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Chapter 16The Management of

Cash and Marketable Securities

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Cash Management

• Cash Management encompasses the design of collection and disbursement systems for cash and the temporary investment of cash while it resides in the firm.

• Treasury Management Association– Certified Cash Manager designation

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Cash and Marketable Securities

• Are the most liquid of a firm’s assets

• Cash consists of currency and deposits in checking accounts

• Marketable securities consist of S-T investments made with idle cash

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Cash Management FunctionDetermining

• The optimal size of a firm’s liquid asset balance

• The most efficient methods of controlling the collection and disbursement of cash

• The appropriate types and amounts of S-T investments

Consider risk versus expected return trade-offs from alternative policies

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Reasons for Holding Liquid Assets

• Transactions

• Precautionary

• Future requirements

• Speculative

• Compensating balances

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Cash Budget• Required because cash inflows and outflows are

seldom synchronized• First step in cash management• Show forecasted receipts and disbursements• Show forecast of any cumulative shortages or

surpluses - See Chapter 15• Series of cash budgets

Daily and Weekly - Control

Monthly - Planning

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Bank Services • Maintenance of disbursement and payroll accounts

• Collection of deposits

• Bank Reconciliation on CD ROMs

• Supply credit information

• Lines of credit

• Term loans

• Handling of dividend payments

• Registration and transfer of stock

• Consulting advice Fee-Based System of Compensation

Might require compensating balances

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Account Analysis

• An Account Analysis statement measures the costs and benefits of a bank relationship.

• It is a monthly listing which banks provide corporate customers indicating the services used and the charges assessed.

• It also shows the degree to which the firm’s actual balances offset fees charged.

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Electronic Data Interchange

• Electronic Data Interchange (EDI) is the interchange of documents such as purchase orders, shipment notices, invoices, etc. in a standard digital format and Electronic Funds Transfer (EFT).

• Computers interacting with other computers, typically through a Value Added Network (VAN)

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Advantages of EDI

• Lower labor costs

• Lower error levels

• Reduced uncertainty

• Lower inventory - Just-in Time

• Faster payments

• Enhanced service

• Greater management control

Key drawback: Loss of float

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Cash Management• Determination of the optimal size • Compensating balance requirements establish lower limit -

Absolute minimum balance vs. Minimum average balance• Holding excess liquid assets results in an opportunity cost• Inadequate liquid balances result in shortage costs

– Missing cash discounts– Deterioration of the firm’s credit rating– Higher interest costs– Risk of insolvency

• Treasury Management Information System

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Cash CollectionOpportunities to “speed up” and increase the available

cash balance• Float• Decentralized collection system• Lock-box system• Wire transfers• Depository transfer check ( DTC )• Electronic depository transfer check ( EDTC )• Courier service• ACH Debit • Preauthorized check ( PAC )

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Float• Float is the difference between the checking account balances shown on

the books and those of the bank• Positive or Disbursement Float - balance at bank > firm’s balance - “Red

Book Balance” when firm’s book balance is negative• Negative or collection or deposit float - firm shows a higher balance than

bank’s• Net Float = Disbursement Float - Deposit Float• Components of float

– Mail float– Processing float– Check clearing float

• Bank Float - Ledger Balance vs. Available Balance

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Decentralized Collection System• Decentralized collection systems reduce mailing times

and check clearing times

• Concentration Banking– Receives deposits from depository banks– Transfers funds to disbursement banks– Serves as focal point for short term investments

• Depository Banks– Lock-box (next slide)– Field

• Trend to nationwide banking

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Lock-Box System• Local bank

– “Empties” the box or has the box in the bank– Deposits payments in the firm’s account– Makes a report of the payments

• Firm makes disbursements of funds in excess of compensating balances

• Involves significant fees• Wholesale vs. Retail Lock-boxes• Evaluation involves comparison of costs versus benefits of

faster collection• Where should the lock-box be located and who should send

their checks to which lock boxes?

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Depository Transfer Check (DTC)

• Unsigned nonnegotiable check drawn on the local collection bank and payable to the concentration bank

• Electronic DTC or EDTC or Automated Clearing House (ACH) DTC has one day availability. – The information is sent electronically through

an ACH

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Other Methods of Moving Funds

• Wire Transfer - Fastest way of moving funds between banks since no mail or clearing time is involved. – Bank wire vs. Fed wire

• Courier Service• ACH Debit does not require the signature of the

person or firm on whose account it is being drawn. Used to pay utility bills, water bills, insurance payments, etc.

• Preauthorized Check

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Controlling Cash Disbursements• Payables Centralization and Scheduling

• Zero-balance system– Involves a master account and subsidiary accounts– Transfers cash in the exact amount required for the cleared

checks or borrows on a line of credit

• Drafts or Payable through Drafts– Drawn on Firm Itself – e.g. Insurance Company – Deposit funds only after the draft is presented for payment

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Controlling Cash Disbursements (Concluded)

• ACH Credits– e. g. Payrolls

• Synchronize deposits with check clearings– Requires accurate estimates of float

• Avoid an “E.F. Hutton”

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Electronic Funds Transfer (EFT)

• Eliminates disbursement and collection float

• Debit Cards

• “Tiger Stripe”

• “Smart Cards”

• Internet transactions

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Three Bank Treasury Services Web Sites

• Bank of America– http://corp.bankofamerica.com/treasury_trade/

gt_global_treasury_services.html• First Union Bank’s Cash Management Services

– http://www.firstunion.com/business/cashman/ services.html

• Wachovia Treasury Services– http://www.wachovia.com/cash_management/

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Cash Management for Small Firms

• Less extensive access to capital markets

• Cash shortage may be more expensive to rectify

• Many small businesses are rapidly growing

• May have low balances of cash resources

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Choosing Marketable Securities• Default risk - Most important

– Lowest on U.S. Treasury securities– Risk and expected return inversely related

• Event Risk - Recapitalization• Marketability and Liquidity

– Sold quickly without significant price concession• Maturity

– Shorter maturities have less risk of price fluctuation• Rate of return

– Taxability– Least important consideration

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Marketable SecuritiesT-Bills Treasury

IssuesFed Agency

S-T MunicipalSecurities

NegotiableCD’s

CommercialPaper

RepurchaseAgreements

Banker’sAcceptance

EurodollarDeposits

Money MarketP/S

Money MarketMutual Funds

Money MarketAccounts

(70% DRD)

Please see page 630 of your text.

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Multinational Corporation ( MNC )• Difficult and costly currency transactions

– EURO

• Cash transfer facilities may be lacking

• Many governments place restrictions on the movement of cash outside the country

• Overdraft Systems

• Greater variety of investment opportunities

• Usually have centralized cash management– International Lock-Box

• London, Frankfort, Singapore, Tokyo

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Multinational Corporation ( MNC )continued

• Tracks cash balances around the world

• Identifies best sources of S-T borrowing/ lending

• Use Multilateral Netting– Cross-border transactions are netted off to

minimize costly transactions – Misdirected funds - funds that cross a

border unnecessarily

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Conclusion• Cash Management• Bank Services• Electronic Data Interchange• Methods to Accelerate Cash

Inflows• Float• Methods to Control Cash

Outflows• Marketable Securities• Multinational Cash

Management