Topic 6 – Working Capital

Management

Cash and Marketable Securities Mgt.

 Cash Management - Objectives

• have enough cash on hand to meet disbursal needs.

• minimize investment in idle cash balances
 Issues

• Short of cash will lead to liquidity problems :-

financial distress:- creditworthiness:- bankruptcy.
• High amount of cash in hand:- not generating
profit / more cash. Should invest in marketable
securities
• Therefore, needs to balance up between cash
requirement and short term investment.
 Cash Management (cont..)

The Steps of Efficient Management of Cash

• Determine Operating Cycle (OC)
• Determine Cash Cycle (CC)
• Determine Cash Turnover (CT)
• Minimum Operating cash (OC)
 Cash Management (cont..)
Operating Cycle (i.e. Days)
The lag time between the purchase of raw material and Cash
Receipt from Sales or Receivable
Average Age Average
OC = of Inventory + Collection Period

Cash Cycle (i.e. Days)

The lag time between the Cash Payment of Purchases and Cash
Receipt from Sales or Receivable
Average Average Average
CC = Age of + Collection - Payment
Inventory Period Period
 Cash Management (cont..)
Cash Turnover
Number of Times (X) the Cash is Turned
CTO = 360
CC
Minimum Operating Cash
The amount of Cash that need to be held (i.e. to
avoid any Shortage in making Payments)
MOC = Annual Cash Outlays
Cash Turnover
 Cash Management (cont..)

Example:
ABC Sdn Bhd has an average age of inventories of 70 days,
an average collection period 40 days and an average
payment period of 30 days. The company annual cash
outlay is RM 300,000.
 Cash Management (cont..)
Solution:
• OC = AAI + ACP
= 70 + 40, 110 days
• CC = AAI + ACP – APP
= 70 + 40 - 30, 80 days
• CTO = 360 / CC
= 360 / 80, 4.5 times
• MOC = Annual Cash Outlay / CTO
= 300,000 / 4.5, RM 66,666.67
So, the ABC needs RM 66,666.67 to support its
short-term obligations.
 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.
• Liquidity - ability to transform securities into cash.
• Taxability - taxability of interest income and capital gains.
• Yield - influenced by the previous four considerations.
 Examples of marketable securities

• Treasury bills:- issue at discount, BNM

• Commercial paper:- companies, issue at discount.
• Banker’s acceptance
• Negotiable certificates of deposits