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Cash and Liquidity Management: Mcgraw-Hill/Irwin
Cash and Liquidity Management: Mcgraw-Hill/Irwin
McGraw-Hill/Irwin
Chapter Outline
Reasons for Holding Cash Understanding Float Cash Collection and Concentration Managing Cash Disbursements Investing Idle Cash Appendix
The Basic Idea The BAT Model The Miller-Orr Model: A More General Approach Implications of the BAT and Miller-Orr Models Other Factors Influencing the Target Cash Balance
20-2
Understanding Float
Float difference between cash balance recorded in the cash account and the cash balance recorded at the bank Disbursement float
Generated when a firm writes checks Available balance at bank book balance > 0
Collection float
Checks received increase book balance before the bank credits the account Available balance at bank book balance < 0
20-5
What is the NPV of a project that could reduce the delay by 3 days if the cost is $8 million?
Immediate cash inflow = 3*3 million = 9 million NPV = 9 8 = $1 million
20-7
Cash Collection
Payment Mailed Payment Received Payment Deposited Cash Available
Mailing Time
Availability Delay
One of the goals of float management is to try to reduce the collection delay. There are several techniques that can reduce various parts of the delay.
20-8
Costs
Daily cost = .1(15,000) + 3*10 = 1530 Present value of daily cost = 1530/.0001 = 15,300,000
NPV = 15,000,000 15,300,000 = -300,000 The company should not accept this lock-box proposal
20-10
Cash Disbursements
Slowing down payments can increase disbursement float but it may not be ethical or optimal to do this Controlling disbursements
Zero-balance account Controlled disbursement account
20-11
Investing Cash
Money market financial instruments with an original maturity of one year or less Temporary Cash Surpluses
Seasonal or cyclical activities buy marketable securities with seasonal surpluses, convert securities back to cash when deficits occur Planned or possible expenditures accumulate marketable securities in anticipation of upcoming expenses
20-12
Figure 20.6
20-13
Quick Quiz
What are the major reasons for holding cash? What is the difference between disbursement float and collection float? How does a lock box system work? What are the major characteristics of shortterm securities?
20-15
Chapter 20
End of Chapter
McGraw-Hill/Irwin