Cash and Marketable

Securities
Management
 Motives for Holding Cash
Transactions Motive -- to meet payments
arising in the ordinary course of business
Speculative Motive -- to take advantage
of temporary opportunities.
Precautionary Motive -- to maintain to
meet unexpected and emergency cash needs
 Cash Management
Cash Management involves the efficient
collection, disbursement and temporary
investment of cash.
Speed Up Cash Receipts
Slowing down Cash Payment
Investment of Surplus funds to
Temporary Investments.
 Speeding Up Cash
Receipts
Collections
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
Collection Float

Mail Processing Availability

Float Float Float

Deposit Float

Collection Float: total time between the mailing

of the check by the customer and the availability
of cash to the receiving firm.
Mail Float

Customer Firm
mails check receives check

Mail Float: time the check is in the mail.

Processing Float

Firm Firm
receives check deposits check

Processing Float: time it takes a company

to process the check internally.
Availability Float

Firm Firm’s bank

deposits check account credited

Availability Float: time consumed in clearing

the check through the banking system.
Deposit Float

Processing Float Availability Float

Deposit Float: time during which the check

received by the firm remains uncollected funds.
 Earlier Billing
Accelerate preparation and mailing
of invoices
computerized billing
invoices included with shipment
invoices are faxed
advance payment requests
preauthorized debits
 Preauthorized Payments
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.
 Lockbox Systems
Lockbox Systems
A post office box maintained by a
firm’s bank that is used as a
receiving point for customer
remittances.
 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.
 Lockbox System
Advantage

Receive remittances sooner which reduces

processing float.
Disadvantage
Cost of creating and maintaining a
lockbox system. Generally, not
advantageous for small remittances.
 Concentration Banking
Cash Concentration

The movement of cash from lockbox or

field banks into the firm’s central cash pool
residing in a concentration bank.
Compensating Balance
Demand deposits maintained by a firm to
compensate a bank for services provided,
credit lines, or loans.
 Concentration Banking

Moving cash balances to

a central location:
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.
 Concentration Services for
Transferring Funds

(1) Depository Transfer Check (DTC)

Definition: A non-negotiable
check payable to a single
company account at a
concentration bank.
Funds are not immediately available upon
receipt of the DTC.
 Concentration Services for
Transferring Funds

(2) Automated Clearinghouse

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

(3) Wire Transfer

Definition: A generic term for
electronic funds transfer using
a two-way communications
system, like Fedwire.
Funds are available upon receipt of the wire
transfer. Much more expensive.
 S-l-o-w-i-n-g D-o-w-n
Cash Payouts
“Playing the Float”
Control of Disbursements
Payable through Draft (PTD)
Payroll and Dividend
Disbursements
Zero Balance Account (ZBA)
Remote and Controlled Disbursing
 “Playing the Float”
Net 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.

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.”
 Control of Disbursements
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.
Solution:
Centralize payables into a single (smaller
number of) account(s). This provides better
control of the disbursement process.
 Methods of Managing
Disbursements
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.
Delays the time to have funds on deposit to
cover the draft.
Some suppliers prefer checks.
Banks will impose a higher service charge due
to the additional handling involved.
 Methods of Managing
Disbursements
Payroll and Dividend Disbursements
The firm attempts to determine when payroll and
dividend checks will be presented for collection.
Many times a separate account is set up to handle
each of these types of disbursements.
A distribution scheduled is projected based on past
experiences.
Funds are deposited based on expected needs.
Minimizes excessive cash balances.
 Methods of Managing
Disbursements
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.

Eliminates the need to accurately

estimate each disbursement account.
Only need to forecast overall cash needs.
 `

Disbursement Float – Total time between the mailing

of a check by a firm and the check’s clearing the firm’s
checking account.

Remote 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.
 Remote and Controlled
Disbursing
Controlled 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.

Late check presentments are minimal, which allows

more accurate predicting of disbursements on a day-to-
day basis.
 Outsourcing
Outsourcing -- Subcontracting a certain business
operation to an outside firm, instead of doing it
“in-house.”
Why might a firm outsource?*
1. Improving company focus
2. Reducing and controlling operating costs
3. Freeing resources for other purposes
* The Outsourcing Institute, 2002
 Cash Balances to Maintain
The optimal level of cash should be
the larger of:
(1) the transaction balances required when cash management is
efficient.
(2) the compensating balance requirements of commercial banks.
 Investment in Marketable
Securities
Marketable Securities are shown on
the balance sheet as:
1. Cash equivalents if maturities are
less than three (3) months at the time of
acquisition.
2. Short-term investments if remaining
maturities are less than one (1) year.
 The Marketable Securities
Portfolio

Ready Cash
Segment (R$)
F Optimal balance of
$ R marketable securities
held to take care of
C $ probable deficiencies in
the firm’s cash account.
$
 The Marketable Securities
Portfolio
Controllable Cash
Segment (C$)
F Marketable securities
$ R held for meeting
controllable (knowable)
C $ outflows, such as taxes
and dividends.
$
 The Marketable Securities
Portfolio
Free Cash Segment
(F$)
F “Free” marketable
$ R securities (that is,
available for as yet
C $ unassigned purposes).
$
 Variables in Marketable
Securities Selection
Safety

Refers to the likelihood of getting back the same

number of dollars you originally invested
(principal).
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.
 Variables in Marketable
Securities Selection
Interest Rate (or Yield) Risk

The variability in the market price of a

security caused by changes in interest
rates.
Maturity
Refers to the remaining life of the
security.
 Common Money Market
Instruments
Money Market Instruments

All government securities and short-term

corporate obligations. (Broadly defined)
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.
4, 13, and 26 weeks maturity
 Common Money Market
Instruments
Treasury Notes: Medium-term (2-10
years’ original maturity) obligations of
the U.S. Treasury.

Treasury Bonds: Long-term (more than

10 years’ original maturity) obligations
of the U.S. Treasury.
 Money Market
Instruments
Repurchase Agreements (RPs; repos):
Agreements to buy securities (usually Treasury bills)
and resell them at a higher price at a later date.

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.
Maturity less than 6 months and highly liquid
Sold on discount basis
 Common Money Market
Instruments
Commercial Paper: Short-term, unsecured
promissory notes, generally issued by large
corporations The largest dollar-volume instrument.
Sold on discount basis
Short term up to 270 days
( Direct Placement)
 Common Money Market
Instruments

Negotiable 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.
 Common Money Market
Instruments
Eurodollars: A U.S. dollar-denominated
deposit -- generally in a bank located outside
the United States -- not subject to U.S. banking
regulations

Money Market Preferred Stock: Preferred

stock having a dividend rate that is reset at
auction every 49 days.
 Selecting Securities for the
Portfolio Segments

Ready Cash
Segment (R$)
F Safety and ability to
$ R convert to cash is most
important.
C $ Select U.S. Treasuries
for this segment.
$
 Selecting Securities for the
Portfolio Segments
Controllable Cash
Segment (C$)
F Marketability less
$ R important. Possibly
match time needs.
C $ May select CDs, repos,
BAs, euros for this
$ segment.
 Selecting Securities for the
Portfolio Segments
Free Cash Segment
(F$)
F Base choice on yield subject
$ R to risk-return trade-offs.
Any money market
C $ instrument may be selected
for this segment.
$