CASH:
Cash Management
CASH:
Objectives: have enough cash on hand to meet disbursal needs. minimize investment in idle cash balances.
= Funds Flow
= Information Flow
Collection Float
Mail Float
Processing Float
Availability Float
Deposit Float Collection Float: total time between the mailing of the check by the customer and the availability of cash to the receiving firm.
Mail Float
Mail Float: time the check is in the mail until the firm receives check.
Processing Float
Availability Float
Availability Float: time consumed in clearing the check through the banking system.
Deposit Float
Processing Float
Availability Float
Deposit Float: time during which the check received by the firm remains uncollected 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. 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
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
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
Cash Management
Managing Cash Outflow
Cash Management
Managing Cash Outflow
Remote Disbursing
Firm writes checks on a bank in a distant
town. This extends disbursing float.
Summary
Cash Collection Methods How?
(Ordinary)Depository transfer
checks Eliminates excess funds in regional banks
Summary
Cash Collection Methods How?
Wire transfers
Moves funds immediately between banks
Summary
Cash Disbursal Methods How?
Payable-through drafts
effective central office control over field authorized payments
D S i
[(Average daily float) x (Number of days of float reduction)] = Amount that can be invested
[($109,589) x (7)] = $767,123 x Interest rate on investment)]
= $38,358
Thus, the cost of the Healthy Herbal's current billing system is: Annual interest forgone $38,356 Plus: Clerical costs 35,000 Cost of current system $73,356
And, the net annual gain from adoption of the proposed concentration banking system is: Cost of current system $73,356 Less: cost of concentration banking system 40,000 Net annual gain from proposed system $33,356
Annual collection = ($6,232,375) (12 regions) = $74,788,500 Daily collections = $74,788,500 / 365 = $204,900 Use of the lock-box system will reduce Marino Rug Company's float by 3 days The value of the float reduction is found by presuming the freed funds will be added to the marketable securities portfolio and will earn the 9.75% yield. Monthly cost per region to operate the lock-box system =$325
($204,900) (3) (.0975) = $59,933 The annual cost of operating the lock-box system is: ($325 per month) (12 regions) (12 months) = $46,800 The net annual savings are: ($59,933) - ($46,800) = $13,133 Marino's management should approve the use of the proposed lock-box system and, thereby, save $13,133 per year.
Marketable Securities
Considerations
Marketable Securities
Considerations
Marketable Securities
Types
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.
Solutions
Calculate the value of the estimated return for each holding period and compare it with the transaction fee if a gain can be made by investing in the securities
Recommendation 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 0.12 0.12 0.12 0.12 0.12 1/12 2/12 3/12 6/12 12/12 20,000 40,000 60,000 120,000 240,000 < < > > > 45,000 45,000 45,000 45,000 45,000 No No Yes Yes Yes
Example 2
The Company has $4M in excess cash to invest in a
marketable securities portfolio. Its broker will charge $10,000 to invest the entire $4M. The president wants at least half of the $4M invested at a maturity period of three months or less; the remainder can be invested in securities with maturities not to exceed six months. The relevant term structure of shortterm yield follows:
Maturity Period 1 month 2 months 3 months 4 months 5 months 6 months Available Yield (annual) 6.20% 6.40% 6.50% 6.70% 6.90% 7.00%
Required
a. What would be the maturity periods of the securities purchased
with the excess $4M to maximize the before-tax income from the added investment? What will be the amount of the income from such investment.