Cash

Cash and
and Marketable
Marketable
Securities
Securities Management
Management
 Motives for Holding Cash
• Transactions Motive -- to hold cash to satisfy
normal disbursement collection activities
associated with a firm's on-going operation
• Speculative Motive -- to hold cash as a safety
margin to act as a financial reserve
• Precautionary Motive -- to hold cash in order
to be able to take advantage of bargain
purchases that might arise, attractive
interest rates and favorable exchange rate
fluctuations.
 Managing Cash Collection and Disbursement
• Cash management refers to the collection,
concentration, and disbursement of cash. The goal is to
manage the cash balances of an enterprise in such a
way as to maximize the availability of cash not invested
in fixed assets or inventories and to do so in such a way
as to avoid the risk of insolvency
• Cash collection and disbursement policies are designed
to reduce a firm’s liquid asset balances by exploiting
imperfections in the collection and payment process.
• The objective is to speed up collections and slow down
disbursements.
• The primary objective of cash collection
involves expediting collections by reducing the
lag between the time customers pay their bills
and the time the checks are collected.
• The primary objective of cash disbursement is
to slow payments so that the firm can keep
the funds invested or in the bank as long as
possible.
• Expediting collections and slowing
disbursements help increase a firm’s cash
balance and provide it with funds to use for
other profitable investments.
 Collection Float

Mail Processing Availability

Float Float Float

Deposit Float

Collection Float: total time between the mailing

of the check by the customer and the availability
of cash to the receiving firm.
 Mail Float

Customer Firm
mails check receives check

Mail Float: time the check is in the mail.

 Processing Float

Firm Firm
receives check deposits check

Processing Float: time it takes a company

to process the check internally.
 Availability Float

Firm Firm’s bank

deposits check account credited

Availability Float: time consumed in clearing

the check through the banking system.
 Deposit Float

Processing Float Availability Float

Deposit Float: time during which the check

received by the firm remains uncollected funds.
 Control of Disbursements
Firms should be able to:
- generate daily detailed information on balances,
receipts, and disbursements.
What Internal Controls Are Needed for Cash Disbursement?

- Segregation of Duties 
- Authorization and Processing of
Disbursements 
- Managing Restricted Funds 
- Check Signing 
 Cost and Benefit of Cash Management

Purposes :
• To verify that an investment’s (or a project’s)
benefits are more than it’s costs
• To select an investment (or a project) by
comparing their benefits over costs ratios.