2Cash and MarketableCash and MarketableSecurities ManagementSecurities ManagementMotives for Holding CashSpeeding Up Cash ReceiptsS-l-o-w-i-n-g D-o-w-nCash PayoutsElectronic Commerce
3Cash and MarketableCash and MarketableSecurities ManagementSecurities ManagementOutsourcingCash Balances to MaintainInvestment in MarketableSecurities
4Motives for Holding CashMotives for Holding CashTransactions MotiveTransactions Motive -- to meetpayments arising in the ordinarycourse of businessSpeculative MotiveSpeculative Motive -- to takeadvantage of temporary opportunitiesPrecautionary MotivePrecautionary Motive -- to maintain acushion or buffer to meet unexpectedcash needs
5Cash Management SystemCash Management SystemCollections DisbursementsMarketable securitiesinvestmentControl through information reporting= Funds Flow = Information Flow
6Speeding UpSpeeding UpCash ReceiptsCash ReceiptsExpedite preparing and mailing theinvoiceAccelerate the mailing of payments fromcustomersReduce the time during which paymentsreceived by the firm remain uncollectedCollections
7Collection FloatCollection FloatCollection FloatCollection Float: total time between the mailingof the check by the customer and the availabilityof cash to the receiving firm.ProcessingProcessingFloatFloatAvailabilityAvailabilityFloatFloatMailMailFloatFloatDeposit FloatDeposit Float
8Mail FloatMail FloatMail FloatMail Float: time the check is in the mail.CustomerCustomermails checkmails checkFirmFirmreceives checkreceives check
9Processing FloatProcessing FloatProcessing FloatProcessing Float: time it takes a companyto process the check internally.FirmFirmdeposits checkdeposits checkFirmFirmreceives checkreceives check
10Availability FloatAvailability FloatAvailability FloatAvailability Float: time consumed in clearingthe check through the banking system.FirmFirmdeposits checkdeposits checkFirm’s bankFirm’s bankaccount creditedaccount credited
11Deposit FloatDeposit FloatDeposit FloatDeposit Float: time during which the checkreceived by the firm remains uncollected funds.Processing FloatProcessing Float Availability FloatAvailability Float
12Earlier BillingEarlier BillingAccelerate preparation andmailing of invoicescomputerized billinginvoices included with shipmentinvoices are faxedadvance payment requestspreauthorized debits
13Preauthorized PaymentsPreauthorized PaymentsPreauthorized debitPreauthorized debitThe transfer of funds from a payor’sbank account on a specified date tothe payee’s bank account; thetransfer is initiated by the payeewith the payor’s advanceauthorization.
14Lockbox SystemLockbox SystemLockboxLockboxA post office box maintained by afirm’s bank that is used as areceiving point for customerremittances.
15Lockbox ProcessLockbox ProcessCustomers are instructed to mail theirremittances to the lockbox location.Bank picks up remittances several timesdaily from the lockbox.Bank deposits remittances in the customersaccount and provides a deposit slip with alist of payments.Company receives the list and any additionalmailed items.
16Lockbox SystemLockbox SystemDisadvantageDisadvantageCost of creating and maintaining alockbox system. Generally, notadvantageous for small remittances.AdvantageAdvantageReceive remittances sooner whichreduces processing float.
17Concentration BankingConcentration BankingCompensating BalanceCompensating BalanceNon-interest-bearing demand depositsmaintained by a firm to compensate abank for services provided, credit lines,or loans.Cash ConcentrationCash ConcentrationThe movement of cash from lockbox orfield banks into the firm’s central cashpool residing in a concentration bank.
