9-1 chapter 9 cash and marketable securities management
DESCRIPTION
9-3 Motives for Holding Cash Transactions Motive Transactions Motive -- to meet payments arising in the ordinary course of business Speculative Motive Speculative Motive -- to take advantage of temporary opportunities Precautionary Motive Precautionary Motive -- to maintain a cushion or buffer to meet unexpected cash needsTRANSCRIPT
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Chapter 9Chapter 9Cash and Marketable Cash and Marketable
Securities Securities ManagementManagement
9-2
Cash and Marketable Cash 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 Cash Balances to Maintain Investment in Marketable
Securities
9-3
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
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Speeding Up Speeding 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
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Collection FloatCollection Float
Collection FloatCollection Float: total time between the mailingof the check by the customer and the availability
of cash to the receiving firm.
ProcessingProcessingFloatFloat
AvailabilityAvailabilityFloatFloat
MailMailFloatFloat
Deposit FloatDeposit Float
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Mail FloatMail Float
Mail FloatMail Float: time the check is in the mail.
Customer Customer mails checkmails check
FirmFirmreceives checkreceives check
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Processing FloatProcessing Float
Processing FloatProcessing Float: time it takes a companyto process the check internally.
FirmFirmdeposits checkdeposits check
FirmFirmreceives checkreceives check
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Availability FloatAvailability Float
Availability FloatAvailability Float: time consumed in clearingthe check through the banking system.
FirmFirmdeposits checkdeposits check
Firm’s bankFirm’s bankaccount creditedaccount credited
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Deposit FloatDeposit Float
Deposit FloatDeposit Float: time during which the check received by the firm remains uncollected funds.
Processing FloatProcessing Float Availability FloatAvailability Float
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Earlier BillingEarlier Billing
Accelerate preparation and mailing of invoices
computerized billing invoices included with shipment invoices are faxed advance payment requests preauthorized debits
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Preauthorized PaymentsPreauthorized Payments
Preauthorized debit Preauthorized 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.
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Lockbox SystemsLockbox Systems
Traditional LockboxTraditional LockboxA post office box maintained by a firm’s bank that is used as a receiving point for customer
remittances.Electronic LockboxElectronic Lockbox
A collection service provided by a firm’s bank that receives electronic payments and
accompanying remittance data and communicates this information to the
company in a specified format.
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Lockbox Process*Lockbox 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.
* Based on the traditional lockbox system
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Lockbox SystemLockbox System
DisadvantageDisadvantageCost of creating and maintaining a
lockbox system. Generally, not advantageous for small remittances.
AdvantageAdvantageReceive remittances sooner which
reduces processing float.
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Concentration BankingConcentration Banking
Compensating BalanceCompensating BalanceDemand deposits maintained by a firm
to compensate a bank for services provided, credit lines, or loans.
Cash ConcentrationCash ConcentrationThe movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank.
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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 to Moving cash balances to a central location:a central location:
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S-l-o-w-i-n-g D-o-w-n S-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)
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““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.
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Methods of Managing Methods of Managing DisbursementsDisbursements
Delays the time to have funds on deposit to Delays the time to have funds on deposit to cover the draft.cover the draft.
Some suppliers prefer checks.Some suppliers prefer checks. Banks will impose a higher service charge Banks 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.
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Methods of Managing Methods of Managing DisbursementsDisbursements
Many times a separate account is set up to Many 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 on A distribution scheduled is projected based on past experiences. [See slide 9-22]past experiences. [See slide 9-22]
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 and dividend checks will be presented for collection.
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Percentage of Payroll Percentage of Payroll Checks CollectedChecks Collected
F M T W H F M and after(Payday)(Payday)
Perc
ent o
fPe
rcen
t of
Payr
oll C
olle
cted
Payr
oll C
olle
cted
100%
75%
50%
25%
0%
The firm may plan onpayroll checks beingpresented in a similar
pattern every pay period.
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Methods of Managing Methods of Managing DisbursementsDisbursements
Eliminates the need to accurately Eliminates the need to accurately estimate each disbursement account.estimate each disbursement account.
Only need to forecast Only 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.
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Cash Balances to MaintainCash Balances to MaintainThe optimal level of cash should The 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.
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Investment in Investment in Marketable SecuritiesMarketable Securities
Marketable Securities are shown Marketable Securities are shown on the balance sheet as:on the balance sheet as:
1.1. Cash equivalents if maturities are Cash equivalents if maturities are less than three (3) months at the less than three (3) months at the time of acquisition.time of acquisition.
2.2. Short-term investments if remaining Short-term investments if remaining maturities are less than one (1) maturities are less than one (1) year.year.
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Variables in Marketable Variables 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.
SafetySafetyRefers to the likelihood of getting back the
same number of dollars you originally invested (principal).
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Variables in Marketable Variables in Marketable Securities SelectionSecurities Selection
MaturityMaturityRefers to the remaining life of the
security.
Interest Rate (or Yield) RiskInterest Rate (or Yield) RiskThe variability in the market price of a
security caused by changes in interest rates.
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Common Money Common Money Market InstrumentsMarket Instruments
Treasury Bills (T-bills)Treasury Bills (T-bills): : Short-term, non-interest bearing obligations issued at a discount and redeemed at maturity for full face value. Minimum $1,000 amount.
Money Market InstrumentsMoney Market InstrumentsAll government securities and short-term corporate obligations. (Broadly defined)
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Common Money Common 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.
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Common Money Common 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.