This document discusses cash and marketable securities management. It covers motives for holding cash such as transactional, speculative, and precautionary motives. It also discusses ways to speed up cash receipts such as earlier billing and lockbox systems. Methods to slow down cash payouts include payable through drafts, payroll accounts, and zero balance accounts. The document also discusses investing excess cash in marketable securities and variables to consider like marketability, safety, maturity, and interest rate risk. Common money market instruments are also outlined.

1. 1
Chapter 9Chapter 9
Cash and MarketableCash and Marketable
SecuritiesSecurities
ManagementManagement
Instructor: Ajab Khan Burki

2. 2
Cash and MarketableCash and Marketable
Securities ManagementSecurities Management
Motives for Holding Cash
Speeding Up Cash Receipts
S-l-o-w-i-n-g D-o-w-n
Cash Payouts
Electronic Commerce

3. 3
Cash and MarketableCash and Marketable
Securities ManagementSecurities Management
Outsourcing
Cash Balances to Maintain
Investment in Marketable
Securities

4. 4
Motives for Holding CashMotives for Holding Cash
Transactions MotiveTransactions Motive -- to meet
payments arising in the ordinary
course of business
Speculative MotiveSpeculative Motive -- to take
advantage of temporary opportunities
Precautionary MotivePrecautionary Motive -- to maintain a
cushion or buffer to meet unexpected
cash needs

5. 5
Cash Management SystemCash Management System
Collections Disbursements
Marketable securities
investment
Control through information reporting
= Funds Flow = Information Flow

6. 6
Speeding UpSpeeding Up
Cash ReceiptsCash Receipts
Expedite preparing and mailing the
invoice
Accelerate the mailing of payments from
customers
Reduce the time during which payments
received by the firm remain uncollected
Collections

7. 7
Collection FloatCollection Float
Collection FloatCollection Float: total time between the mailing
of the check by the customer and the availability
of cash to the receiving firm.
ProcessingProcessing
FloatFloat
AvailabilityAvailability
FloatFloat
MailMail
FloatFloat
Deposit FloatDeposit Float

8. 8
Mail FloatMail Float
Mail FloatMail Float: time the check is in the mail.
CustomerCustomer
mails checkmails check
FirmFirm
receives checkreceives check

9. 9
Processing FloatProcessing Float
Processing FloatProcessing Float: time it takes a company
to process the check internally.
FirmFirm
deposits checkdeposits check
FirmFirm
receives checkreceives check

10. 10
Availability FloatAvailability Float
Availability FloatAvailability Float: time consumed in clearing
the check through the banking system.
FirmFirm
deposits checkdeposits check
Firm’s bankFirm’s bank
account creditedaccount credited

11. 11
Deposit FloatDeposit Float
Deposit FloatDeposit Float: time during which the check
received by the firm remains uncollected funds.
Processing FloatProcessing Float Availability FloatAvailability Float

12. 12
Earlier BillingEarlier Billing
Accelerate preparation and
mailing of invoices
computerized billing
invoices included with shipment
invoices are faxed
advance payment requests
preauthorized debits

13. 13
Preauthorized PaymentsPreauthorized Payments
Preauthorized debitPreauthorized debit
The transfer of funds from a payor’s
bank account on a specified date to
the payee’s bank account; the
transfer is initiated by the payee
with the payor’s advance
authorization.

14. 14
Lockbox SystemLockbox System
LockboxLockbox
A post office box maintained by a
firm’s bank that is used as a
receiving point for customer
remittances.

15. 15
Lockbox ProcessLockbox Process
Customers are instructed to mail their
remittances to the lockbox location.
Bank picks up remittances several times
daily from the lockbox.
Bank deposits remittances in the customers
account and provides a deposit slip with a
list of payments.
Company receives the list and any additional
mailed items.

16. 16
Lockbox SystemLockbox System
DisadvantageDisadvantage
Cost of creating and maintaining a
lockbox system. Generally, not
advantageous for small remittances.
AdvantageAdvantage
Receive remittances sooner which
reduces processing float.

17. 17
Concentration BankingConcentration Banking
Compensating BalanceCompensating Balance
Non-interest-bearing demand deposits
maintained by a firm to compensate a
bank for services provided, credit lines,
or loans.
Cash ConcentrationCash Concentration
The movement of cash from lockbox or
field banks into the firm’s central cash
pool residing in a concentration bank.

