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Chapter 16 The Management of Cash and Marketable Securities
Cash Management <ul><li>Cash Management encompasses the design  of collection and disbursement systems for cash and the te...
Cash and Marketable Securities <ul><li>Are the most liquid of a firm’s assets </li></ul><ul><li>Cash consists of currency ...
Cash Management Function <ul><li>Determining </li></ul><ul><li>The optimal size of a firm’s liquid asset balance </li></ul...
Reasons for Holding Liquid Assets <ul><li>Transactions </li></ul><ul><li>Precautionary </li></ul><ul><li>Future requiremen...
Cash Budget <ul><li>Required because cash inflows and outflows are seldom synchronized </li></ul><ul><li>First step in cas...
Bank Services  <ul><li>Maintenance of disbursement and payroll accounts </li></ul><ul><li>Collection of deposits  </li></u...
Account Analysis <ul><li>An  Account Analysis  statement measures the costs and benefits of a bank relationship. </li></ul...
Electronic Data Interchange <ul><li>Electronic Data Interchange (EDI) is the interchange of documents such as purchase ord...
Advantages of EDI <ul><li>Lower labor costs </li></ul><ul><li>Lower error levels </li></ul><ul><li>Reduced uncertainty </l...
Cash Management <ul><li>Determination of the optimal size  </li></ul><ul><li>Compensating balance requirements establish l...
Cash Collection Opportunities to “speed up” and increase the available cash balance <ul><li>Float </li></ul><ul><li>Decent...
Float <ul><li>Float is the difference between the checking account balances shown on the books and those of the bank </li>...
Decentralized Collection System <ul><li>Decentralized collection systems reduce mailing times and check clearing times </l...
Lock-Box System <ul><li>Local bank  </li></ul><ul><ul><li>“Empties” the box or has the box in the bank </li></ul></ul><ul>...
Depository Transfer Check (DTC) <ul><li>Unsigned nonnegotiable check drawn on the local collection bank and payable to the...
Other Methods of Moving Funds <ul><li>Wire Transfer - Fastest way of moving funds between banks since no mail or clearing ...
Controlling Cash Disbursements <ul><li>Payables Centralization and Scheduling </li></ul><ul><li>Zero-balance system </li><...
Controlling Cash Disbursements (Concluded) <ul><li>ACH Credits </li></ul><ul><ul><li>e. g. Payrolls </li></ul></ul><ul><li...
Electronic Funds Transfer (EFT) <ul><li>Eliminates disbursement and collection float </li></ul><ul><li>Debit Cards </li></...
Three Bank Treasury Services Web Sites <ul><li>Bank of America </li></ul><ul><ul><li>http://corp.bankofamerica.com/treasur...
Cash Management for Small Firms <ul><li>Less extensive access to capital markets </li></ul><ul><li>Cash shortage may be mo...
Choosing Marketable Securities <ul><li>Default risk -  Most important </li></ul><ul><ul><li>Lowest on U.S. Treasury securi...
Finance 312 Marketable Securities (70% DRD) Please see page 630 of your text.
Multinational Corporation ( MNC ) <ul><li>Difficult and costly currency transactions </li></ul><ul><ul><li>EURO </li></ul>...
Multinational Corporation ( MNC ) continued <ul><li>Tracks cash balances around the world </li></ul><ul><li>Identifies bes...
Conclusion <ul><li>Cash Management </li></ul><ul><li>Bank Services </li></ul><ul><li>Electronic Data Interchange </li></ul...
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Chapter 16

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Transcript of "Chapter 16"

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