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Chapter 16
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Chapter 16


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  • 1. Chapter 16 The Management of Cash and Marketable Securities
  • 2. Cash Management
    • Cash Management encompasses the design of collection and disbursement systems for cash and the temporary investment of cash while it resides in the firm.
    • Treasury Management Association
      • Certified Cash Manager designation
  • 3. Cash and Marketable Securities
    • Are the most liquid of a firm’s assets
    • Cash consists of currency and deposits in checking accounts
    • Marketable securities consist of S-T investments made with idle cash
  • 4. Cash Management Function
    • Determining
    • The optimal size of a firm’s liquid asset balance
    • The most efficient methods of controlling the collection and disbursement of cash
    • The appropriate types and amounts of S-T investments
    • Consider risk versus expected return trade-offs from alternative policies
  • 5. Reasons for Holding Liquid Assets
    • Transactions
    • Precautionary
    • Future requirements
    • Speculative
    • Compensating balances
  • 6. Cash Budget
    • Required because cash inflows and outflows are seldom synchronized
    • First step in cash management
    • Show forecasted receipts and disbursements
    • Show forecast of any cumulative shortages or surpluses - See Chapter 15
    • Series of cash budgets
      • Daily and Weekly - Control
      • Monthly - Planning
  • 7. Bank Services
    • Maintenance of disbursement and payroll accounts
    • Collection of deposits
    • Bank Reconciliation on CD ROMs
    • Supply credit information
    • Lines of credit
    • Term loans
    • Handling of dividend payments
    • Registration and transfer of stock
    • Consulting advice
    • Fee-Based System of Compensation
    • Might require compensating balances
  • 8. Account Analysis
    • An Account Analysis statement measures the costs and benefits of a bank relationship.
    • It is a monthly listing which banks provide corporate customers indicating the services used and the charges assessed.
    • It also shows the degree to which the firm’s actual balances offset fees charged.
  • 9. Electronic Data Interchange
    • Electronic Data Interchange (EDI) is the interchange of documents such as purchase orders, shipment notices, invoices, etc. in a standard digital format and Electronic Funds Transfer (EFT).
    • Computers interacting with other computers, typically through a Value Added Network (VAN)
  • 10. Advantages of EDI
    • Lower labor costs
    • Lower error levels
    • Reduced uncertainty
    • Lower inventory - Just-in Time
    • Faster payments
    • Enhanced service
    • Greater management control
    Key drawback: Loss of float
  • 11. Cash Management
    • Determination of the optimal size
    • Compensating balance requirements establish lower limit - Absolute minimum balance vs. Minimum average balance
    • Holding excess liquid assets results in an opportunity cost
    • Inadequate liquid balances result in shortage costs
      • Missing cash discounts
      • Deterioration of the firm’s credit rating
      • Higher interest costs
      • Risk of insolvency
    • Treasury Management Information System
  • 12. Cash Collection Opportunities to “speed up” and increase the available cash balance
    • Float
    • Decentralized collection system
    • Lock-box system
    • Wire transfers
    • Depository transfer check ( DTC )
    • Electronic depository transfer check ( EDTC )
    • Courier service
    • ACH Debit
    • Preauthorized check ( PAC )
  • 13. Float
    • Float is the difference between the checking account balances shown on the books and those of the bank
    • Positive or Disbursement Float - balance at bank > firm’s balance - “Red Book Balance” when firm’s book balance is negative
    • Negative or collection or deposit float - firm shows a higher balance than bank’s
    • Net Float = Disbursement Float - Deposit Float
    • Components of float
      • Mail float
      • Processing float
      • Check clearing float
    • Bank Float - Ledger Balance vs. Available Balance
  • 14. Decentralized Collection System
    • Decentralized collection systems reduce mailing times and check clearing times
    • Concentration Banking
      • Receives deposits from depository banks
      • Transfers funds to disbursement banks
      • Serves as focal point for short term investments
    • Depository Banks
      • Lock-box (next slide)
      • Field
    • Trend to nationwide banking
  • 15. Lock-Box System
    • Local bank
      • “Empties” the box or has the box in the bank
      • Deposits payments in the firm’s account
      • Makes a report of the payments
    • Firm makes disbursements of funds in excess of compensating balances
    • Involves significant fees
    • Wholesale vs. Retail Lock-boxes
    • Evaluation involves comparison of costs versus benefits of faster collection
    • Where should the lock-box be located and who should send their checks to which lock boxes?
  • 16. Depository Transfer Check (DTC)
    • Unsigned nonnegotiable check drawn on the local collection bank and payable to the concentration bank
    • Electronic DTC or EDTC or Automated Clearing House (ACH) DTC has one day availability.
      • The information is sent electronically through an ACH
  • 17. Other Methods of Moving Funds
    • Wire Transfer - Fastest way of moving funds between banks since no mail or clearing time is involved.
      • Bank wire vs. Fed wire
    • Courier Service
    • ACH Debit does not require the signature of the person or firm on whose account it is being drawn. Used to pay utility bills, water bills, insurance payments, etc.
    • Preauthorized Check
  • 18. Controlling Cash Disbursements
    • Payables Centralization and Scheduling
    • Zero-balance system
      • Involves a master account and subsidiary accounts
      • Transfers cash in the exact amount required for the cleared checks or borrows on a line of credit
    • Drafts or Payable through Drafts
      • Drawn on Firm Itself
      • e.g. Insurance Company
      • Deposit funds only after the draft is presented for payment
  • 19. Controlling Cash Disbursements (Concluded)
    • ACH Credits
      • e. g. Payrolls
    • Synchronize deposits with check clearings
      • Requires accurate estimates of float
    • Avoid an “E.F. Hutton”
  • 20. Electronic Funds Transfer (EFT)
    • Eliminates disbursement and collection float
    • Debit Cards
    • “Tiger Stripe”
    • “Smart Cards”
    • Internet transactions
  • 21. Three Bank Treasury Services Web Sites
    • Bank of America
    • First Union Bank’s Cash Management Services
      • services.html
    • Wachovia Treasury Services
    Finance 312
  • 22. Cash Management for Small Firms
    • Less extensive access to capital markets
    • Cash shortage may be more expensive to rectify
    • Many small businesses are rapidly growing
    • May have low balances of cash resources
  • 23. Choosing Marketable Securities
    • Default risk - Most important
      • Lowest on U.S. Treasury securities
      • Risk and expected return inversely related
    • Event Risk - Recapitalization
    • Marketability and Liquidity
      • Sold quickly without significant price concession
    • Maturity
      • Shorter maturities have less risk of price fluctuation
    • Rate of return
      • Taxability
      • Least important consideration
  • 24. Finance 312 Marketable Securities (70% DRD) Please see page 630 of your text.
  • 25. Multinational Corporation ( MNC )
    • Difficult and costly currency transactions
      • EURO
    • Cash transfer facilities may be lacking
    • Many governments place restrictions on the movement of cash outside the country
    • Overdraft Systems
    • Greater variety of investment opportunities
    • Usually have centralized cash management
      • International Lock-Box
        • London, Frankfort, Singapore, Tokyo
  • 26. Multinational Corporation ( MNC ) continued
    • Tracks cash balances around the world
    • Identifies best sources of S-T borrowing/ lending
    • Use Multilateral Netting
      • Cross-border transactions are netted off to minimize costly transactions
      • Misdirected funds - funds that cross a border unnecessarily
  • 27. Conclusion
    • Cash Management
    • Bank Services
    • Electronic Data Interchange
    • Methods to Accelerate Cash Inflows
    • Float
    • Methods to Control Cash Outflows
    • Marketable Securities
    • Multinational Cash Management