18Concentration BankingConcentration BankingImproves control over inflows andoutflows of corporate cash.Reduces idle cash balances to aminimum.Allows for more effective investmentsby pooling excess cash balances.Moving cash balances toMoving cash balances toa central location:a central location:
19Concentration ServicesConcentration Servicesfor Transferring Fundsfor Transferring FundsDefinition: A non-negotiable checkpayable to a single companyaccount at a concentrationbank.Funds are not immediately availableFunds are not immediately availableupon receipt of the DTC.upon receipt of the DTC.(1) Depository Transfer Check (DTC)(1) Depository Transfer Check (DTC)
20Concentration ServicesConcentration Servicesfor Transferring Fundsfor Transferring FundsDefinition: An electronic version of thedepository transfer check(DTC).(1) Electronic check image version ofElectronic check image version ofthe DTC.the DTC.(2) Cost is not significant and is(2) Cost is not significant and isreplacing DTC.replacing DTC.(2) Automated Clearinghouse(2) Automated Clearinghouse(ACH) Electronic Transfer(ACH) Electronic Transfer
21Concentration ServicesConcentration Servicesfor Transferring Fundsfor Transferring FundsDefinition: A generic term for electronicfunds transfer using a two-way communications system,like Fedwire.Funds are available upon receipt of theFunds are available upon receipt of thewire transfer. Much more expensive.wire transfer. Much more expensive.(3) Wire Transfer(3) Wire Transfer
22S-l-o-w-i-n-g D-o-w-nS-l-o-w-i-n-g D-o-w-nCash PayoutsCash Payouts“Playing the Float”Control of DisbursementsPayable through Draft (PTD)Payroll and DividendDisbursementsZero Balance Account (ZBA)Remote and Controlled Disbursing
23““Playing the Float”Playing the Float”You write a check today, which is subtractedfrom your calculation of the account balance.The check has not cleared, which creates float.You can potentially earn interest on money thatyou have “spent.”Net FloatNet Float -- The dollar difference betweenthe balance shown in a firm’s (orindividual’s) checkbook balance and thebalance on the bank’s books.
24Control of DisbursementsControl of DisbursementsSolution:Solution:Centralize payables into a single (smallernumber of) account(s). This provides bettercontrol of the disbursement process.Firms should be able to:Firms should be able to:1. shift funds quickly to banks from whichdisbursements are made.2. generate daily detailed information onbalances, receipts, and disbursements.
25Methods of ManagingMethods of ManagingDisbursementsDisbursementsDelays the time to have funds on depositDelays the time to have funds on depositto cover the draft.to cover the draft.Some suppliers prefer checks.Some suppliers prefer checks.Banks will impose a higher service chargeBanks will impose a higher service chargedue 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 thepayor and not against a bank as is a check. Aftera PTD is presented to a bank, the payor gets todecide whether to honor or refuse payment.
26Methods of ManagingMethods of ManagingDisbursementsDisbursementsMany times a separate account is set up toMany times a separate account is set up tohandle each of these types of disbursements.handle each of these types of disbursements.A distribution scheduled is projected based onA distribution scheduled is projected based onpast experiences. [See slide 9-27]past experiences. [See slide 9-27]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 anddividend checks will be presented for collection.
27Percentage of PayrollPercentage of PayrollChecks CollectedChecks CollectedF M T W H F M and after(Payday)(Payday)PercentofPercentofPayrollCollectedPayrollCollected100%75%50%25%0%The firm may plan onpayroll checks beingpresented in a similarpattern every pay period.
28Methods of ManagingMethods of ManagingDisbursementsDisbursementsEliminates the need to accuratelyEliminates the need to accuratelyestimate each disbursement account.estimate each disbursement account.Only need to forecastOnly need to forecast overalloverall cash needs.cash needs.Zero Balance Account (ZBA):Zero Balance Account (ZBA):A corporate checking account in which a zerobalance is maintained. The account requires amaster (parent) account from which funds aredrawn to cover negative balances or to whichexcess balances are sent.
29Remote andRemote andControlled DisbursingControlled DisbursingExample:Example: A Vermont business pays a Mainesupplier with a check drawn on a bank in Montana.ThisThis maymay stress supplier relations, and raises ethicalstress supplier relations, and raises ethicalissues.issues.Remote DisbursementRemote Disbursement -- A system in whichthe firm directs checks to be drawn on a bankthat is geographically remote from its customerso as to maximize check-clearing time.This maximizes disbursement float.This maximizes disbursement float.
30Remote andRemote andControlled DisbursingControlled DisbursingLate check presentments are minimal, whichLate check presentments are minimal, whichallows more accurate predicting ofallows more accurate predicting ofdisbursements on a day-to-day basis.disbursements on a day-to-day basis.Controlled DisbursementControlled Disbursement -- A system inwhich the firm directs checks to be drawnon a bank (or branch bank) that is able togive early or mid-morning notification ofthe total dollar amount of checks that willbe presented against its account that day.
