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.