Cash Management

Cash Cycle
Factors that influence the desired level
of cash
Optimal cash inventories
Short-term investment strategies


The Manager
Resource Decisions
Information
Decisions
Financing Decisions
Investment Decisions
Human Resources
Decisions
Managing an entitys Resources
Cash Management
Inventory Management
Working Capital Management
Investment in Human Capital
Long-term Assets
Accounts Receivable
Economics of Information
Database Management
Data Modeling
IS Planning & Development
Debt vs. Tax Financing
Cost of
Capital
Discount Rate
Value
Creation
Financial
Markets
Cash Inflows
Operating
Decisions

Recruitment, Selection
Training, Productivity
Performance Appraisal
Compensation
Unions & Labor Relations
Life cycle effects,
Business cycle,
public events,
etc.
Overview
ST finl planning = deals w/ short-lived assets and liabilities
(working capital management);

concerned w/ 1) size of investment in CA like cash, A/R,
Inventorya tool is cash budget analysis and 2) how to
finance ST assetsa tool is performing credit analysis

Managing WC involves determing:
How much to invest in CA?
- CA vs. FA
- Nature of activities/programs
In each CA?
- Cash, A/R, Inventory
- Cash Mgt
- A/R is Credit Mgt
- Inv = POM & Cash balance models
Our objectives
Learn about the Cash Cycle
Understand the factors that influence the
desired level of cash
Learn two models that calculate the optimal
level of cash
Gain an overview of what factors/areas are
inputs to a cash budget and how they affect
the cash balance
Objectives of Public Money
Managers
Bringing the entitys cash resources
within control
Achieving optimum conservation and
utilization of the funds


Key areas of Public Cash
Management
Organization
Collection and disbursement of funds
Netting of interagency payments
Investment of excess funds
Optimal level of cash balances
Cash planning and budgeting
Bank relations

Treasury Management of
Cash Balances
Operate with smaller amount of cash
Supervision is centralized
Better service from banks
Proper allocation of funds
How much cash should a
organization keep on hand?
Enough cash to make payments when
needed. (transactions motive)
(Daily or Weekly Cash Budget helpful)

Additional cash may be held for unexpected
requirements. (precautionary motive)


The size of the minimum cash
balance depends on:
How quickly and cheaply a organization can raise
cash when needed.

How accurately managers can predict cash
requirements.
(Cash Budget helpful)

How much precautionary cash the managers need
for emergencies.
The organizations maximum cash
balance depends on:
Available (short-term) investment opportunities
e.g. money market funds, CDs, commercial paper
Expected return on investment opportunities.
e.g. If expected returns are high, organizations should
be quick to invest excess cash
Transaction cost of withdrawing cash and making
an investment
Demand for Cash for daily transactions
(Cash Budget helpful)
Consider Cash an Inventory
Grantsville has a daily demand for cash of $10,000.
Grantsvilles treasurer invests excess cash in the state investment pool
that earns .01% per day. I n order to transfer funds from the state pool,
Grantsville must pay a transaction cost of $20. How much cash should
it transfer when it runs out. (Grantsville can complete the cash transfer
electronically so it waits until the cash balance is zero).
An inventory approach to Cash
Balance decisions:
the trade-offs: - hold little cash = invest
remainder in M/S to earn interest
- if hold too little cash = incur transactions
costs to meet cash needs
- hold lots of cash = forgo investing in M/S
and earning interest
50000000 1002 504 339.3333333 258 210
Order Quantity (Z)
Cost ($)
Z
*

Total Costs
Holding Costs:
(Z/2)*r
Order Costs:(M/Z)*TC
Optimal Cash Balance via Baumol Model
Z
*


Z*= [(2M*TC)/r]
M = $10,000 r = .01% .0001
TC = $20
Z = $63,246
Problems with the Baumol Model
Cash flows may not be very predictable, much less
constant
Treasurers may want a safety stock of cash
The Miller - Orr Model
The Miller-Orr Model provides a formula for
determining the optimum cash balance (Z), the
point at which to sell securities to raise cash
(lower limit L) and when to invest excess cash by
buying securities and lowering cash holdings
(upper limit H).
Depends on:
transaction costs of buying or selling securities
variability of daily cash (incorporates uncertainty)
return on short-term investments
Days of the Month
The Miller - Orr Model
Lower Limit
Upper Limit
Z
Sell Securities
Buy Securities
H
L
The Miller-Orr Model
- Target Cash Balance (Z)
3 x TC x V
4 x r
Z = + L
3
where: TC = transaction cost of buying
or selling securities
V = variance of daily cash flows
r = daily return on short-term
investments
L = minimum cash requirement
Example: Suppose that short-term securities yield
5% per year and it costs the organization $50 each
time it buys or sells securities (TC). The daily
variance of cash flows is $1000 (V) and your bank
requires $1,000 minimum checking account
balance (L).*
The Miller-Orr Model
- Target Cash Balance (Z)
3 x 50 x 1000
4 x .05/360
Z = + $1,000

= $3,000 + $1,000 = $4,000
3
The Miller-Orr Model
- Upper Limit
The upper limit for the cash account (H) is
determined by the equation:
H = 3Z - 2L
where:
Z = Target cash balance
L = Lower limit
In the previous example:
H = 3 ($4,000) - 2($1,000) = $10,000
Days of the Month
The Miller - Orr Model
Lower Limit
Upper Limit
$4000
Sell Securities
Buy Securities
$10,000
$1000
Cash Pooling
Centralized cash management involves transfer
of an agencys cash in excess of minimal
operating requirements into a centrally
managed
account also known as a cash pool.
Procedure
and
Benefits

Investment of excess funds
The Collection & Disbursement of Public Funds
Controlling Cash
Collection &
Disbursement
Dual responsibility
Receipts maintained in a
location separate from
cash & checks
Certification of vouchers
Managing Cash Balances
Safety
Liquidity
Maximize pool of funds
available for investment
Concentration Accounts
Zero-balance accounts
Highest yield
Collection of funds
Need for accelerating collections
How to accelerate collection of receivables


Disbursement of funds
Importance of disbursement of funds
Review of disbursements

Payment instruments being used (checks,
drafts, wire transfers, etc.)
Bank charges and internal costs
Techniques being used
Time involved for processing of instruments


Payments Netting in Public
Cash Management
Need for payments netting
Procedure involved
Only netted amount is transferred (bilateral
netting)
Netting center (multilateral netting)


Our objectives
Learn about the Cash Cycle
Understand the factors that influence the
desired level of cash
Learn two models that calculate the optimal
level of cash
Gain an overview of what factors/areas are
inputs to a cash budget and how they affect
the cash balance
Stop Here
Payments netting in Public
Cash Management (contd.)
Payments Netting in Public
Cash Management (contd.)
Cash Planning and Budgeting
Cash Planning and Budgeting
(contd.)