18. 18
Concentration BankingConcentration Banking
Improves control over inflows and
outflows of corporate cash.
Reduces idle cash balances to a
minimum.
Allows for more effective investments
by pooling excess cash balances.
Moving cash balances toMoving cash balances to
a central location:a central location:

19. 19
Concentration ServicesConcentration Services
for Transferring Fundsfor Transferring Funds
Definition: A non-negotiable check
payable to a single company
account at a concentration
bank.
Funds are not immediately availableFunds are not immediately available
upon receipt of the DTC.upon receipt of the DTC.
(1) Depository Transfer Check (DTC)(1) Depository Transfer Check (DTC)

20. 20
Concentration ServicesConcentration Services
for Transferring Fundsfor Transferring Funds
Definition: An electronic version of the
depository transfer check
(DTC).
(1) Electronic check image version ofElectronic check image version of
the DTC.the DTC.
(2) Cost is not significant and is(2) Cost is not significant and is
replacing DTC.replacing DTC.
(2) Automated Clearinghouse(2) Automated Clearinghouse
(ACH) Electronic Transfer(ACH) Electronic Transfer

21. 21
Concentration ServicesConcentration Services
for Transferring Fundsfor Transferring Funds
Definition: A generic term for electronic
funds transfer using a two-
way communications system,
like Fedwire.
Funds are available upon receipt of theFunds are available upon receipt of the
wire transfer. Much more expensive.wire transfer. Much more expensive.
(3) Wire Transfer(3) Wire Transfer

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S-l-o-w-i-n-g D-o-w-nS-l-o-w-i-n-g D-o-w-n
Cash PayoutsCash Payouts
“Playing the Float”
Control of Disbursements
Payable through Draft (PTD)
Payroll and Dividend
Disbursements
Zero Balance Account (ZBA)
Remote and Controlled Disbursing

23. 23
““Playing the Float”Playing the Float”
You write a check today, which is subtracted
from your calculation of the account balance.
The check has not cleared, which creates float.
You can potentially earn interest on money that
you have “spent.”
Net FloatNet Float -- The dollar difference between
the balance shown in a firm’s (or
individual’s) checkbook balance and the
balance on the bank’s books.

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Control of DisbursementsControl of Disbursements
Solution:Solution:
Centralize payables into a single (smaller
number of) account(s). This provides better
control of the disbursement process.
Firms should be able to:Firms should be able to:
1. shift funds quickly to banks from which
disbursements are made.
2. generate daily detailed information on
balances, receipts, and disbursements.

25. 25
Methods of ManagingMethods of Managing
DisbursementsDisbursements
Delays the time to have funds on depositDelays the time to have funds on deposit
to 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 charge
due 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 the
payor and not against a bank as is a check. After
a PTD is presented to a bank, the payor gets to
decide whether to honor or refuse payment.

26. 26
Methods of ManagingMethods of Managing
DisbursementsDisbursements
Many times a separate account is set up toMany times a separate account is set up to
handle 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 on
past 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 Disbursements
The firm attempts to determine when payroll and
dividend checks will be presented for collection.

27. 27
Percentage of PayrollPercentage of Payroll
Checks CollectedChecks Collected
F M T W H F M and after
(Payday)(Payday)
PercentofPercentof
PayrollCollectedPayrollCollected
100%
75%
50%
25%
0%
The firm may plan on
payroll checks being
presented in a similar
pattern every pay period.

28. 28
Methods of ManagingMethods of Managing
DisbursementsDisbursements
Eliminates the need to accuratelyEliminates the need to accurately
estimate 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 zero
balance is maintained. The account requires a
master (parent) account from which funds are
drawn to cover negative balances or to which
excess balances are sent.

29. 29
Remote andRemote and
Controlled DisbursingControlled Disbursing
Example:Example: A Vermont business pays a Maine
supplier with a check drawn on a bank in Montana.
ThisThis maymay stress supplier relations, and raises ethicalstress supplier relations, and raises ethical
issues.issues.
Remote DisbursementRemote Disbursement -- A system in which
the firm directs checks to be drawn on a bank
that is geographically remote from its customer
so as to maximize check-clearing time.
This maximizes disbursement float.This maximizes disbursement float.

30. 30
Remote andRemote and
Controlled DisbursingControlled Disbursing
Late check presentments are minimal, whichLate check presentments are minimal, which
allows more accurate predicting ofallows more accurate predicting of
disbursements on a day-to-day basis.disbursements on a day-to-day basis.
Controlled DisbursementControlled Disbursement -- A system in
which the firm directs checks to be drawn
on a bank (or branch bank) that is able to
give early or mid-morning notification of
the total dollar amount of checks that will
be presented against its account that day.

