9.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Chapter 9 Cash and Marketable Securities Management

9.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. 1. List and explain the motives for holding cash. 2. Understand the purpose of efficient cash management. 3. Describe methods for speeding up the collection of accounts receivable and methods for controlling cash disbursements. 4. Differentiate between remote and controlled disbursement, and discuss any ethical concerns raised by either of these two methods. 5. Discuss how electronic data interchange (EDI) and outsourcing each relates to a company’s cash collections and disbursements 6. Identify the key variables that should be considered before purchasing any marketable securities. 7. Define the most common money-market instruments that a marketable securities portfolio manager would consider for investment. After Studying Chapter 9, you should be able to:

9.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Motives for Holding Cash Speeding Up Cash Receipts S-l-o-w-i-n-g D-o-w-n Cash Payouts Electronic Commerce Cash and Marketable Securities Management

9.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Outsourcing Cash Balances to Maintain Investment in Marketable Securities Cash and Marketable Securities Management

9.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. 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 needs Motives for Holding Cash

9.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Collections Disbursements (Payments) Marketable securities investment Control through information reporting = Funds Flow= Information Flow Cash Management System

9.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Speed up 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 Speeding Up Cash Receipts

9.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Management Of Receipts & Disbursements  Speeding Up Collections:  Techniques include:  EFTPOS & Bpay  Direct Deposits  Automated Periodic Payment Authorisations  Slowing Down Payments:  Techniques include:  Controlled Disbursing

9.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Management Of Receipts & Disbursements  Other Important Management Tools:  Overdrafts  Zero Balance Accounts  Automatic Periodic Payment Authorisations

9.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Accelerate preparation and mailing of invoices computerised billing invoices included with shipment invoices are faxed advance payment requests preauthorised debits Earlier Billing

9.11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Preauthorised debit Direct Debit: The transfer of funds from a payor’s (the firm owing money) bank account on a specified date to the payee’s bank account; the transfer is initiated by the payee with the payor’s advance authorisation. Preauthorised Payments

9.12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. “ Playing the Float” Control of Disbursements In NZ, payments are made on the 20 th of the month following the date of the invoice. For example, invoices dated on 30 April (or any other date in April) will be paid on 20 May. S-l-o-w-i-n-g D-o-w-n Cash Payouts

9.13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Firms should be able to: 1. shift funds quickly to bank accounts from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Control of Disbursements

9.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Eliminates the need to accurately estimate each disbursement account. Eliminates the need to accurately estimate each disbursement account. Only need to forecast overall cash needs. Only need to forecast overall cash needs. 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. Methods of Managing Disbursements

9.15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Messaging systems can be: 1. Unstructured 1. Unstructured – utilise technologies such as faxes and s 2. Structured such as electronic data interchange (EDI). 2. Structured – utilise technologies such as electronic data interchange (EDI). Electronic Commerce Electronic Commerce – The exchange of business information in an electronic (non- paper) format, including over the Internet. Electronic Commerce

9.16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Electronic Data Interchange Electronic Data Interchange – The movement of business data electronically in a structured, computer-readable format. EDI Electronic Funds Transfer (EFT) Financial EDI (FEDI) Electronic Data Interchange (EDI)

9.17 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Electronic Funds Transfer (EFT) Electronic Funds Transfer (EFT) – the electronic movements of information between two depository institutions resulting in a value (money) transfer. EDISubset Electronic Funds Transfer (EFT) Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS) Electronic Funds Transfer (EFT)

9.18 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. EFT Regulation In January 1999, a regulation that required ALL US federal government payments be made electronically.* This: provides more security than paper checks and is cheaper to process for the government. * Except tax refunds and special waiver situations Electronic Funds Transfer (EFT)

9.19 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Financial EDI Financial EDI – The movement of financially related electronic information between a company and its bank or between banks. Financial EDI (FEDI)

9.20 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Costs Computer hardware and software expenditures Increased training costs to implement and utilise an EDI system Additional expenses to convince suppliers and customers to use the electronic system Loss of floatBenefits 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 Costs and Benefits of EDI

9.21 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. 1. Reducing and controlling operating costs 2. Improve company focus 3. Freeing resources for other purposes * The Outsourcing Institute, 2005 Outsourcing Outsourcing – Subcontracting a certain business operation to an outside firm, instead of doing it “in- house.” For example, an entire function such as accounting might be handed over to the outsource provider Why might a firm outsource?* Outsourcing

9.22 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Factoring Accounts Receivable  Involves the sale of accounts receivable at a discount to a bank or other financial institution (factor) in exchange for funds.  The factor provides the accounting function for the management of the debt.  Similar to borrowing with accounts receivable as capital.  Commonly used by small to medium sized businesses.

9.23 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Factoring Accounts Receivable Advantages  Allows the firm to turn accounts receivable immediately into cash.  Ensures a known pattern of cash flows.  Allows the firm to take advantage of early settlement discounts, or use cash to improve liquidity.  May lead to the elimination of credit and collection departments.

9.24 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. 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. Cash Balances to Maintain

9.25 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Investment in Marketable Securities  Marketable Securities are short term, interest earning, money market instruments that can easily be converted into cash. Shown on the balance sheet as “short-term investments”  Used to earn a return on temporarily idle funds.  Two types:  Government Issues  Non Government Issues

9.26 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Treasury Bills (T-bills): Treasury Bills (T-bills): Short-term, non- interest bearing obligations of the US Treasury issued at a discount and redeemed at maturity for full face value. Minimum $100 amount and $100 increments thereafter. Money Market Instruments All government securities and short-term corporate obligations. (Broadly defined) Common Money Market Instruments

9.27 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. BEY = [ (1000 – 990) / (990) ] *[ 365 / 91 ] BEY = 4.05% T-Bills and Bond Equivalent Yield (BEY) Method: BEY = [ (FA – PP) / (PP) ] *[ 365 / DM ] FA: face amount of security PP: purchase price of security DM: days to maturity of security A $1,000, 13-week T-bill is purchased for $990 – what is its BEY?

9.28 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. EAY = (1 + [.0405/(365 / 91)]) 365/ EAY = 4.11% T-Bills and Equivalent Annual Yield (EAY) Method: EAY = (1 + [ BEY / (365 / DM) ] ) 365/DM - 1 BEY: bond equivalent yield from the previous slide DM: days to maturity of security Calculate the EAY of the $1,000, 13-week T-bill purchased for $990 described on the previous slide?

9.29 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Treasury Bonds: Treasury Bonds: Long-term (more than 10 years’ original maturity) obligations of the US Treasury. Treasury Notes:Treasury Notes: Medium-term (2-10 years’ original maturity) obligations of the US Treasury. Common Money Market Instruments

9.30 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited Created by Gregory Kuhlemeyer. Eurodollars: Eurodollars: A US dollar-denominated deposit – generally in a bank located outside the United States – not subject to US banking regulations Commercial Paper:Commercial Paper: Short-term, unsecured promissory notes, generally issued by large corporations (unsecured IOUs). The largest dollar-volume instrument in US. Maturities don’t exceed 270 days to preclude SEC registration. Common Money Market Instruments