This document discusses cash management strategies for firms. It covers: 1. Reasons why firms hold cash including transactional, precautionary, and speculative motives. 2. Costs of holding too little or too much cash, including opportunity costs and financing costs. 3. Measuring collection and disbursement float. 4. Techniques for managing cash collections like lockbox systems and concentration banking. 5. Techniques for managing cash disbursements like controlled disbursement accounts.

1. 12/23/2022
Prepared By
Dr. Mahmoud Otaify
2
1. Why Firms Hold
Cash?
2.What is Cost of
Holding less or excess
Cash?
3. How to measure
Collection or
Disbursement float?
4. How can firm
manage cash
collection?
5. How can firm
manage cash
disbursement?
1
2

2. 12/23/2022
Warm-Up
Discuss
“Collect early and
pay late”
Dr. Mahmoud Otaify - Cash MGT
3
4
Cash
MGT
invest
temporari
ly idle
cash
Speed up
cash
collection
manage
disburs
ements
3
4

3. 12/23/2022
5
Dr. Mahmoud Otaify - Cash MGT
6
Transaction motive
The need to hold cash to satisfy normal disbursement and collection
activities associated with a firm’s ongoing operations.
It uses cash on hand to pay bills
To run firm’s ongoing operations
Payment of
wages and
salaries
trade debts taxes, dividends.
5
6

4. 12/23/2022
Dr. Mahmoud Otaify - Cash MGT 7
Precautionary motive
The need to hold cash as a safety margin to act as
a financial reserve
It will use cash reserves to deal with
What If the firm faces unexpected
conditions
Speculative Motive
The need to hold cash in order to be able to
take advantage
It will use cash to take advantage
What If the Company finds opportunities such has
bargain purchase
price
attractive interest
rates
Favorable exchange
rate Fluctuations
Dr. Mahmoud Otaify - Cash MGT
8
7
8

5. 12/23/2022
What is Cost of
Holding less or
excess Cash?
Dr. Mahmoud Otaify - Cash MGT
2
Dr. Mahmoud Otaify - Cash MGT 10
When a firm holds cash in
excess of some necessary
minimum
an opportunity cost of
holding excess cash (in
currency or bank deposits)
=interest income that could be
earned in the next best use,
such as investing in marketable
securities
If the firm maintains too small a
cash balance, it may run out of
cash
firm may have to raise
cash on a short-term
basis
=by selling marketable
securities or borrowing
= This involves various
costs
9
10

6. 12/23/2022
Hold
required
cash reserve
For
Transactio
n needs
Hold Excess
cash
For
Precautionary
and
speculative
needs
Dr. Mahmoud Otaify - Cash MGT 11
How to measure
Collection or
Disbursement
float?
Dr. Mahmoud Otaify - Cash MGT
12
11
12

7. 12/23/2022
Collection or Disbursement times
= the time delay between when payment is
placed in the mail and when it is received
Mailing Delay
(Float)
= the time it takes the receiver of a check to
process the payment and deposit it in a bank
for collection
Check Processing
delay (float)
= the time required to clear a check
through the banking system
Bank’s Availability
delay (clearing float)
Dr. Mahmoud Otaify - Cash MGT 13
Float sent not Useable
Dr. Mahmoud Otaify - Cash MGT 14
Book Cash
Balance
Clearing Process
of checks
Bank cash
Balance
Float
13
14

8. 12/23/2022
15
On June
7
• GM currently has
$100,000 on deposit
with its bank
On June
8
• it buys some raw
materials and pays
with a check for
$30,000
On June
14
• Supplier presented
check to the bank
Float = Firm’s available balance
− Firm’s book balance
=100,000 – 100,000
= 0
Disbursement Float
Float = Firm’s available
balance − Firm’s book
balance
=100,000 – 70,000
= 30,000
Float = Firm’s available balance −
Firm’s book balance
= 70,000 – 70,000 = 0
16
On Oct 14
• GM currently has
$100,000 on deposit
with its bank
On Oct 20
• GM receives a check
from a customer for
$40,000
On Oct 25
• GM presented the
check to the
customer’s bank and
received $40,000
Float = Firm’s available balance
− Firm’s book balance
=100,000 – 100,000
= 0
Collection Float
Float = Firm’s available balance
− Firm’s book balance
=100,000 – 140,000
= - 40,000
Float = Firm’s available balance − Firm’s book
balance =140,000 – 140,000 = 0
Dr. Mahmoud Otaify - Cash MGT
15
16

