Professional Documents
Culture Documents
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Cash and Marketable
Securities Management
! Motives for Holding Cash
! Speeding Up Cash Receipts
! S-l-o-w-i-n-g D-o-w-n Cash Payouts
! Electronic Commerce
! Cash Balances to Maintain
! Investment in Marketable Securities
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Motives for Holding Cash
Transactions Motive -- to meet
payments arising in the ordinary
course of business
Speculative Motive -- to take
advantage of temporary opportunities
Precautionary Motive -- to maintain a
cushion or buffer to meet unexpected
cash needs
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Cash Management System
Collections Disbursements
Marketable securities
investment
Deposit Float
Customer Firm
mails check receives check
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Processing Float
Firm Firm
receives check deposits check
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Availability Float
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Deposit Float
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Earlier Billing
Accelerate preparation and
mailing of invoices
! computerized billing
! invoices included with shipment
! invoices are faxed
! advance payment requests
! preauthorized debits
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Preauthorized Payments
Preauthorized debit
The transfer of funds from a payor’s
bank account on a specified date to
the payee’s bank account; the
transfer is initiated by the payee
with the payor’s advance
authorization.
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Lockbox Systems
Traditional Lockbox
A post office box maintained by a firm’s bank
that is used as a receiving point for customer
remittances.
Electronic Lockbox
A collection service provided by a firm’s bank
that receives electronic payments and
accompanying remittance data and
communicates this information to the
company in a specified format.
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Lockbox Process*
! Customers are instructed to mail their
remittances to the lockbox location.
! Bank picks up remittances several times
daily from the lockbox.
! Bank deposits remittances in the customers
account and provides a deposit slip with a
list of payments.
! Company receives the list and any additional
mailed items.
* Based on the traditional lockbox system
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Lockbox System
Advantage
Receive remittances sooner which
reduces processing float.
Disadvantage
Cost of creating and maintaining a
lockbox system. Generally, not
advantageous for small remittances.
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Concentration Banking
Cash Concentration
The movement of cash from lockbox or
field banks into the firm’s central cash
pool residing in a concentration bank.
Compensating Balance
Demand deposits maintained by a firm
to compensate a bank for services
provided, credit lines, or loans.
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Concentration Banking
Moving cash balances to
a central location:
! Improves control over inflows and
outflows of corporate cash.
! Reduces idle cash balances to a
minimum.
! Allows for more effective investments
by pooling excess cash balances.
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Concentration Services
for Transferring Funds
(1) Depository Transfer Check (DTC)
25%
0%
F M T W H F M and after
(Payday)
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Methods of Managing
Disbursements
Zero Balance Account (ZBA):
A corporate checking account in which a zero
balance is maintained. The account requires a
master (parent) account from which funds are
drawn to cover negative balances or to which
excess balances are sent.
! Eliminates the need to accurately
estimate each disbursement account.
! Only need to forecast overall cash needs.
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Remote and
Controlled Disbursing
Remote Disbursement -- A system in which
the firm directs checks to be drawn on a bank
that is geographically remote from its customer
so as to maximize check-clearing time.
This maximizes disbursement float.
Ready Cash
Segment (R$)
F$
Optimal balance of
R$ marketable securities
held to take care of
C$ probable deficiencies
in the firm’s cash
account.
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The Marketable
Securities Portfolio
Controllable Cash
Segment (C$)
F$
Marketable securities
R$ held for meeting
controllable
C$ (knowable) outflows,
such as taxes and
dividends.
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The Marketable
Securities Portfolio
Free Cash
Segment (F$)
F$
“Free” marketable
R$ securities (that is,
available for as yet
C$ unassigned
purposes).
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Variables in Marketable
Securities Selection
Safety
Refers to the likelihood of getting back the
same number of dollars you originally
invested (principal).
Marketability (or Liquidity)
The ability to sell a significant volume of
securities in a short period of time in the
secondary market without significant price
concession.
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Variables in Marketable
Securities Selection
Interest Rate (or Yield) Risk
The variability in the market price of a
security caused by changes in
interest rates.
Maturity
Refers to the remaining life of the
security.
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Any Questions?
38
To Do
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