1. Principles of Corporate Finance
Seventh Edition
Richard A. Brealey
Stewart C. Myers
Chapter 31
Cash Management
Slides by
Matthew Will
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved

2. Topics Covered Cash Collection and Disbursement Systems
Managing Float
How Much Cash Should the Firm Hold?
Investing Idle Cash
Money Market Investments
Floating Rate Preferred Stock

3. Float
Time exists between the moment a check is written and the moment the funds are deposited in the recipient’s account.
This time spread is called Float.
Payment Float - Checks written by a company that have not yet cleared.
Availability Float - Checks already deposited that have not yet cleared. 3

4. Company’s ledger balance
Float
Payment Float illustration - The company issues a $200,000 check that has not yet cleared.
Company’s ledger balance
$800,000
Payment float
$200,000 +
equals
Bank’s ledger balance
$1,000,000 6

5. Company’s ledger balance
Float
Availability Float illustration - The company deposits a $100,000 check that has not yet cleared.
Company’s ledger balance
$900,000 +
Payment float
$200,000
equals
Bank’s ledger balance
$1,100,000 9

6. Float Net Float illustration
Net float = payment float - availability float
Bank’s ledger balance
$1,100,000
equals
Available balance
$1,000,000 +
Availability float
$100,000 12

7. Managing Float
Payers attempt to create delays in the check clearing process.
Recipients attempt to remove delays in the check clearing process.
Sources of delay
Time it takes to mail check
Time for recipient to process check
Time for bank to clear check 16

8. Managing Float Check mailed Check received Mail float Check deposited
Processing float
Presentation
float
Cash available
to recipient
Check charged to
payer’s account
Availability 20

9. Managing Float
Concentration Banking - system whereby customers make payments to a regional collection center which transfers the funds to a principal bank.
Lock-Box System - System whereby customers send payments to a post office box and a local bank collects and processes checks.
Zero-Balance Accounts - Regional bank accounts to which just enough funds are transferred daily to pay each day’s bills. 21

10. Money Markets Money Market - market for short term financial assets.
commercial paper
certificates of deposit
repurchase agreements 26

11. Inventories & Cash Balances
Economic Order Quantity - Order size that minimizes total inventory costs. 23

12. Inventories & Cash Balances
Determination of optimal order size
Total costs
Carrying costs
Inventory costs, dollars
Total order costs
Order size
Optimal
order size 24

13. Inventories & Cash Balances
The optimal amount of short term securities sold to raise cash will be higher when annual cash outflows are higher and when the cost per sale of securities is higher. Conversely, the initial cash balance falls when the interest is higher. 25

14. Inventories & Cash Balances
(Everyman’s Bookstore)
balance ($000) 25
Average
12.5
inventory 1 2 3 4 5
Weeks
Value of bills sold = Q =
2 x annual cash disbursement x cost per sale
interest rate
2 x x 20
.08 =
= 25