Cash Management

Motives for Holding Cash o Transaction Motive Cash that are kept in this motive are used in regular transactions and operations of the business. These cash balances allow the company to meets needs that arise in the normal course of their business.

Precautionary Motive When holding cash with a precautionary motive, consideration for risks are taken. This means that the cash is set aside for uncertain events that are unfavorable for the business.

Speculative Motive In this motive, future transactions are taken as opportunities. This means that the company sees that they may be able to use the money in creating more profit for the business.

Risk-Return Trade Off o The company should use its cash in its best interest. The concept of Risk0return trade off is that the company will use its cash to a high risk project when the return is very high. This also applies in keeping cash on hand. If the return is not high enough for the company, they might as well keep the cash on themselves and not spend it on other things. Objective: Maintain enough cash to meet disbursal needs Reduce cash balances to a minimum

Controlling Cash Inflow and Outflow o Float Length of time from when a check is written until the actual recipient can use the check. Elements: Mail float the time lapsed from the moment a consumer mails a remittance check until the firm begins to process it.

Processing Float the time required for the firm to process the customers remittance checks before they can be deposited to the bank. Transit Float the time necessary for the deposited check from a customer to clear through the commercial banking system and become usable funds to the company. Disbursing Float the customers funds are already available to the companys bank account until the companys payment check has cleared through the banking system.

Wire Transfers This eliminates the transit float. Funds move in this manner immediately become usable or good funds to the firm at the receiving bank.

LockBox Agreement This has been the most widely used commercial banking service for expediting cash gathering. This reduces both the mail float and the processing float. The firms customers are instructed to mail their remittance checks not to the companys headquarters but to a numbered Post Office box.

Zero-Balance Accounts. They permit centralized control over outflows while maintaining divisional authority. The firms authorized employees continue to write checks on their individual accounts. Actually, the separated accounts contains no funds at all. Objectives: For the firm to achieve better control over its cash payments To reduce excess cash balances held in regional banks for disbursing purposes To increase disbursing float