Chapter 9

Cash and Marketable

Securities
Management
9.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 After Studying Chapter 9,
you should be able to:
1. List and explain the motives for holding cash.
2. Understand the purpose of efficient cash management.
3. Describe methods for speeding up the collection of accounts
receivable and methods for controlling cash disbursements.
4. Differentiate between remote and controlled disbursement, and
discuss any ethical concerns raised by either of these two
methods.
5. Discuss how electronic data interchange (EDI) and outsourcing
each relates to a company’s cash collections and disbursements
6. Identify the key variables that should be considered before
purchasing any marketable securities.
7. Define the most common money-market instruments that a
marketable securities portfolio manager would consider for
investment.
9.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 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

9.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Cash and Marketable
Securities Management

• Outsourcing
• Cash Balances to Maintain
• Investment in Marketable
Securities

9.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 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
9.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Cash Management System

Collections Disbursements
(Payments)

Marketable securities
investment

Control through information reporting

= Funds Flow = Information Flow

9.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Speeding Up
Cash Receipts
Collections
• Speed up preparing and mailing the
invoice
• Accelerate the mailing of payments from
customers
• Reduce the time during which payments
received by the firm remain uncollected

9.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Management Of Receipts &
Disbursements
 Speeding Up Collections:
 Techniques include:
 EFTPOS & Bpay
 Direct Deposits
 Automated Periodic Payment Authorisations

 Slowing Down Payments:

 Techniques include:
 Controlled Disbursing

9.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Management Of Receipts &
Disbursements
 OtherImportant Management Tools:
 Overdrafts

 Zero Balance Accounts

 Automatic Periodic Payment

Authorisations

9.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Earlier Billing
Accelerate preparation and
mailing of invoices
• computerised billing
• invoices included with shipment
• invoices are faxed
• advance payment requests
• preauthorised debits
9.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Preauthorised Payments

Preauthorised debit
Direct Debit:
The transfer of funds from a payor’s (the firm
owing money) bank account on a specified
date to the payee’s bank account; the transfer
is initiated by the payee with the payor’s
advance authorisation.

9.11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 S-l-o-w-i-n-g D-o-w-n
Cash Payouts
• “Playing the Float”
• Control of Disbursements
• In NZ, payments are made on the
20th of the month following the date
of the invoice. For example, invoices
dated on 30 April (or any other date
in April) will be paid on 20 May.

9.12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Control of Disbursements
Firms should be able to:
1. shift funds quickly to bank accounts
from which disbursements are made.
2. generate daily detailed information on
balances, receipts, and disbursements.

9.13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 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.
9.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Electronic Commerce
Electronic Commerce – The exchange of
business information in an electronic (non-
paper) format, including over the Internet.

Messaging systems can be:

1. Unstructured – utilise technologies
such as faxes and e-mails
2. Structured – utilise technologies such
as electronic data interchange (EDI).
9.15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Electronic Data
Interchange (EDI)
Electronic Data Interchange – The
movement of business data electronically
in a structured, computer-readable format.

Electronic Funds Transfer (EFT)

EDI
Financial EDI (FEDI)

9.16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Electronic Funds
Transfer (EFT)
Electronic Funds Transfer (EFT) – the electronic
movements of information between two
depository institutions resulting in a value
(money) transfer.

Electronic Funds Transfer (EFT)

EDI Society of Worldwide Interbank
Subset Financial Telecommunications (SWIFT)
Clearinghouse Interbank Payments
System (CHIPS)
9.17 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Electronic Funds
Transfer (EFT)

EFT Regulation
In January 1999, a regulation that required
ALL federal government payments be made
electronically.* This:
• provides more security than paper checks and
• is cheaper to process for the government.

* Except tax refunds and special waiver situations

9.18 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial EDI (FEDI)
Financial EDI – The movement of financially
related electronic information between a
company and its bank or between banks.

9.19 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Costs and Benefits of EDI
Costs Benefits
• Computer hardware and • Information and payments
software expenditures move faster and with
greater reliability
• Increased training costs
to implement and utilise • Improved cash
an EDI system forecasting and cash
management
• Additional expenses to
convince suppliers and • Customers receive faster
and more reliable service
customers to use the
electronic system • Reduction in mail, paper,
and document storage
• Loss of float costs
9.20 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Outsourcing
Outsourcing – Subcontracting a certain
business operation to an outside firm, instead
of doing it “in-house.” For example, an entire
function such as accounting might be handed
over to the outsource provider
Why might a firm outsource?*
1. Reducing and controlling operating costs
2. Improve company focus
3. Freeing resources for other purposes
* The Outsourcing Institute, 2005

9.21 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Factoring Accounts Receivable

 Involves the outright sale of accounts

receivable at a discount to a bank or other
financial institution (factor) in exchange for
funds.
 The factor provides the accounting function
for the management of the debt.
 Similar to borrowing with accounts receivable
as capital.
 Commonly used by small to medium sized
businesses.

9.22 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Factoring Accounts Receivable

Advantages
 Allows the firm to turn accounts receivable
immediately into cash.
 Ensures a known pattern of cash flows.
 Allows the firm to take advantage of early
settlement discounts, or use cash to improve
liquidity.
 May lead to the elimination of credit and
collection departments.

9.23 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Cash Balances to Maintain
The optimal level of cash should
be the larger of:
(1) The transaction balances required
when cash management is
efficient.
(2) The compensating balance
requirements of commercial
banks.
9.24 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Investment in
Marketable Securities
 Marketable Securities are short term, interest
earning, money market instruments that can easily be
converted into cash. Shown on the balance sheet as
“short-term investments”

 Used to earn a return on temporarily idle funds.

 Two types:
 Government Issues
 Non Government Issues

9.25 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Common Money
Market Instruments
Money Market Instruments
All government securities and short-term
corporate obligations. (Broadly defined)
• Treasury Bills (T-bills): Short-term,
non-interest bearing obligations of
the US Treasury issued at a discount
and redeemed at maturity for full face
value. Minimum $100 amount and
$100 increments thereafter.
9.26 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 T-Bills and Bond Equivalent
Yield (BEY) Method:
BEY = [ (FA – PP) / (PP) ] *[ 365 / DM ]
• FA: face amount of security
• PP: purchase price of security
• DM: days to maturity of security

A $1,000, 13-week T-bill is purchased for $990 – what is its

BEY?

BEY = [ (1000 – 990) / (990) ] *[ 365 / 91 ]

BEY = 4.05%
9.27 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 T-Bills and Equivalent
Annual Yield (EAY) Method:
EAY = (1 + [ BEY / (365 / DM) ] )365/DM - 1
• BEY: bond equivalent yield from the previous slide
• DM: days to maturity of security
Calculate the EAY of the $1,000, 13-week T-bill purchased
for $990 described on the previous slide?

EAY = (1 + [.0405/(365 / 91)])365/91 - 1

EAY = 4.11%
9.28 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Common Money
Market Instruments
• Treasury Notes: Medium-term (2-
10 years’ original maturity)
obligations of the US Treasury.

• Treasury Bonds: Long-term (more

than 10 years’ original maturity)
obligations of the US Treasury.

9.29 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Common Money
Market Instruments
• Commercial Paper: Short-term, unsecured
promissory notes, generally issued by large
corporations (unsecured IOUs). The largest
dollar-volume instrument in US. Maturities
don’t exceed 270 days to preclude SEC
registration.
• Eurodollars: A US dollar-denominated
deposit – generally in a bank located outside
the United States – not subject to US
banking regulations
9.30 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.