2002, Prentice Hall, Inc.

Ch. 19: Cash and Marketable Securities Management

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 firm’s bank account until its payment check has cleared through the banking system.

Cash Management

Managing Cash Inflow

• Lockbox SystemInstead 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 SystemInstead 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 TransfersMoves 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 firm’s

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 firm’s 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 issuer’s 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 4 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.