Chapter 19 -   Cash and Marketable Securities Management    2005, Pearson Prentice Hall
Liquid Asset Management <ul><li>  CASH -  motives for holding cash: </li></ul><ul><li>Transactions : to meet cash needs th...
Cash Management <ul><li>  CASH : </li></ul><ul><li>Trade Off : cash decreases risk of insolvency, but earns no returns! </...
Cash Management <ul><li>  CASH : </li></ul><ul><li>Objectives :  </li></ul><ul><li>have enough cash on hand to meet disbur...
Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Reducing Float can speed up cash receipts. </li></ul><ul><l...
Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Reducing Float can speed up cash receipts. </li></ul><ul><l...
Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Lockbox System </li></ul><ul><li>Instead of mailing checks ...
Cash Management <ul><li>Lockbox System benefits: </li></ul><ul><li>Increased working cash  - reduces  time required to con...
Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Preauthorized Checks (PACs) </li></ul><ul><li>Arrangement t...
Cash Management <ul><li>PAC System benefits: </li></ul><ul><li>Highly predictable cash flows. </li></ul><ul><li>Reduced ex...
Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Depository Transfer Checks (DTCs) </li></ul><ul><ul><li>Mov...
Cash Management <ul><li>DTC System benefits: </li></ul><ul><li>Lower levels of excess cash .  </li></ul><ul><li>Reduced ex...
Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Wire Transfers </li></ul><ul><li>Moves cash quickly between...
Cash Management <ul><li>Managing Cash Outflow </li></ul><ul><li>Zero Balance Accounts (ZBAs)  </li></ul><ul><li>Different ...
Cash Management <ul><li>Managing Cash Outflow </li></ul><ul><li>Payable-Through Drafts (PTDs)  </li></ul><ul><li>Allows th...
Cash Management <ul><li>Managing Cash Outflow </li></ul><ul><li>Remote Disbursing  </li></ul><ul><li>Firm writes checks on...
Marketable Securities <ul><li>Considerations </li></ul><ul><li>Financial Risk  - uncertainty of expected returns due to ch...
Marketable Securities <ul><li>Considerations </li></ul><ul><li>Liquidity  - ability to transform securities into cash. </l...
Marketable Securities <ul><li>Types </li></ul><ul><li>Treasury Bills  - short-term securities issued by the U.S. governmen...
Marketable Securities <ul><li>Types </li></ul><ul><li>Federal Agency Securities  - Debt issued by agencies, including: </l...
Marketable Securities <ul><li>Types </li></ul><ul><li>Bankers’ Acceptances  - short-term securities used in international ...
Marketable Securities <ul><li>Types </li></ul><ul><li>Commercial Paper  - short-term unsecured “IOUs” sold by large reputa...
Marketable Securities <ul><li>Types </li></ul><ul><li>Money Market Mutual Funds  - a pool of money market securities, divi...
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Fm10e ch19

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Fm10e ch19

  1. 1. Chapter 19 - Cash and Marketable Securities Management  2005, Pearson Prentice Hall
  2. 2. Liquid Asset Management <ul><li> CASH - motives for holding cash: </li></ul><ul><li>Transactions : to meet cash needs that arise from doing business. </li></ul><ul><li>Precautionary : having cash on hand for unexpected needs. </li></ul><ul><li>Speculative : to take advantage of potential profit-making situations. </li></ul>
  3. 3. Cash Management <ul><li> CASH : </li></ul><ul><li>Trade Off : cash decreases risk of insolvency, but earns no returns! </li></ul>
  4. 4. Cash Management <ul><li> CASH : </li></ul><ul><li>Objectives : </li></ul><ul><li>have enough cash on hand to meet disbursal needs. </li></ul><ul><li>minimize investment in idle cash balances. </li></ul>
  5. 5. Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Reducing Float can speed up cash receipts. </li></ul><ul><li>Mail Float : length of time from the moment a customer mails a check until the firm begins to process it. </li></ul><ul><li>Processing Float : the time required by a firm to process a check before it can be deposited in a bank. </li></ul>
  6. 6. Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Reducing Float can speed up cash receipts. </li></ul><ul><li>Transit Float : time required for a check to clear through the banking system and become usable funds. </li></ul><ul><li>Disbursing Float : occurs because funds are available in a firm’s bank account until its payment check has cleared through the banking system. </li></ul>
  7. 7. Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Lockbox System </li></ul><ul><li>Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box. </li></ul><ul><li>A commercial bank collects and deposits the checks. </li></ul><ul><li>This reduces mail float, processing float and transit float. </li></ul>
