9-1

Chapter 9Chapter 9Cash and Marketable Cash and Marketable

Securities Securities ManagementManagement

9-2

Cash and Marketable Cash and Marketable Securities ManagementSecurities Management

Motives for Holding Cash Speeding Up Cash Receipts S-l-o-w-i-n-g D-o-w-n

Cash Payouts Cash Balances to Maintain Investment in Marketable

Securities

9-3

Motives for Holding CashMotives for Holding Cash

Transactions MotiveTransactions Motive -- to meet payments arising in the ordinary course of business

Speculative MotiveSpeculative Motive -- to take advantage of temporary opportunities

Precautionary MotivePrecautionary Motive -- to maintain a cushion or buffer to meet unexpected cash needs

9-4

Speeding Up Speeding Up Cash ReceiptsCash Receipts

Expedite preparing and mailing the invoice

Accelerate the mailing of payments from customers

Reduce the time during which payments received by the firm remain uncollected

Collections

9-5

Collection FloatCollection Float

Collection FloatCollection Float: total time between the mailingof the check by the customer and the availability

of cash to the receiving firm.

ProcessingProcessingFloatFloat

AvailabilityAvailabilityFloatFloat

MailMailFloatFloat

Deposit FloatDeposit Float

9-6

Mail FloatMail Float

Mail FloatMail Float: time the check is in the mail.

Customer Customer mails checkmails check

FirmFirmreceives checkreceives check

9-7

Processing FloatProcessing Float

Processing FloatProcessing Float: time it takes a companyto process the check internally.

FirmFirmdeposits checkdeposits check

FirmFirmreceives checkreceives check

9-8

Availability FloatAvailability Float

Availability FloatAvailability Float: time consumed in clearingthe check through the banking system.

FirmFirmdeposits checkdeposits check

Firm’s bankFirm’s bankaccount creditedaccount credited

9-9

Deposit FloatDeposit Float

Deposit FloatDeposit Float: time during which the check received by the firm remains uncollected funds.

Processing FloatProcessing Float Availability FloatAvailability Float

9-10

Earlier BillingEarlier Billing

Accelerate preparation and mailing of invoices

computerized billing invoices included with shipment invoices are faxed advance payment requests preauthorized debits

9-11

Preauthorized PaymentsPreauthorized Payments

Preauthorized debit Preauthorized debit The transfer of funds from a payor’s bank account on a specified date to

the payee’s bank account; the transfer is initiated by the payee

with the payor’s advance authorization.

9-12

Lockbox SystemsLockbox Systems

Traditional LockboxTraditional LockboxA post office box maintained by a firm’s bank that is used as a receiving point for customer

remittances.Electronic LockboxElectronic Lockbox

A collection service provided by a firm’s bank that receives electronic payments and

accompanying remittance data and communicates this information to the

company in a specified format.

9-13

Lockbox Process*Lockbox Process* Customers are instructed to mail their

remittances to the lockbox location. Bank picks up remittances several times daily

from the lockbox. Bank deposits remittances in the customers

account and provides a deposit slip with a list of payments.

Company receives the list and any additional mailed items.

* Based on the traditional lockbox system

9-14

Lockbox SystemLockbox System

DisadvantageDisadvantageCost of creating and maintaining a

lockbox system. Generally, not advantageous for small remittances.

AdvantageAdvantageReceive remittances sooner which

reduces processing float.

9-15

Concentration BankingConcentration Banking

Compensating BalanceCompensating BalanceDemand deposits maintained by a firm

to compensate a bank for services provided, credit lines, or loans.

Cash ConcentrationCash ConcentrationThe movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank.

9-16

Concentration BankingConcentration Banking

Improves control over inflows and outflows of corporate cash.

Reduces idle cash balances to a minimum.

Allows for more effective investments by pooling excess cash balances.

Moving cash balances to Moving cash balances to a central location:a central location:

9-17

S-l-o-w-i-n-g D-o-w-n S-l-o-w-i-n-g D-o-w-n Cash PayoutsCash Payouts

“Playing the Float” Control of Disbursements

Payable through Draft (PTD) Payroll and Dividend

Disbursements Zero Balance Account (ZBA)

9-18

““Playing the Float”Playing the Float”

You write a check today, which is subtracted from your calculation of the account balance.

The check has not cleared, which creates float. You can potentially earn interest on money that

you have “spent.”

Net FloatNet Float -- The dollar difference between the balance shown in a firm’s (or

individual’s) checkbook balance and the balance on the bank’s books.