31. 31
Electronic CommerceElectronic Commerce
Messaging systems can be:
1. UnstructuredUnstructured -- utilize technologies
such as faxes and e-mailsfaxes and e-mails
2.2. StructuredStructured -- utilize technologies suchsuch
asas electronic data interchange (EDI)electronic data interchange (EDI)..
Electronic CommerceElectronic Commerce -- The exchange of
business information in an electronic (non-
paper) format, including over the Internet.

32. 32
Electronic DataElectronic Data
Interchange (EDI)Interchange (EDI)
Electronic Data InterchangeElectronic Data Interchange -- The
movement of business data electronically
in a structured, computer-readable format.
EDIEDI
Electronic Funds Transfer (EFT)Electronic Funds Transfer (EFT)
Financial EDI (FEDI)Financial EDI (FEDI)

33. 33
Electronic FundsElectronic Funds
Transfer (EFT)Transfer (EFT)
Electronic Funds Transfer (EFT)Electronic Funds Transfer (EFT) -- the electronic
movements of information between two
depository institutions resulting in a value
(money) transfer.
EDIEDI
SubsetSubset
Electronic Funds Transfer (EFT)Electronic Funds Transfer (EFT)
Society of Worldwide Interbank
Financial Telecommunications (SWIFT)
Clearinghouse Interbank Payments
System (CHIPS)

34. 34
Electronic FundsElectronic Funds
Transfer (EFT)Transfer (EFT)
New RegulationNew Regulation
In January 1999, a new regulation requires
ALL federal government payments be made
electronically.* This will:
• provide more security than paper checks and
• be cheaper to process for the government.
* Except tax refunds and special waiver situations

35. 35
Financial EDI (FEDI)Financial EDI (FEDI)
Financial EDIFinancial EDI -- The movement of
financially related electronic information
between a company and its bank or
between banks.
Financial EDI (FEDI)Financial EDI (FEDI)
Examples includeExamples include:
Lockbox remittance information
Bank balance information
EDIEDI
SubsetSubset

36. 36
Costs and Benefits of EDICosts and Benefits of EDI
CostsCosts
Computer hardware and
software expenditures
Increased training costs
to implement and utilize
an EDI system
Additional expenses to
convince suppliers and
customers to use the
electronic system
Loss of float
BenefitsBenefits
Information and payments
move faster and with
greater reliability
Improved cash
forecasting and cash
management
Customers receive faster
and more reliable service
Reduction in mail, paper,
and document storage
costs

37. 37
OutsourcingOutsourcing
Reducing and controlling operating
costs
Improving company focus
Access to world-class capabilities
* The Outsourcing Institute, 1998
OutsourcingOutsourcing -- Subcontracting a certain
business operation to an outside firm,
instead of doing it “in-house.”
Why might a firm outsourceWhy might a firm outsource?*?*

38. 38
Cash Balances to MaintainCash Balances to Maintain
The optimal level of cash shouldThe optimal level of cash should
be the larger of:be the larger of:
(1) the transaction balances required
when cash management is
efficient.
(2) the compensating balance
requirements of commercial
banks.

39. 39
Investment inInvestment in
Marketable SecuritiesMarketable Securities
Marketable Securities are shownMarketable Securities are shown
on the balance sheet as:on the balance sheet as:
1.1. Cash equivalents if maturities areCash equivalents if maturities are
less than three (3) months at theless than three (3) months at the
time of acquisition.time of acquisition.
2.2. Short-term investments if remainingShort-term investments if remaining
maturities are less than one (1)maturities are less than one (1)
year.year.

40. 40
The MarketableThe Marketable
Securities PortfolioSecurities Portfolio
Ready CashReady Cash
Segment (R$)Segment (R$)
Optimal balance ofOptimal balance of
marketable securitiesmarketable securities
held to take care ofheld to take care of
probable deficienciesprobable deficiencies
in the firm’s cashin the firm’s cash
account.account.
R$
F$
C$

41. 41
Controllable CashControllable Cash
Segment (C$)Segment (C$)
Marketable securitiesMarketable securities
held for meetingheld for meeting
controllablecontrollable
(knowable) outflows,(knowable) outflows,
such as taxes andsuch as taxes and
dividends.dividends.
The MarketableThe Marketable
Securities PortfolioSecurities Portfolio
R$
F$
C$

42. 42
Free CashFree Cash
Segment (F$)Segment (F$)
““Free” marketableFree” marketable
securities (that is,securities (that is,
available for as yetavailable for as yet
unassignedunassigned
purposes).purposes).
The MarketableThe Marketable
Securities PortfolioSecurities Portfolio
R$
F$
C$

43. 43
Variables in MarketableVariables in Marketable
Securities SelectionSecurities Selection
Marketability (or Liquidity)Marketability (or Liquidity)
The ability to sell a significant volume of
securities in a short period of time in the
secondary market without significant price
concession.
SafetySafety
Refers to the likelihood of getting back the
same number of dollars you originally
invested (principal).

