chapter 19 - cash and marketable securities management

Chapter 19 -Chapter 19 - Cash and Marketable Cash and Marketable Securities ManagementSecurities Management

Liquid Asset ManagementLiquid Asset Management

CASHCASH- motives for holding cash:- motives for holding cash:

TransactionsTransactions: to meet cash needs that : to meet cash needs that arise from doing business.arise from doing business.

PrecautionaryPrecautionary: having cash on hand for : having cash on hand for unexpected needs.unexpected needs.

SpeculativeSpeculative: to take advantage of : to take advantage of potential profit-making situations.potential profit-making situations.

Cash ManagementCash Management

CASHCASH::


CASHCASH::

Trade OffTrade Off: cash decreases risk of : cash decreases risk of insolvency, but earns no returns!insolvency, but earns no returns!


CASHCASH::


CASHCASH::

ObjectivesObjectives::


CASHCASH::

ObjectivesObjectives: : have enough cash on hand to meet have enough cash on hand to meet

disbursal needs.disbursal needs.


CASHCASH::

ObjectivesObjectives: : have enough cash on hand to meet have enough cash on hand to meet

disbursal needs.disbursal needs. minimize investment in idle cash minimize investment in idle cash

balances.balances.


Managing Cash InflowManaging Cash Inflow Reducing Float can speed up cash Reducing Float can speed up cash

receipts.receipts. Mail FloatMail Float: length of time from the : length of time from the

moment a customer mails a check until moment a customer mails a check until the firm begins to process it.the firm begins to process it.

Processing FloatProcessing Float: the time required by : the time required by a firm to process a check before it can a firm to process a check before it can be deposited in a bank.be deposited in a bank.



receipts.receipts.



receipts.receipts. Transit FloatTransit Float: time required for a : time required for a

check to clear through the banking check to clear through the banking system and become usable funds.system and become usable funds.



receipts.receipts. Transit FloatTransit Float: time required for a check : time required for a check

to clear through the banking system and to clear through the banking system and become usable funds.become usable funds.

Disbursing FloatDisbursing Float: occurs because funds : occurs because funds are available in a firm’s bank account are available in a firm’s bank account until its payment check has cleared until its payment check has cleared through the banking system.through the banking system.


Managing Cash InflowManaging Cash Inflow Lockbox SystemLockbox SystemInstead of mailing checks to the firm, Instead of mailing checks to the firm,

customers mail checks to a nearby P.O. customers mail checks to a nearby P.O. Box. Box.

A commercial bank collects and deposits A commercial bank collects and deposits the checks.the checks.


Managing Cash InflowManaging Cash Inflow

Lockbox SystemLockbox System Instead of mailing checks to the firm, Instead of mailing checks to the firm,

customers mail checks to a nearby P.O. customers mail checks to a nearby P.O. Box. Box.

A commercial bank collects and deposits A commercial bank collects and deposits the checks.the checks.

This reduces This reduces mail float, processing floatmail float, processing float and and transit float.transit float.


Lockbox System benefits:Lockbox System benefits: Increased working cashIncreased working cash - reduces - reduces

time required to convert receivables to time required to convert receivables to cash.cash.

Elimination of clerical functionsElimination of clerical functions - bank - bank handles receiving, endorsing, totaling handles receiving, endorsing, totaling and depositing.and depositing.

Early knowledge of dishonored checksEarly knowledge of dishonored checks - - firm learns of customers’ bad checks firm learns of customers’ bad checks faster.faster.



Preauthorized Checks (PACs)Preauthorized Checks (PACs) Arrangement that allows firms to create Arrangement that allows firms to create

checks to collect payments directly from checks to collect payments directly from customer accounts. customer accounts.



Preauthorized Checks (PACs)Preauthorized Checks (PACs) Arrangement that allows firms to create Arrangement that allows firms to create

checks to collect payments directly from checks to collect payments directly from customer accounts. customer accounts.

This reduces This reduces mail float and processing mail float and processing float.float.


PAC System benefits:PAC System benefits: Highly predictable cash flows.Highly predictable cash flows. Reduced expensesReduced expenses - eliminates - eliminates

billing and postage costs; reduces billing and postage costs; reduces clerical processing costs.clerical processing costs.

Customer preferenceCustomer preference - eliminates - eliminates regular billing for customers.regular billing for customers.

Increased working cash Increased working cash - - dramatically reduces mail float and dramatically reduces mail float and processing float.processing float.



Depository Transfer Checks Depository Transfer Checks (DTCs)(DTCs)



Depository Transfer Checks Depository Transfer Checks (DTCs)(DTCs) Moves cash from local banks to Moves cash from local banks to

concentration bank accounts. concentration bank accounts.



Depository Transfer Checks Depository Transfer Checks (DTCs)(DTCs) Moves cash from local banks to Moves cash from local banks to

concentration bank accounts. concentration bank accounts. Firms avoid having idle cash in Firms avoid having idle cash in

multiple banks in different regions of multiple banks in different regions of the country.the country.