  8. 8. Cash Management <ul><li>Lockbox System benefits: </li></ul><ul><li>Increased working cash - reduces time required to convert receivables to cash. </li></ul><ul><li>Elimination of clerical functions - bank handles receiving, endorsing, totaling and depositing. </li></ul><ul><li>Early knowledge of dishonored checks - firm learns of customers’ bad checks faster. </li></ul>
  9. 9. Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Preauthorized Checks (PACs) </li></ul><ul><li>Arrangement that allows firms to create checks to collect payments directly from customer accounts. </li></ul><ul><li>This reduces mail float and processing float. </li></ul>
  10. 10. Cash Management <ul><li>PAC System benefits: </li></ul><ul><li>Highly predictable cash flows. </li></ul><ul><li>Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs. </li></ul><ul><li>Customer preference - eliminates regular billing for customers. </li></ul><ul><li>Increased working cash - dramatically reduces mail float and processing float. </li></ul>
  11. 11. Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Depository Transfer Checks (DTCs) </li></ul><ul><ul><li>Moves cash from local banks to concentration bank accounts. </li></ul></ul><ul><ul><li>Firms avoid having idle cash in multiple banks in different regions of the country. </li></ul></ul>
  12. 12. Cash Management <ul><li>DTC System benefits: </li></ul><ul><li>Lower levels of excess cash . </li></ul><ul><li>Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs. </li></ul><ul><li>Customer preference - eliminates regular billing for customers. </li></ul><ul><li>Increased working cash - dramatically reduces mail float and processing float. </li></ul>
  13. 13. Cash Management <ul><li>Managing Cash Inflow </li></ul><ul><li>Wire Transfers </li></ul><ul><li>Moves cash quickly between banks. </li></ul><ul><li>Eliminates transit float . </li></ul>
  14. 14. Cash Management <ul><li>Managing Cash Outflow </li></ul><ul><li>Zero Balance Accounts (ZBAs) </li></ul><ul><li>Different divisions of a firm may write checks from their own ZBA. </li></ul><ul><li>Division accounts then have negative balances. </li></ul><ul><li>Cash is transferred daily from the firm’s master account to restore the zero balance. </li></ul><ul><li>Allows more control over cash outflows. </li></ul>
  15. 15. Cash Management <ul><li>Managing Cash Outflow </li></ul><ul><li>Payable-Through Drafts (PTDs) </li></ul><ul><li>Allows the firm to examine checks written by the firm’s regional units. </li></ul><ul><li>Checks are passed on to the firm, which can stop payment if necessary. </li></ul>
  16. 16. Cash Management <ul><li>Managing Cash Outflow </li></ul><ul><li>Remote Disbursing </li></ul><ul><li>Firm writes checks on a bank in a distant town. </li></ul><ul><li>This extends disbursing float. </li></ul><ul><li>(Discouraged by the Federal Reserve System) </li></ul>
  17. 17. Marketable Securities <ul><li>Considerations </li></ul><ul><li>Financial Risk - uncertainty of expected returns due to changes in issuer’s ability to pay. </li></ul><ul><li>Interest rate risk - uncertainty of expected returns due to changes in interest rates. </li></ul>
  18. 18. Marketable Securities <ul><li>Considerations </li></ul><ul><li>Liquidity - ability to transform securities into cash. </li></ul><ul><li>Taxability - taxability of interest income and capital gains. </li></ul><ul><li>Yield - influenced by the previous four considerations. </li></ul>
  19. 19. Marketable Securities <ul><li>Types </li></ul><ul><li>Treasury Bills - short-term securities issued by the U.S. government. </li></ul>
  20. 20. Marketable Securities <ul><li>Types </li></ul><ul><li>Federal Agency Securities - Debt issued by agencies, including: </li></ul><ul><ul><li>Federal National Mortgage Association (Fannie Mae) </li></ul></ul><ul><ul><li>Federal Home Loan Banks </li></ul></ul><ul><ul><li>Federal Land Banks </li></ul></ul><ul><ul><li>Federal Intermediate Credit Banks </li></ul></ul><ul><ul><li>Banks for the Cooperatives </li></ul></ul>
  21. 21. Marketable Securities <ul><li>Types </li></ul><ul><li>Bankers’ Acceptances - short-term securities used in international trade. Sold on discount basis. </li></ul><ul><li>Negotiable CDs - short-term securities issued by banks, with typical deposits of $100,000, $500,000 and $1 million. </li></ul>
  22. 22. Marketable Securities <ul><li>Types </li></ul><ul><li>Commercial Paper - short-term unsecured “IOUs” sold by large reputable firms to raise cash. </li></ul><ul><li>Repurchase Agreements - an investor acquires short-term securities subject to a commitment from a bank to repurchase the securities on a specific date. </li></ul>
  23. 23. Marketable Securities <ul><li>Types </li></ul><ul><li>Money Market Mutual Funds - a pool of money market securities, divided into shares, which are sold to investors. </li></ul>
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