31Electronic CommerceElectronic CommerceMessaging systems can be:1. UnstructuredUnstructured -- utilize technologiessuch as faxes and e-mailsfaxes and e-mails2.2. StructuredStructured -- utilize technologies suchsuchasas electronic data interchange (EDI)electronic data interchange (EDI)..Electronic CommerceElectronic Commerce -- The exchange ofbusiness information in an electronic (non-paper) format, including over the Internet.
32Electronic DataElectronic DataInterchange (EDI)Interchange (EDI)Electronic Data InterchangeElectronic Data Interchange -- Themovement of business data electronicallyin a structured, computer-readable format.EDIEDIElectronic Funds Transfer (EFT)Electronic Funds Transfer (EFT)Financial EDI (FEDI)Financial EDI (FEDI)
33Electronic FundsElectronic FundsTransfer (EFT)Transfer (EFT)Electronic Funds Transfer (EFT)Electronic Funds Transfer (EFT) -- the electronicmovements of information between twodepository institutions resulting in a value(money) transfer.EDIEDISubsetSubsetElectronic Funds Transfer (EFT)Electronic Funds Transfer (EFT)Society of Worldwide InterbankFinancial Telecommunications (SWIFT)Clearinghouse Interbank PaymentsSystem (CHIPS)
34Electronic FundsElectronic FundsTransfer (EFT)Transfer (EFT)New RegulationNew RegulationIn January 1999, a new regulation requiresALL federal government payments be madeelectronically.* This will:• provide more security than paper checks and• be cheaper to process for the government.* Except tax refunds and special waiver situations
35Financial EDI (FEDI)Financial EDI (FEDI)Financial EDIFinancial EDI -- The movement offinancially related electronic informationbetween a company and its bank orbetween banks.Financial EDI (FEDI)Financial EDI (FEDI)Examples includeExamples include:Lockbox remittance informationBank balance informationEDIEDISubsetSubset
36Costs and Benefits of EDICosts and Benefits of EDICostsCostsComputer hardware andsoftware expendituresIncreased training coststo implement and utilizean EDI systemAdditional expenses toconvince suppliers andcustomers to use theelectronic systemLoss of floatBenefitsBenefitsInformation and paymentsmove faster and withgreater reliabilityImproved cashforecasting and cashmanagementCustomers receive fasterand more reliable serviceReduction in mail, paper,and document storagecosts
37OutsourcingOutsourcingReducing and controlling operatingcostsImproving company focusAccess to world-class capabilities* The Outsourcing Institute, 1998OutsourcingOutsourcing -- Subcontracting a certainbusiness operation to an outside firm,instead of doing it “in-house.”Why might a firm outsourceWhy might a firm outsource?*?*
38Cash Balances to MaintainCash Balances to MaintainThe optimal level of cash shouldThe optimal level of cash shouldbe the larger of:be the larger of:(1) the transaction balances requiredwhen cash management isefficient.(2) the compensating balancerequirements of commercialbanks.
39Investment inInvestment inMarketable SecuritiesMarketable SecuritiesMarketable Securities are shownMarketable Securities are shownon the balance sheet as:on the balance sheet as:1.1. Cash equivalents if maturities areCash equivalents if maturities areless than three (3) months at theless than three (3) months at thetime of acquisition.time of acquisition.2.2. Short-term investments if remainingShort-term investments if remainingmaturities are less than one (1)maturities are less than one (1)year.year.
