This document discusses cash and marketable securities management. It defines cash and marketable securities, and explains why companies hold cash balances and invest in marketable securities. The objectives and techniques of cash management are described, including determining optimal cash balances, managing cash flows, and speeding or slowing funds through techniques like lockboxes and float. The document provides information on cash management strategies to help companies maintain adequate liquidity and control costs.

1. Chapter 12
Cash and Marketable
Securities Management

2. Objectives:
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1. Understand the concept of cash management
2. Learn the objectives of cash management
3. Identify the reason for holding cash balances.
4. Determine target balances
5. Understand the other factor that influence
the target cash balance
6. Know cash management techniques to manage
properly the cash flows of the firms

3. Cash
⊸ used to exchange goods, debt, or services.
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Marketable Securities
⊸ high liquid assets
⊸ interest-earning, money market instruments
used by the firm to obtain a return on temporarily
idle fund
Definitions:

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Types of Marketable Securities
⊸ Marketable Debt Securities – these are
government and corporate bonds
⊸ Marketable Equity Securities – these are
common and most preferred stocks
⊸ Money market instruments, derivatives
and indirect investments

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Why Invest to Market Securities?

6. Cash Management
⊸ the process of collecting and managing
cash flows
⊸ In business, companies have a multitude
of cash inflows and outflows that must
be prudently managed in order to meet
payment obligations, plan for future
payments, and maintain adequate
business stability.
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7. Objectives of
⊸ to have adequate control over the cash
position, so as to avoid the risk of
insolvency and use the excessive cash in
some profitable way
⊸ maximize liquidity and control cash flows
and maximize the value of funds while
minimizing the cost of funds
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Cash Management

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Collections Disbursements
Marketable securities
investment
Control through information reporting
Cash Management System

9. Reasons of Holding Cash Balances
⊸ Transactions Motive - to meet
payments arising in the ordinary
course of business
⊸ Precautionary Motive - to maintain
a cushion or buffer to meet
unexpected cash needs
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10. ⊸ Speculative Motive - to take
advantage of temporary opportunities
⊸ Compensating Balance-
compensation to banks for providing
loans and services
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Reasons of Holding Cash Balances

11. Target Balance
⊸ A target cash balance describes the ideal
level of cash that a company seeks to hold
in reserve at any given point in time.
⊸ Optimum level of cash
⊸ Target cash balances will fluctuate based
on economic conditions and opportunities,
factors unique to the industry or company,
and the availability of funding options.
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12. Determining Optimal Cash Balance
Under Conditions of Certainty
[William Baumol’s Cash Model]
⊸ This model emphasizes on maintaining the
optimum cash balance in a year to meet the business
expenses on the one hand and grab the profitable
investment opportunities on the other side.
⊸ ‘C’ is the optimum cash balance;
‘F’ is the fixed transaction cost;
‘T’ is the total cash requirement for that period;
‘i’ is the rate of interest during the period
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13. Determining Optimal Cash Balance
Under Conditions of Uncertainty
[Miller-Orr’s Cash Model]
⊸ model only determines the cash withdrawal;
however, cash is the most uncertain element of
the business.
⊸ Identifies upper and lower limit of cash
⊸ ‘Z’ is the spread across the minimum level and the maximum level;
⊸ ‘T’ is the transaction cost per transfer;
⊸ ‘V’ is the variance of daily cash flow per annum;
⊸ ‘i’ is the daily interest rate
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.

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CA S H
MA N A G E M E N T
T E C H N I Q U E S

15. I. Float
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⊸ refers to funds that have been dispatched by
a payer but are not yet in form that can be
spent by the payee.
⊸ It also exists when a payee has receive
funds in a spendable form but these funds
have not been withdrawn from the account
of the payer.

16. Types of Float
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1. Collection Float
⊸ The delay between the time when a payer or
customer deducts a payment from its checking account
ledger and the time when the payee or vendor actually
receives the funds in a spendable form.
2. Disbursement Float
⊸ the lapse between the time when a firm deducts
a payment from its checking account ledger (disburses
it) and the time when funds are actually withdrawn
from its account.

17. Components of Float
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1. Mail Float

18. Components of Float
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2. Processing Float

19. Components of Float
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3. Availability Float

20. Components of Float
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4. Deposit Float

21. II. SPEEDING UP COLLECTIONS
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1. Lockbox System
⊸ a collection procedure in which payers send
their payments to a nearby post office box that is
emptied by the firm’s bank several times daily; the
bank deposits the payment checks in the firm’s
account
2. Direct Send
⊸ a collection procedure in which the payee
presents checks for payment directly to the banks
on which they are drawn

22. III. Concentration Services
for Transferring Funds
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1. Preauthorized Check (PAC)
⊸ a check written by the payee against a customer’s
checking account for a previously agreed upon
amount. Because of prior legal authorization, the
check does not require the customer’s signature.
2. Depository Transfer Check (DTC)
⊸ an unsigned check drawn on one of the firm’s bank
accounts and deposited into its account at a
concentration or major disbursement bank, thereby
speeding up the transfer of funds.

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3. Wire Transfers
⊸ telegraphic communications that, via book-
keeping entries, remove funds from the payer’s
bank and deposit them into the payee’s bank
4. ACH (automated clearing house)
⊸ debits preauthorized electronic withdrawals from
the payer’s account that are then transferred to the
payee’s account via a settlement among banks by the
automated clearinghouse.
III. Concentration Services
for Transferring Funds

24. IV. SLOWING DOWN DISBURESMENT
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1. Controlled Disbursing
⊸ The strategic use of mailing points and bank
accounts to lengthen mail float and clearing
float, respectively.
2. Playing the float
⊸ A method of consciously anticipating the
resulting float, or delay, associated with the
payment process and using it to keep funds in
an interest-earning form for as long as possible.

25. IV. SLOWING DOWN DISBURESMENT
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3. Staggered Funding
⊸ A way to play the float by depositing a
certain proportion of a payroll or payment into
the firm’s checking account on several successive
days following the actual issuance of a group of
checks.
4. Payable-through draft
⊸ A draft drawn on the payer’s checking
account, payable to a given payee but not payable
on demand; approval of the draft by the payer is
required before the banks pays the draft.

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Overdraft System
⊸ Automatic coverage by the bank of all checks
presented against the firm’s account,
regardless of the account balance.
Zero-balance account
⊸ A checking account in which a zero balance is
maintained and the firm is required to deposit
funds to cover checks drawn on the account
only as they are presented for payment.
V. OVER DRAFT, ZERO-BALANCE,
AND ACH CREDITS

27. V. OVER DRAFT, ZERO-BALANCE,
AND ACH CREDITS
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ACH (automated clearing house)credits
⊸ Deposits of payroll directly into the
payee’s (employees) accounts. Sacrifices
disbursement float but may generate
goodwill for the employer.

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“A system must be in place to transfer
funds from where they come in to where
they are needed, to arrange loans to cover
net corporate shortfalls, and to invest net
corporate surpluses without delay.”

29. “Profits Are an Opinion,
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Cash Is a Fact.”
Alfred Rappaport

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References:
Brigham, E. and Ehrhardt, M., 2011. Financial
Management: Theory and Practice. 13th ed. Ohio: South-
Western Publishing
https://www.investopedia.com
https://financial-dictionary.thefreedictionary.com
http://educ.jmu.edu
https://www.accountingnotes.net
https://www.kantox.com/en/glossary

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Thank you
and
God bless!