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 firm’s 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 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
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.