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Topic: Management of Cash & Marketable Securities

Group Name: Prottasha Sec: A BBA (6th Batch) S.L No I.D Number Name

2 3 4 5 6 7

114967 114981 114987 114989 114991 114995

Md.Raihan Shrabon
Sorrowar Md Shoeb Afrina Siddiqa Md. Yousuf Ali Khairul Molla Md. Nazmul hudda Md. Ashik Alahi



Md. Shaoon Howlader
Golam Tanvir

This underlines the significances of cash management . that is. Apart from the fact that it is the most liquid asset.Introduction Cash Management is one of the key areas of working capital management. receivables get eventually converted into cash. cash is the common denominator to which all current assets can be reduced because the other major liquid asset.

drafts and demand deposits in banks. such as marketable securities and time deposits in banks. it is used broadly to cover currency and generally accepted equivalents of cash. Marketable securities are short -term interest earning money market instruments used by firms to obtain a return on temporarily idle funds.Motives for Holding Cash The term ‘cash’ with reference to cash management is used in two senses. The broad view of cash also includes nearcash assets. In a narrow senses. such as cheques. . The main characteristics of these is that they can be readily sold and converted into cash. They provide a short-term investment outlet for excess cash and are also useful for meeting planned outflow of funds.

operating expenses. taxes. strikes and failure of important customers. • Flood. dividends. • Unexpected slow down in collection of accounts receivables. Precautionary Motive: Precautionary motive is a motive for holding cash as a cushion to meet unexpected contingencies/demand for cash. wages. .Transaction Motive: Transaction motive is a motive for holding cash to meet requirements to finance transaction in the normal course of business. The unexpected contingencies may be: • Bills may be presented for settlement earlier than expected. cash payments have to be made for purchases. • Sharp increase in cost of raw materials. financial charges like interest. and so on. For example.

It helps to take advantages of: An opportunity to purchase raw materials at a reduced price. Delay purchase of raw materials on the anticipation of decline in prices. Compensating balance are also required by some loan agreements between a bank and its customers. .Speculative Motive: Speculative motive is motive for holding cash to quickly take advantages of opportunities typically outside the normal course of business. Compensating Motive: • • • • Compensating Motive is a motive for holding cash to compensate banks for providing certain services or loans. Make purchase at favorable prices. A chance to speculate on interest rate movements by buying securities.

Objective of Cash Management The basic objectives of cash management are two-fold. • A cash discount can be availed of if payment is made within the due date. . • The relationship with the bank is not strained. These objectives are: Meeting Payments Schedule: A basic objective of cash management is to meet the payment schedule. The advantages of adequate cash are: • It prevents insolvency or bankruptcy arising out of the inability of a firm to meet its obligations. These are conflicting and mutually contradictory and the task of cash management is to reconcile them. that is to have sufficient cash to meet the cash disbursement needs of a firm. • It helps in forecasting good relations with trade creditors & suppliers. • It helps to meet unanticipated cash expenditure that may be available periodically. The importance of sufficient cash to meet the payment schedule can hardly be overemphasized. • It leads a strong credit rating.

. A low level of ash balances. But it also implies that funds will remain idle. A high level of cash balances will ensure prompt payment together with all the advantages. on the other hand. may fail to meet the payment schedule. The aim of cash management.Minimizing Funds Committed to Cash Balances: The second objective of cash management is to minimize cash balances. as cash is a non-earning asset and the firm will have to forego profits. therefore should be to have an optimal amount of cash balances. two conflicting aspects have to be reconciled. In minimizing the cash balances.

Synchronization of cash flows 2. Uncertainty & Cash Management. . Short Costs 3.Factors Determining Cash Needs: The factors that determine the required cash balances are: 1. Procurement & Management 5. Excess Cash Balances 4.

Cash Management Model Financial manager need not necessarily follow cash management models exactly but a familiarity with them provides an insight into the normative frameworks to how cash management should be conducted. the next aspect relates to the determination of cash needs. Cash budget. therefore attempts to outline the following analytical models for cash management: (1) Baumol Model (b) Miller Model (c) Orgler’s Models. namely 1.Determining Cash Needs After the examination of the pertinent considerations and cost that determine cash needs. . Cash management models and 2. There are two approaches to derive an optimal cash balances. This section.