9. 12/23/2022
Dr. Mahmoud Otaify - Cash MGT 17
firm’s payment
(disbursement) activities
generate
disbursement float
Firm’s
collection activities
generate
collection float
The net effect (net float)
the sum of the total collection
and disbursement floats
Calculating Float - Example
Dr. Mahmoud Otaify - Cash MGT 18
What are your disbursement, collection,
and net floats?
One day
you write a check
for $4,000
then deposit a
check for $3,000
You have $10,000 on deposit
no outstanding checks uncleared deposits
Disbursement Float
= 10,000 – 6,000 =
+4,000
Collection Float =
10,000 – 13,000 =
-3,000
Net float = +4,000 –
3000 = +1,000
Net float = 10,000 –
9000 = +1,000
17
18

10. 12/23/2022
1. You have $95,000 on deposit
with no outstanding checks or
uncleared deposits. One day
you write a check for
$24,300.
a.Does this create a
disbursement float or a
collection float?
b.What is your available
balance? Book balance?
Dr. Mahmoud Otaify - Cash MGT 19
Cash Collection
MGT Systems
Lockbox
system
Concentration
Bank
19
20

11. 12/23/2022
Dr. Mahmoud Otaify - Cash MGT 21
What if
customers will pay with cash,
check, or credit card
at the point of sale
there is no problem with
mailing delay
some the payments a
company receives are checks
that arrive through the mail
all three components of
collection time become
relevant
Dr. Mahmoud Otaify - Cash MGT 22
21
22

12. 12/23/2022
1
24
Customer Customer Customer
Customer
Customer
Customer
Customer
Lockbox
23
24

13. 12/23/2022
Dr. Mahmoud Otaify - Cash MGT 25
A lockbox system
reduces mailing
time
• because checks
are received at
a nearby post
office instead of
at corporate
headquarters.
Lockboxes also
reduce the
processing time
• because the
corporation
doesn’t have to
open the
envelopes and
deposit checks
for collection.
The process used by the firm to bring lockbox and other deposits together into one bank,
often called the concentration bank.
2
25
26

14. 12/23/2022
Dr. Mahmoud Otaify - Cash MGT 27
DTC
depository transfer
check
An unsigned
check drawn
on one of a
firm’s bank
accounts and
deposited in
Concentration
bank.
ACH
Automated
clearinghouse
transfer
A computerized
clearing facility
makes a paperless
transfer of funds
between the payer
and payee banks
wire
transfer
electronic
communication
via bookkeeping
entries
removes funds
from the payer’s
bank and deposits
them in the payee’s
bank
Cash
Disbursement
MGT Systems
slow down disbursements as much as possible
Dr. Mahmoud Otaify - Cash MGT
28
27
28

15. 12/23/2022
Techniques to Manage Cash
Disbursement
Increasing
Disbursement Float
Disbursement float can be increased
by writing a check on a geographically
distant bank.
Bad business practice
Controlling
Disbursements
Develop systems to have no more than
the minimum amount necessary to
pay bills on deposit in the bank.
1. zero-balance account
2. Controlled disbursement account
Dr. Mahmoud Otaify - Cash MGT 29
Dr. Mahmoud Otaify - Cash MGT 30
each of these accounts must
have a safety stock of cash to
meet unanticipated demands
total amount of cash held as a
buffer is smaller under the
zero-balance arrangement,
which frees up cash to be used
elsewhere
29
30

16. 12/23/2022
Controlled Disbursement
Accounts
Dr. Mahmoud Otaify - Cash MGT 31
Informs the day’s total $$$
Q & A
Dr. Mahmoud Otaify - Cash MGT
32
31
32