Ch. 19: Cash and Marketable Securities Management

1. Ch. 19: Cash and Marketable Securities Management  2002, Prentice Hall, Inc.

2. Liquid Asset Management 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.

3. Cash Management CASH:

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

5. Cash Management CASH:

6. Cash Management CASH: • Objectives:

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

8. Cash Management CASH: • Objectives: • have enough cash on hand to meet disbursal needs. • Minimize investment in idle cash balances.

9. 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.

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

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

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

17. 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.

18. 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.

19. Cash Management Managing Cash Inflow • Depository Transfer Checks (DTCs)

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

21. 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.

22. 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.

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

24. 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.

25. 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.

26. 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)

27. 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.

28. Marketable Securities Considerations • Liquidity - ability to transform securities into cash. • Taxability - Taxability of interest income and capital gains. • Yield - Influenced by the previous 4 considerations.

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

30. Marketable Securities Types

31. Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including:

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

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

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

35. 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

36. 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

37. 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.

38. 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.

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