Professional Documents
Culture Documents
Prepared by
Gady Jacoby
University of Manitoba
and
Sebouh Aintablian
American University of
Beirut
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
28-2
Executive Summary
• Cash management is not as complex and
conceptually challenging as other topics, such as
capital budgeting and asset pricing.
• Financial managers in many companies, especially
in the retail and services industries, spend a
significant portion of their time on cash
management.
• Most large Canadian corporations hold some of
their assets in cash and marketable securities.
Chapter Outline
28.1 Reasons for Holding Cash
28.2 Determining the Target Cash Balance
28.3 Managing the Collection and Disbursement of
Cash
28.4 Investing Idle Cash
28.5 Summary & Conclusions
Costs in dollars of
holding cash Trading costs increase when the firm
must sell securities to meet cash needs.
Total cost of holding cash
Opportunity
Costs
The investment income
foregone when holding cash.
Trading costs
C* Size of cash balance
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T
The trading cost is F
1 2 3 Time C
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T
Trading costs F
C
C* Size of cash balance
The optimal cash balance is found where the opportunity
costs equal the trading costs
2T
C *
F
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C T
K F
2 C
Multiply both sides by C
C2 T F
K T F C 2
2
2 K
2TF
C
*
K
McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited
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$ When the cash balance reaches the upper control limit H cash
is invested elsewhere to get us to the target cash balance Z.
H
When the cash balance
reaches the lower
control limit, L,
investments are sold
Z to raise cash to get
us up to the target
L cash balance.
Time
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3 Fσ 2
H 3Z 2 L
* *
Z* 3 L
4K
where s2 is the variance of net daily cash flows.
• The average cash balance in the Miller-Orr model
is
4Z * L
Average cash balance
3
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Accelerating Collections
Customer Company Company
Cash
mails receives deposits
received
payment payment payment
time
Mail Processing Clearing
delay delay delay
Collection float
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Firm processes
Bank clears cheques
receivables
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Controlling Disbursements
• Firms use zero-balance accounts to avoid carrying
extra balances in each disbursement account.
• With a zero-balance account, the firm, in
cooperation with its bank, transfers in just enough
funds to cover cheques presented that day.
• The firm maintains two disbursement accounts: one
for suppliers and one for payroll.
Marketable Short-term
securities financing
Long-term
financing
J F M A M Time
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Examples are:
– T-bills
– Commercial paper
– Banker’s acceptances
– Dollar swaps