40The MarketableThe MarketableSecurities PortfolioSecurities PortfolioReady CashReady CashSegment (R$)Segment (R$)Optimal balance ofOptimal balance ofmarketable securitiesmarketable securitiesheld to take care ofheld to take care ofprobable deficienciesprobable deficienciesin the firm’s cashin the firm’s cashaccount.account.R$F$C$
41Controllable CashControllable CashSegment (C$)Segment (C$)Marketable securitiesMarketable securitiesheld for meetingheld for meetingcontrollablecontrollable(knowable) outflows,(knowable) outflows,such as taxes andsuch as taxes anddividends.dividends.The MarketableThe MarketableSecurities PortfolioSecurities PortfolioR$F$C$
42Free CashFree CashSegment (F$)Segment (F$)““Free” marketableFree” marketablesecurities (that is,securities (that is,available for as yetavailable for as yetunassignedunassignedpurposes).purposes).The MarketableThe MarketableSecurities PortfolioSecurities PortfolioR$F$C$
43Variables in MarketableVariables in MarketableSecurities SelectionSecurities SelectionMarketability (or Liquidity)Marketability (or Liquidity)The ability to sell a significant volume ofsecurities in a short period of time in thesecondary market without significant priceconcession.SafetySafetyRefers to the likelihood of getting back thesame number of dollars you originallyinvested (principal).
44Variables in MarketableVariables in MarketableSecurities SelectionSecurities SelectionMaturityMaturityRefers to the remaining life of thesecurity.Interest Rate (or Yield) RiskInterest Rate (or Yield) RiskThe variability in the market price of asecurity caused by changes ininterest rates.
45Common MoneyCommon MoneyMarket InstrumentsMarket Instruments Treasury Bills (T-bills)Treasury Bills (T-bills):: Short-term,non-interest bearing obligations ofthe U.S. Treasury issued at adiscount and redeemed at maturityfor full face value. Minimum $1,000amount and $1,000 incrementsthereafter.Money Market InstrumentsMoney Market InstrumentsAll government securities and short-termcorporate obligations. (Broadly defined)
46Common MoneyCommon MoneyMarket InstrumentsMarket Instruments Treasury BondsTreasury Bonds:: Long-term(more than 10 years’ originalmaturity) obligations of the U.S.Treasury. Treasury NotesTreasury Notes:: Medium-term(2-10 years’ original maturity)obligations of the U.S. Treasury.
47Common MoneyCommon MoneyMarket InstrumentsMarket Instruments Bankers’ Acceptances (BAs)Bankers’ Acceptances (BAs):: Short-term promissory trade notes forwhich a bank (by having “accepted”them) promises to pay the holder theface amount at maturity. Repurchase Agreements (RPs;Repurchase Agreements (RPs;repos)repos):: Agreements to buy securities(usually Treasury bills) and resellthem at a higher price at a later date.
48Common MoneyCommon MoneyMarket InstrumentsMarket Instruments Federal Agency SecuritiesFederal Agency Securities:: Debt securitiesissued by federal agencies andgovernment-sponsored enterprises(GSEs). Examples: FFCB, FNMA, andFHLMC. Commercial PaperCommercial Paper:: Short-term, unsecuredpromissory notes, generally issued bylarge corporations (unsecured IOUs). Thelargest dollar-volume instrument.
49Common MoneyCommon MoneyMarket InstrumentsMarket Instruments Negotiable Certificate of DepositNegotiable Certificate of Deposit:: Alarge-denomination investment in anegotiable time deposit at acommercial bank or savingsinstitution paying a fixed or variablerate of interest for a specified periodof time.
50Common MoneyCommon MoneyMarket InstrumentsMarket Instruments Money Market Preferred StockMoney Market Preferred Stock::Preferred stock having a dividendrate that is reset at auction every 49days. EurodollarsEurodollars:: A U.S. dollar-denominated deposit -- generally in abank located outside the UnitedStates -- not subject to U.S. bankingregulations
51Selecting Securities forSelecting Securities forthe Portfolio Segmentsthe Portfolio SegmentsReady CashReady CashSegment (R$)Segment (R$)Safety and ability toSafety and ability toconvert to cash isconvert to cash ismost important.most important.SelectSelect U.S.U.S.TreasuriesTreasuries for thisfor thissegment.segment.R$F$C$
53Free CashFree CashSegment (F$)Segment (F$)Base choice on yieldBase choice on yieldsubject to risk-returnsubject to risk-returntrade-offs.trade-offs.Any money marketAny money marketinstrumentinstrument may bemay beselected for thisselected for thissegment.segment.R$F$C$Selecting Securities forSelecting Securities forthe Portfolio Segmentsthe Portfolio Segments