DTC System benefits:DTC System benefits: Lower levels of excess cashLower levels of excess cash. . Reduced expensesReduced expenses - eliminates billing - eliminates billing

and postage costs; reduces clerical and postage costs; reduces clerical processing costs.processing costs.

Customer preferenceCustomer preference - eliminates - eliminates regular billing for customers.regular billing for customers.

Increased working cash Increased working cash - dramatically - dramatically reduces mail float and processing float.reduces mail float and processing float.



Wire TransfersWire Transfers Moves cash quickly between banks.Moves cash quickly between banks. Eliminates Eliminates transit floattransit float..


Managing Cash OutflowManaging Cash OutflowZero Balance Accounts (ZBAs) Zero Balance Accounts (ZBAs) Different divisions of a firm may write Different divisions of a firm may write

checks from their own ZBA.checks from their own ZBA. Division accounts then have negative Division accounts then have negative

balances.balances. Cash is transferred daily from the firm’s Cash is transferred daily from the firm’s

master account to restore the zero balance.master account to restore the zero balance. Allows more control over cash outflows.Allows more control over cash outflows.


Managing Cash OutflowManaging Cash Outflow

Payable-Through Drafts (PTDs) Payable-Through Drafts (PTDs) Allows the firm to examine checks Allows the firm to examine checks

written by the firm’s regional units.written by the firm’s regional units. Checks are passed on to the firm, which Checks are passed on to the firm, which

can stop payment if necessary.can stop payment if necessary.


Managing Cash OutflowManaging Cash Outflow

Remote Disbursing Remote Disbursing Firm writes checks on a bank in a distant Firm writes checks on a bank in a distant

town.town. This extends disbursing float.This extends disbursing float. (Discouraged by the Federal Reserve (Discouraged by the Federal Reserve

System)System)

Marketable SecuritiesMarketable Securities

ConsiderationsConsiderations

Financial RiskFinancial Risk - uncertainty of - uncertainty of expected returns due to changes in expected returns due to changes in issuer’s ability to pay.issuer’s ability to pay.

Interest rate riskInterest rate risk - uncertainty of - uncertainty of expected returns due to changes in expected returns due to changes in interest rates.interest rates.


ConsiderationsConsiderations

LiquidityLiquidity - ability to transform - ability to transform securities into cash.securities into cash.

TaxabilityTaxability - taxability of interest - taxability of interest income and capital gains. income and capital gains.

YieldYield - influenced by the previous - influenced by the previous four considerations.four considerations.


TypesTypes

Treasury BillsTreasury Bills - short-term securities - short-term securities issued by the U.S. government.issued by the U.S. government.


TypesTypes


TypesTypes Federal Agency SecuritiesFederal Agency Securities - Debt - Debt

issued by agencies, including:issued by agencies, including:



issued by agencies, including:issued by agencies, including: Federal National Mortgage Association Federal National Mortgage Association

(Fannie Mae)(Fannie Mae)




(Fannie Mae)(Fannie Mae) Federal Home Loan BanksFederal Home Loan Banks




(Fannie Mae)(Fannie Mae) Federal Home Loan BanksFederal Home Loan Banks Federal Land BanksFederal Land Banks




(Fannie Mae)(Fannie Mae) Federal Home Loan BanksFederal Home Loan Banks Federal Land BanksFederal Land Banks Federal Intermediate Credit BanksFederal Intermediate Credit Banks




(Fannie Mae)(Fannie Mae) Federal Home Loan BanksFederal Home Loan Banks Federal Land BanksFederal Land Banks Federal Intermediate Credit BanksFederal Intermediate Credit Banks Banks for the CooperativesBanks for the Cooperatives


TypesTypes Bankers’ AcceptancesBankers’ Acceptances - short-term - short-term

securities used in international securities used in international trade. Sold on discount basis.trade. Sold on discount basis.

Negotiable CDsNegotiable CDs - short-term - short-term securities issued by banks, with securities issued by banks, with typical deposits of $100,000, typical deposits of $100,000, $500,000 and $1 million.$500,000 and $1 million.


TypesTypes Commercial PaperCommercial Paper - short-term - short-term

unsecured “IOUs” sold by large unsecured “IOUs” sold by large reputable firms to raise cash. reputable firms to raise cash.

Repurchase AgreementsRepurchase Agreements - an - an investor acquires short-term investor acquires short-term securities subject to a commitment securities subject to a commitment from a bank to repurchase the from a bank to repurchase the securities on a specific date.securities on a specific date.


TypesTypes Money Market Mutual Funds Money Market Mutual Funds - a - a

pool of money market securities, pool of money market securities, divided into shares, divided into shares, which are sold to which are sold to investors.investors.

chapter 19 - cash and marketable securities management

Documents