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The Management of Cash
and Marketable Securities
©2006 Thomson/South-Western
Introduction

This chapter reviews the various cash
management decisions made by financial
managers.

The financial managers must consider the
risk vs. return trade-offs characteristic of
these decisions.
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Cash and Marketable Securities

Are the most liquid of a firm’s assets

Cash consists of currency and deposits in
checking accounts.

Marketable securities consist of S-T
investments made with idle cash.
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Cash Management Function

Concerned with determining
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The optimal size of a firm’s liquid asset
balance
The most efficient methods of controlling the
collection and disbursement of cash
The appropriate types and amounts of
S-T investments
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Cash Management Decisions

Must consider the risk versus expected
return trade-offs from alternative policies
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Check out cash management at this Web
site:
http://www.bankofamerica.com/
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Reasons for Holding Liquid Assets

Transactions

Precautionary
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Future requirements
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Speculative

Compensating balances
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Cash Budget
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Required because cash inflows and
outflows are seldom synchronized
First step in cash management
Show forecasted receipts and
disbursements
Show forecast of any cumulative
shortages or surpluses
Series of cash budgets
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Daily
Weekly
Monthly
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Bank Services

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Maintenance of disbursement and payroll
accounts
Collection of deposits
Lines of credit
Term loans
Handling of dividend payments
Registration and transfer of stock
Supply credit information
Consulting advice
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Cash Management

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Determination of the optimal size
Compensating balance requirements establish
lower limit
Holding excess liquid assets results in an
opportunity cost
Inadequate liquid balances result in shortage
costs

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Missing cash discounts
Deterioration of the firm’s credit rating
Higher interest costs
Risk of insolvency
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Cash Collection
Opportunities to increase the available cash balance
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Float
Decentralized collection system
Lockbox
Wire transfers
Depository transfer check (DTC)
Electronic depository transfer check
(EDTC)
Courier service
Preauthorized check (PAC)
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Float

Positive
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Negative

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Speed collection/slow disbursements
Components of float
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Firm shows a higher balance than bank’s
Management's goal

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Balance at bank is greater than the firm’s balance
Mail float
Processing float
Check clearing float
A number of systems can be used to reduce
the float
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Lockbox System

Local bank
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Empties the box
Deposits payments in the firm’s account
Makes a report of the payments
Firm makes disbursements of funds in excess of
compensating balances
Involves significant fees
More beneficial for small number of larger
deposits
Evaluation involves comparison of costs versus
benefits of faster collection
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Setting Up Lockboxes

This Web site will set up and operate a
lock box system:
http://www.firstunion.com/index.html
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Slowing Cash Disbursements
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Zero-balance system
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Drafts
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Transfers cash in the exact amount required
for the cleared checks
Deposit funds only after the draft is presented
for payment.
Synchronize deposits with check
clearings
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Requires accurate estimates of float
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Cash Management for Small Firms
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Less-extensive access to capital markets
Cash shortage may be more expensive to
rectify.
Many small businesses are rapidly
growing.
May have low balances of cash resources
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Choosing Marketable Securities

Default risk



Marketability

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Sold quickly without significant price concession
Maturity


Lowest on U.S. Treasury securities
Risk and expected return inversely related
Shorter maturities have less risk of price
fluctuation
Rate of return

Least important consideration
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Marketable Securities
T-Bills
Treasury
Issues
S-T Municipal Negotiable
Securities
CDs
Repurchase
Agreements
Banker’s
Acceptance
Fed Agency
Commercial
Paper
Eurodollar
Deposits
Money Market Money Market Money market
P/S
Mutual Funds Accounts
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Multinational Corporation (MNC)
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Difficult and costly currency transactions
Cash transfer facilities
Greater variety of investment opportunities
Usually have centralized cash management
Tracks cash balances around the world
Identifies best sources of S-T borrowing/ lending
Use Multilateral netting

Cross-border transactions are netted off to minimize
costly transactions and misdirected funds.
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