44. 44
Variables in MarketableVariables in Marketable
Securities SelectionSecurities Selection
MaturityMaturity
Refers to the remaining life of the
security.
Interest Rate (or Yield) RiskInterest Rate (or Yield) Risk
The variability in the market price of a
security caused by changes in
interest rates.

45. 45
Common MoneyCommon Money
Market InstrumentsMarket Instruments
 Treasury Bills (T-bills)Treasury Bills (T-bills):: Short-term,
non-interest bearing obligations of
the U.S. Treasury issued at a
discount and redeemed at maturity
for full face value. Minimum $1,000
amount and $1,000 increments
thereafter.
Money Market InstrumentsMoney Market Instruments
All government securities and short-term
corporate obligations. (Broadly defined)

46. 46
Common MoneyCommon Money
Market InstrumentsMarket Instruments
 Treasury BondsTreasury Bonds:: Long-term
(more than 10 years’ original
maturity) obligations of the U.S.
Treasury.
 Treasury NotesTreasury Notes:: Medium-term
(2-10 years’ original maturity)
obligations of the U.S. Treasury.

47. 47
Common MoneyCommon Money
Market InstrumentsMarket Instruments
 Bankers’ Acceptances (BAs)Bankers’ Acceptances (BAs):: Short-
term promissory trade notes for
which a bank (by having “accepted”
them) promises to pay the holder the
face amount at maturity.
 Repurchase Agreements (RPs;Repurchase Agreements (RPs;
repos)repos):: Agreements to buy securities
(usually Treasury bills) and resell
them at a higher price at a later date.

48. 48
Common MoneyCommon Money
Market InstrumentsMarket Instruments
 Federal Agency SecuritiesFederal Agency Securities:: Debt securities
issued by federal agencies and
government-sponsored enterprises
(GSEs). Examples: FFCB, FNMA, and
FHLMC.
 Commercial PaperCommercial Paper:: Short-term, unsecured
promissory notes, generally issued by
large corporations (unsecured IOUs). The
largest dollar-volume instrument.

49. 49
Common MoneyCommon Money
Market InstrumentsMarket Instruments
 Negotiable Certificate of DepositNegotiable Certificate of Deposit:: A
large-denomination investment in a
negotiable time deposit at a
commercial bank or savings
institution paying a fixed or variable
rate of interest for a specified period
of time.

50. 50
Common MoneyCommon Money
Market InstrumentsMarket Instruments
 Money Market Preferred StockMoney Market Preferred Stock::
Preferred stock having a dividend
rate that is reset at auction every 49
days.
 EurodollarsEurodollars:: A U.S. dollar-
denominated deposit -- generally in a
bank located outside the United
States -- not subject to U.S. banking
regulations

51. 51
Selecting Securities forSelecting Securities for
the Portfolio Segmentsthe Portfolio Segments
Ready CashReady Cash
Segment (R$)Segment (R$)
Safety and ability toSafety and ability to
convert to cash isconvert to cash is
most important.most important.
SelectSelect U.S.U.S.
TreasuriesTreasuries for thisfor this
segment.segment.
R$
F$
C$

52. 52
Controllable CashControllable Cash
Segment (C$)Segment (C$)
Marketability lessMarketability less
important. Possiblyimportant. Possibly
match time needs.match time needs.
May selectMay select CDs,CDs,
repos,repos, BAs,BAs, euroseuros forfor
this segment.this segment.
R$
F$
C$
Selecting Securities forSelecting Securities for
the Portfolio Segmentsthe Portfolio Segments

53. 53
Free CashFree Cash
Segment (F$)Segment (F$)
Base choice on yieldBase choice on yield
subject to risk-returnsubject to risk-return
trade-offs.trade-offs.
Any money marketAny money market
instrumentinstrument may bemay be
selected for thisselected for this
segment.segment.
R$
F$
C$
Selecting Securities forSelecting Securities for
the Portfolio Segmentsthe Portfolio Segments