. Miller Model: Miller Model: is a model that provides for cost efficient transaction balances and assumes uncertain cash flows and determines an upper limit and return point for cash balances.Baumol Model: Baumol Model is a model that provides for cost efficient transactional balances and assumes that the demand for cash can be predicted with certainty and determines the optimal conversion size. Orgler Model: Orgler Model: is a model that provides integration of cash management with production and other aspects if the firm.

Cash Budget Cash Budget is a statement of the inflows and outflows of cash that is used to estimate its short term requirements. It pinpoints the periods when there is likely to be excess cash 3. It helps to arrange needed funds . The various cash budgets are: 1. To coordinate the timing of cash needs 2. It enables a firm which has sufficient cash 4.

. Cash turnover Cash turnover is the number of times cash is used during the year.Cash Management: Basic Strategies Cash management has two basic strategies: (a) Cash cycle (b) Cash turnover Cash cycle Cash cycle is the amount of time cash is tied up between payment for production inputs and receipt of payment forum from the sale of the resulting finished product.

Cash Management Techniques There are some cash management techniques. 2. These are: 1. Speedy cash collection Prompt payment by customer Early concertino of payment input cash Concentration Banking Lock box System . 5. 3. 4.

What the customer has to pay and the period of payment should be notified accurately and in advance. Prompt payment by customer Prompt payment by customer: One way to ensure prompt payment by customers is prompt billing. Early concertino of payment into cash Early concertino of payment into cash: The early conversion of payment into cash. the cash inflow process can be accelerated through systematic planning and refined techniques.Speedy cash collection It describes that. encouraging customers to pay quickly as possible. . as a technique to speed up collection of accounts receivable. in managing cash efficiently. is done to reduce the time lag between posting of the cheque by the customer and the realization of money by the firm. Such as. converting the payment of customers into cash without any delay.

then deposited in local banks for quick clearing. . Lock box System Lock box System is a collection procedure in which payers send their payments to a nearby post box that is emptied by the firms bank several times and the bank deposit the cheque in the firms account. reduces float by shortening the postal and bank float. reduces float by shortening the lethargy as well as postal and bank floats.Concentration Banking Concentration Banking is a collection procedure in which payments are made to regionally dispersed collection centers.

An assessment of certain criteria can provide the financial manager with a useful framework for selection a proper marketable securities mix. Interest rate risk 3. (1) Financial risk: . Financial risk 2.There are three motives for maintaining liquidity and therefore for holding marketable securities: transaction motive. Yield Selection Criterion is the uncertainty of expected return attributable to possible change in financial capacity of issuer of security to make future payment. These consideration includes evaluation of 1. safety/precautionary motive. speculative motive. Taxability 4. Liquidity 5.

income on which is tax exempt sell in the market at lower yield to maturity than other security of the same maturity. Securities . 5) Yield: It is available on the different financial assets suitable for inclusion in the marketable portfolio. 4) Liquidity: It is the ability to transform a security into cash.It is the uncertainty associated with expected return attributable to change in interest rate. 2) Interest rate risk . 3) Taxability It is the difference in market yield is the differential impact of taxes.

Such securities are short term investment instrument to obtain a return on temporarily idle funds.Marketable Securities Marketable Securities the optimal level cash balances of a firm has been determined the residual of its liquid assets is invested in marketable securities. In other words they are securities which can be converted into cash in short period of time typically a few days. .

Marketable Securities Alternatives: Treasury Bill: Treasury bills are issued on action basis having maturity of 91 days and three 364 days and virtually no risk. Commercial Paper: Commercial papers is a short term unsecured promissory note sold by a firm that has high credit rating. Negotiable Certificates of Deposit: Negotiable certificate of deposits are negotiable instrument representing specific cash deposits in bank having varying maturities and yield based on size maturity and prevailing money market condition. .

Repurchase Agreement: Repurchase agreement is an agreement where by a bank sale securities and agree to buy them back at a specific price and time.Bankers Acceptance: Bankers acceptances are short term low risk marketable securities issuing from bank guarantees of business transaction. . Incorporate Deposit Incorporate deposit is short term deposit with other company is a fairly attractive form of investment of short term funds in term of rate of return.

Money Market Mutual Funds: Money market mutual funds are professionally managed portfolios of popular marketable securities having instant liquidity competitive yield and low transaction cost.Bill discounting: Bill discounting is superior to interoperate deposits for investing surplus fund. .


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