1. Cash Management Cash Cycle
Factors that influence the desired level of cash
Optimal cash inventories
Short-term investment strategies

2. Managing an entity’s Resources
The Manager
Life cycle effects,
Business cycle,
public events,
etc.
Resource Decisions
Cash Management
Inventory Management
Working Capital Management
Investment in Human Capital
Long-term Assets
Accounts Receivable
Investment Decisions
Operating
Decisions
Recruitment, Selection
Training, Productivity
Performance Appraisal
Compensation
Unions & Labor Relations
Cash Inflows
Human Resources
Decisions
Value
Creation
Economics of Information
Database Management
Data Modeling
IS Planning & Development
Information
Decisions
Discount Rate
Cost of
Capital
Financial
Markets
Financing Decisions
Debt vs. Tax Financing

3. Overview
ST fin’l planning = deals w/ short-lived assets and liabilities (working capital management);
concerned w/ 1) size of investment in CA like cash, A/R, Inventory…a tool is cash budget analysis and 2) how to finance ST assets…a tool is performing credit analysis

4. Managing WC involves determing:
How much to invest in CA?
- CA vs. FA
- Nature of activities/programs
In each CA?
- Cash, A/R, Inventory
- Cash Mgt
- A/R is Credit Mgt
- Inv = POM & Cash balance models

5. Our objectives Learn about the Cash Cycle
Understand the factors that influence the desired level of cash
Learn two models that calculate the optimal level of cash
Gain an overview of what factors/areas are inputs to a cash budget and how they affect the cash balance

6. Objectives of Public Money Managers
Bringing the entity’s cash resources within control
Achieving optimum conservation and utilization of the funds

7. Key areas of Public Cash Management
Organization
Collection and disbursement of funds
Netting of interagency payments
Investment of excess funds
Optimal level of cash balances
Cash planning and budgeting
Bank relations

8. Treasury Management of Cash Balances
Operate with smaller amount of cash
Supervision is centralized
Better service from banks
Proper allocation of funds

9. How much cash should a organization keep on hand?
Enough cash to make payments when needed. (transactions motive)
(Daily or Weekly Cash Budget helpful)
Additional cash may be held for unexpected requirements. (precautionary motive)

10. The size of the minimum cash balance depends on:
How quickly and cheaply a organization can raise cash when needed.
How accurately managers can predict cash requirements.
(Cash Budget helpful)
How much precautionary cash the managers need for emergencies.

11. The organization’s maximum cash balance depends on:
Available (short-term) investment opportunities
e.g. money market funds, CDs, commercial paper
Expected return on investment opportunities.
e.g. If expected returns are high, organizations should be quick to invest excess cash
Transaction cost of withdrawing cash and making an investment
Demand for Cash for daily transactions
(Cash Budget helpful)

12. Consider Cash an ‘Inventory’
An inventory approach to Cash
Balance decisions:
the trade-offs: - hold little cash = invest remainder in M/S to earn interest
Grantsville has a daily demand for cash of $10,000.
Grantsville’s treasurer invests excess cash in the state investment pool that earns .01% per day. In order to transfer funds from the state pool, Grantsville must pay a transaction cost of $20. How much cash should it transfer when it runs out. (Grantsville can complete the cash transfer electronically so it waits until the cash balance is zero).
- if hold too little cash = incur transactions costs to meet cash needs
- hold lots of cash = forgo investing in M/S and earning interest

13. Optimal Cash Balance via Baumol Model
r = .01%  .0001
TC = $20
Cost ($)
Z*=  [(2M*TC)/r] Z*
Total Costs
Z = $63,246
Holding Costs:
(Z/2)*r
Order Costs:(M/Z)*TC Z*
Order Quantity (Z)

14. Problems with the Baumol Model
Cash flows may not be very predictable, much less
constant
Treasurers may want a ‘safety stock’ of cash

15. The Miller - Orr Model
The Miller-Orr Model provides a formula for determining the optimum cash balance (Z), the point at which to sell securities to raise cash (lower limit L) and when to invest excess cash by buying securities and lowering cash holdings (upper limit H).
Depends on:
transaction costs of buying or selling securities
variability of daily cash (incorporates uncertainty)
return on short-term investments

16. The Miller - Orr Model H Z L Buy Securities Upper Limit
Dollars in the Cash Account Z L
Lower Limit
Sell Securities
Days of the Month

17. The Miller-Orr Model - Target Cash Balance (Z)3
3 x TC x V
4 x r
Z = L
where: TC = transaction cost of buying
or selling securities
V = variance of daily cash flows
r = daily return on short-term
investments
L = minimum cash requirement

18. The Miller-Orr Model - Target Cash Balance (Z)
Example: Suppose that short-term securities yield 5% per year and it costs the organization $50 each time it buys or sells securities (TC). The daily variance of cash flows is $1000 (V) and your bank requires $1,000 minimum checking account balance (L).* 3
Z = $1,000
= $3,000 + $1,000 = $4,000
3 x 50 x 1000
4 x .05/360

19. The Miller-Orr Model - Upper Limit
The upper limit for the cash account (H) is determined by the equation: H = 3Z - 2L where: Z = Target cash balance L = Lower limit
In the previous example: H = 3 ($4,000) - 2($1,000) = $10,000

20. The Miller - Orr Model Buy Securities Upper Limit
$10,000
Dollars in the Cash Account
$4000
$1000
Lower Limit
Sell Securities
Days of the Month

21. Cash Pooling Centralized cash management involves transfer
of an agency’s cash in excess of minimal
operating requirements into a centrally managed
account also known as a cash pool.
Procedure
and
Benefits

22. Investment of excess funds

24. The Collection & Disbursement of Public Funds
Managing Cash Balances
Safety
Liquidity
Maximize pool of funds available for investment
Concentration Accounts
Zero-balance accounts
Highest yield
Controlling Cash Collection & Disbursement
Dual responsibility
Receipts maintained in a location separate from cash & checks
Certification of vouchers

25. Collection of funds Need for accelerating collections
How to accelerate collection of receivables

26. Disbursement of funds Importance of disbursement of funds
Review of disbursements
Payment instruments being used (checks, drafts, wire transfers, etc.)
Bank charges and internal costs
Techniques being used
Time involved for processing of instruments

27. Payments Netting in Public Cash Management
Need for payments netting
Procedure involved
Only netted amount is transferred (bilateral netting)
Netting center (multilateral netting)

28. Our objectives Learn about the Cash Cycle
Understand the factors that influence the desired level of cash
Learn two models that calculate the optimal level of cash
Gain an overview of what factors/areas are inputs to a cash budget and how they affect the cash balance

29. Stop Here

30. Payments netting in Public Cash Management (contd.)

31. Payments Netting in Public Cash Management (contd.)

32. Cash Planning and Budgeting

33. Cash Planning and Budgeting (contd.)