The Management of Cash and Marketable Securities

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Chapter 17

• The Management of Cash and Marketable Securities

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What is Cash and Marketable Securities

• Cash and Marketable securities are the most
  liquid of a firms assets
• Cash consists of currency on hand and deposits in
  checking accounts
• Marketable securities consist of short term
  investments made with idle cash
• Slightly higher return but highly liquid

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Cash Flows Within a Company
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Reasons for Holding Liquid Assets

• Transactions Cash needs that arise from doing
  business.
• Precautionary Cash on hand for unexpected needs.
• Future Requirements Cash to fund major future
  needs.
• Capital Expenditures, Debt Repayments, etc.
• Speculative Cash to take advantage of potential
  profit-making situations.
• Bank Requirements Cash needed for a compensating
  balance.

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Cash Management Function

• Determining the optimal size of a firms liquid
  asset balance
• Determining the most efficient methods of
  controlling the collection/disbursement of cash
• Determining the appropriate types and amounts of
  short-term investments
• Consider the risk/return trade-offs from
  alternative policies

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Inefficient Cash Management

• Excess liquid assets results in a lost
  opportunity cost
• Reduce Debt
• Buy Back Stock
• Expand the Business
• Increase/Pay Dividends
• Inadequate liquid balances result in shortage
  costs
• Missing cash discounts
• Deterioration of the firms credit rating
• Higher interest costs
• Risk of insolvency

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Cash Budget

• First step in cash management
• Required because of timing of cash inflows and
  outflows
• Anticipate cash needs or cash surpluses
• Can be done on daily, weekly, monthly basis

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Bank Services

• Maintenance/Disbursement of payroll accounts
• Collection of deposits
• Provide Lines of credit and term loans
• Handle dividend payments
• Register/Transfer stock
• Supply credit information
• Consulting advice

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Cash Collection

• Seek opportunities to increase the cash balance
• Float The difference between the cash balance on
  banks books and firms books due to timing.
• Delay in the payment of checks
• Delay in clearing of deposits
• Lock-box Post Office Box maintained by bank to
  speed up collection of payments from customers
• Electronic Funds Transfer (EFT) Process of
  electronically sending funds from one bank to
  another bank

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Float

• Positive Bank Balance gt Firms Balance
• Negative Bank Balance lt Firms Balance
• Management's Goal
• Speed collection and slow disbursements
• Components of float
• Mail Float Customer to Company
• Processing Float Company Records and Deposits
• Check Clearing Float Deposit Clears and
  Available
• Float can be reduced or eliminated for a cost

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Types of Float
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Types of Float
Customer Firm Gets
Firm Funds
Mails Processes
Deposits Clear

• Mail Float Date 1 to Date 2
• Processing Float Date 2 to Date 3
• Check Clearing Float Date 3 to Date 4

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Lock Box System

• Local bank
• Empties the box
• Deposits payments in the firms account
• Makes a report of the payments
• Reduces mail, processing, and check-clearing
  float
• Involve significant fees
• Ideal for small number of larger deposits
• Evaluation involves comparison of costs versus
  benefits of faster collection

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Lock Box System
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Electronic Funds Transfer

• EFT can be instantaneous and funds immediately
  available.
• EFT eliminates mail and check-clearing float.
• Common methods of EFT include
• Wire Transfers
• Debit Cards
• Direct Deposit
• Online Banking/Bill Paying

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Choosing Marketable Securities

• Default risk
• Lowest on U.S. Treasury securities
• Marketability
• Sold quickly without significant price concession
• Maturity
• Shorter maturities have less risk of price
  fluctuation
• Rate of return
• Least important consideration, but important

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Examples of Marketable Securities

• Treasury Securities
• Federal Agency Securities
• Municipal Securities
• Negotiable Certificates of Deposit (CDs)
• Commercial Paper