Chapter 19 - Cash and Marketable Securities Management

Liquid Asset Management CASH- motives for holding cash: CASH- motives for holding cash:  Transactions: to meet cash needs that arise from doing business.  Precautionary: having cash on hand for unexpected needs.  Speculative: to take advantage of potential profit-making situations.

Cash Management CASH: CASH:

Cash Management CASH: CASH: Trade Off: cash decreases risk of insolvency, but earns no returns!

Cash Management CASH: CASH:

Cash Management CASH: CASH: Objectives:

Cash Management CASH: CASH: Objectives:  have enough cash on hand to meet disbursal needs.

Cash Management CASH: CASH: Objectives:  have enough cash on hand to meet disbursal needs.  minimize investment in idle cash balances.

Cash Management Managing Cash Inflow  Reducing Float can speed up cash receipts.  Mail Float: length of time from the moment a customer mails a check until the firm begins to process it.  Processing Float: the time required by a firm to process a check before it can be deposited in a bank.

Cash Management Managing Cash Inflow  Reducing Float can speed up cash receipts.

Cash Management Managing Cash Inflow  Reducing Float can speed up cash receipts.  Transit Float: time required for a check to clear through the banking system and become usable funds.

Cash Management Managing Cash Inflow  Reducing Float can speed up cash receipts.  Transit Float: time required for a check to clear through the banking system and become usable funds.  Disbursing Float: occurs because funds are available in a firm’s bank account until its payment check has cleared through the banking system.

Cash Management Managing Cash Inflow  Lockbox System Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box. A commercial bank collects and deposits the checks.

Cash Management Managing Cash Inflow Lockbox System  Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box.  A commercial bank collects and deposits the checks. This reduces mail float, processing float and transit float.

Cash Management Lockbox System benefits:  Increased working cash - reduces time required to convert receivables to cash.  Elimination of clerical functions - bank handles receiving, endorsing, totaling and depositing.  Early knowledge of dishonored checks - firm learns of customers’ bad checks faster.

Cash Management Managing Cash Inflow Preauthorized Checks (PACs)  Arrangement that allows firms to create checks to collect payments directly from customer accounts.

Cash Management Managing Cash Inflow Preauthorized Checks (PACs)  Arrangement that allows firms to create checks to collect payments directly from customer accounts. This reduces mail float and processing float.

Cash Management PAC System benefits:  Highly predictable cash flows.  Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs.  Customer preference - eliminates regular billing for customers.  Increased working cash - dramatically reduces mail float and processing float.

Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs)

Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs)  Moves cash from local banks to concentration bank accounts.

Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs)  Moves cash from local banks to concentration bank accounts.  Firms avoid having idle cash in multiple banks in different regions of the country.

Cash Management DTC System benefits:  Lower levels of excess cash.  Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs.  Customer preference - eliminates regular billing for customers.  Increased working cash - dramatically reduces mail float and processing float.

Cash Management Managing Cash Inflow Wire Transfers  Moves cash quickly between banks.  Eliminates transit float.

Cash Management Managing Cash Outflow Zero Balance Accounts (ZBAs)  Different divisions of a firm may write checks from their own ZBA.  Division accounts then have negative balances.  Cash is transferred daily from the firm’s master account to restore the zero balance.  Allows more control over cash outflows.

Cash Management Managing Cash Outflow Payable-Through Drafts (PTDs)  Allows the firm to examine checks written by the firm’s regional units.  Checks are passed on to the firm, which can stop payment if necessary.

Cash Management Managing Cash Outflow Remote Disbursing  Firm writes checks on a bank in a distant town.  This extends disbursing float.  (Discouraged by the Federal Reserve System)

Marketable Securities Considerations  Financial Risk - uncertainty of expected returns due to changes in issuer’s ability to pay.  Interest rate risk - uncertainty of expected returns due to changes in interest rates.

Marketable Securities Considerations  Liquidity - ability to transform securities into cash.  Taxability - taxability of interest income and capital gains.  Yield - influenced by the previous four considerations.

Marketable Securities Types  Treasury Bills - short-term securities issued by the U.S. government.

Marketable Securities Types

Types  Federal Agency Securities - Debt issued by agencies, including:

Marketable Securities Types  Federal Agency Securities - Debt issued by agencies, including:  Federal National Mortgage Association (Fannie Mae)

Marketable Securities Types  Federal Agency Securities - Debt issued by agencies, including:  Federal National Mortgage Association (Fannie Mae)  Federal Home Loan Banks

Marketable Securities Types  Federal Agency Securities - Debt issued by agencies, including:  Federal National Mortgage Association (Fannie Mae)  Federal Home Loan Banks  Federal Land Banks

Marketable Securities Types  Federal Agency Securities - Debt issued by agencies, including:  Federal National Mortgage Association (Fannie Mae)  Federal Home Loan Banks  Federal Land Banks  Federal Intermediate Credit Banks

Marketable Securities Types  Federal Agency Securities - Debt issued by agencies, including:  Federal National Mortgage Association (Fannie Mae)  Federal Home Loan Banks  Federal Land Banks  Federal Intermediate Credit Banks  Banks for the Cooperatives

Marketable Securities Types  Bankers’ Acceptances - short-term securities used in international trade. Sold on discount basis.  Negotiable CDs - short-term securities issued by banks, with typical deposits of $100,000, $500,000 and $1 million.

Marketable Securities Types  Commercial Paper - short-term unsecured “IOUs” sold by large reputable firms to raise cash.  Repurchase Agreements - an investor acquires short-term securities subject to a commitment from a bank to repurchase the securities on a specific date.

Marketable Securities Types  Money Market Mutual Funds - a pool of money market securities, divided into shares, which are sold to investors.