9-19

Control of DisbursementsControl of Disbursements

Solution:Solution:Centralize payables into a single (smaller

number of) account(s). This provides better control of the disbursement process.

Firms should be able to:Firms should be able to:1. shift funds quickly to banks from which

disbursements are made.2. generate daily detailed information on

balances, receipts, and disbursements.

9-20

Methods of Managing Methods of Managing DisbursementsDisbursements

Delays the time to have funds on deposit to Delays the time to have funds on deposit to cover the draft.cover the draft.

Some suppliers prefer checks.Some suppliers prefer checks. Banks will impose a higher service charge Banks will impose a higher service charge

due to the additional handling involved.due to the additional handling involved.

Payable Through Draft (PTD):Payable Through Draft (PTD):A check-like instrument that is drawn against the payor and not against a bank as is a check. After

a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment.

9-21

Methods of Managing Methods of Managing DisbursementsDisbursements

Many times a separate account is set up to Many times a separate account is set up to handle each of these types of disbursements.handle each of these types of disbursements.

A distribution scheduled is projected based on A distribution scheduled is projected based on past experiences. [See slide 9-22]past experiences. [See slide 9-22]

Funds are deposited based on expected needs.Funds are deposited based on expected needs. Minimizes excessive cash balances.Minimizes excessive cash balances.

Payroll and Dividend DisbursementsPayroll and Dividend DisbursementsThe firm attempts to determine when payroll and dividend checks will be presented for collection.

9-22

Percentage of Payroll Percentage of Payroll Checks CollectedChecks Collected

F M T W H F M and after(Payday)(Payday)

Perc

ent o

fPe

rcen

t of

Payr

oll C

olle

cted

Payr

oll C

olle

cted

100%

75%

50%

25%

0%

The firm may plan onpayroll checks beingpresented in a similar

pattern every pay period.

9-23

Methods of Managing Methods of Managing DisbursementsDisbursements

Eliminates the need to accurately Eliminates the need to accurately estimate each disbursement account.estimate each disbursement account.

Only need to forecast Only need to forecast overalloverall cash needs. cash needs.

Zero Balance Account (ZBA):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.

9-24

Cash Balances to MaintainCash Balances to MaintainThe optimal level of cash should The optimal level of cash should

be the larger of:be the larger of:(1) the transaction balances required

when cash management is efficient.

(2) the compensating balance requirements of commercial banks.

9-25

Investment in Investment in Marketable SecuritiesMarketable Securities

Marketable Securities are shown Marketable Securities are shown on the balance sheet as:on the balance sheet as:

1.1. Cash equivalents if maturities are Cash equivalents if maturities are less than three (3) months at the less than three (3) months at the time of acquisition.time of acquisition.

2.2. Short-term investments if remaining Short-term investments if remaining maturities are less than one (1) maturities are less than one (1) year.year.

9-26

Variables in Marketable Variables in Marketable Securities SelectionSecurities Selection

Marketability (or Liquidity)Marketability (or Liquidity)The ability to sell a significant volume of securities in a short period of time in the

secondary market without significant price concession.

SafetySafetyRefers to the likelihood of getting back the

same number of dollars you originally invested (principal).

9-27

Variables in Marketable Variables in Marketable Securities SelectionSecurities Selection

MaturityMaturityRefers to the remaining life of the

security.

Interest Rate (or Yield) RiskInterest Rate (or Yield) RiskThe variability in the market price of a

security caused by changes in interest rates.

9-28

Common Money Common Money Market InstrumentsMarket Instruments

Treasury Bills (T-bills)Treasury Bills (T-bills): : Short-term, non-interest bearing obligations issued at a discount and redeemed at maturity for full face value. Minimum $1,000 amount.

Money Market InstrumentsMoney Market InstrumentsAll government securities and short-term corporate obligations. (Broadly defined)

9-29

Common Money Common Money Market InstrumentsMarket Instruments

Treasury BondsTreasury Bonds: : Long-term (more than 10 years’ original maturity) obligations of the U.S. Treasury.

Treasury NotesTreasury Notes: : Medium-term (2-10 years’ original maturity) obligations of the U.S. Treasury.

9-30

Common Money Common Money Market InstrumentsMarket Instruments

Bankers’ Acceptances (BAs)Bankers’ Acceptances (BAs): : Short-term promissory trade notes for which a bank (by having “accepted” them) promises to pay the holder the face amount at maturity.

Repurchase Agreements (RPs; Repurchase Agreements (RPs; repos)repos): : Agreements to buy securities (usually Treasury bills) and resell them at a higher price at a later date.