1、Chapter 9,Cash and Marketable Securities Management,List and explain the motives for holding cash. Understand the purpose of efficient cash management. Describe methods for speeding up the collection of accounts receivable and methods for controlling cash disbursements. Differentiate between remote
2、and controlled disbursement, and discuss any ethical concerns raised by either of these two methods. Discuss how electronic data interchange (EDI) and outsourcing each relates to a companys cash collections and disbursements Identify the key variables that should be considered before purchasing any
3、marketable securities. Define the most common money-market instruments that a marketable securities portfolio manager would consider for investment. Describe the three segments of the marketable securities portfolio and note which securities are most appropriate for each segment and why.,After Study
4、ing Chapter 9, you should be able to:,Motives for Holding Cash Speeding Up Cash Receipts S-l-o-w-i-n-g D-o-w-n Cash Payouts Electronic Commerce,Cash and Marketable Securities Management,Outsourcing Cash Balances to Maintain Investment in Marketable Securities,Cash and Marketable Securities Managemen
5、t,Transactions Motive to meet payments arising in the ordinary course of business Speculative Motive to take advantage of temporary opportunities Precautionary Motive to maintain a cushion or buffer to meet unexpected cash needs,Motives for Holding Cash,Collections,Disbursements,Marketable securitie
6、s investment,Control through information reporting,= Funds Flow,= Information Flow,Cash Management System,Cash budget,Expedite preparing and mailing the invoice Accelerate the mailing of payments from customers Reduce the time during which payments received by the firm remain uncollected,Collections
7、,Speeding Up Cash Receipts,Collection Float: Total time between the mailing of the check by the customer and the availability of cash to the receiving firm.,Processing Float,Availability Float,Mail Float,Deposit Float,Collection Float,Mail Float: Time the check is in the mail.,Customer mails check,F
8、irm receives check,Mail Float,Processing Float: Time it takes a company to process the check internally.,Firm deposits check,Firm receives check,Processing Float,Availability Float: Time consumed in clearing the check through the banking system.,Firm deposits check,Firms bank account credited,Availa
9、bility Float,Deposit Float: Time during which the check received by the firm remains uncollected funds.,Processing Float,Availability Float,Deposit Float,Accelerate preparation and mailing of invoices computerized billing invoices included with shipment invoices are faxed advance payment requests pr
10、eauthorized debits,Earlier Billing,Preauthorized debit The transfer of funds from a payors bank account on a specified date to the payees bank account; the transfer is initiated by the payee with the payors advance authorization.,Preauthorized Payments,Traditional Lockbox A post office box maintaine
11、d by a firms bank that is used as a receiving point for customer remittances. Electronic Lockbox A collection service provided by a firms bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.,Lockbox Systems,Cu
12、stomers are instructed to mail their remittances to the lockbox location. Bank picks up remittances several times daily from the lockbox. Bank deposits remittances in the customers account and provides a deposit slip with a list of payments. Company receives the list and any additional mailed items.
13、,* Based on the traditional lockbox system,Lockbox Process*,Disadvantage Cost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances.,Advantage Receive remittances sooner which reduces processing float.,Lockbox System,Cash Concentration The movement of cash f
14、rom lockbox or field banks into the firms central cash pool residing in a concentration bank.,Concentration Banking,Improves control over inflows and outflows of corporate cash. Reduces idle cash balances to a minimum. Allows for more effective investments by pooling excess cash balances.,Moving cas
15、h balances to a central location:,Concentration Banking,Definition: A non-negotiable check payable to a single company account at a concentration bank. Funds are not immediately available upon receipt of the DTC.,(1) Depository Transfer Check (DTC),Concentration Services for Transferring Funds,Defin
16、ition: An electronic version of the depository transfer check (DTC).(1) Electronic check image version of the DTC.(2) Cost is not significant and is replacing DTC.,(2) Automated Clearinghouse (ACH) Electronic Transfer,Concentration Services for Transferring Funds,Definition: A generic term for elect
17、ronic funds transfer using a two-way communications system, like Fedwire. Funds are available upon receipt of the wire transfer. Much more expensive.,(3) Wire Transfer,Concentration Services for Transferring Funds,“Playing the Float”Control of Disbursements Payable through Draft (PTD) Payroll and Di
18、vidend Disbursements Zero Balance Account (ZBA) Remote and Controlled Disbursing,S-l-o-w-i-n-g D-o-w-n Cash Payouts,You write a check today, which is subtracted from your calculation of the account balance. The check has not cleared, which creates float. You can potentially earn interest on money th
19、at you have “spent.”,Net Float - The dollar difference between the balance shown in a firms (or individuals) checkbook balance and the balance on the banks books.,“Playing the Float”,Solution: Centralize payables into a single (smaller number of) account(s). This provides better control of the disbu
20、rsement process.,Firms should be able to: 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements.,Control of Disbursements,Delays the time to have funds on deposit to cover the draft. Some suppliers prefer ch
21、ecks. Banks will impose a higher service charge due to the additional handling involved.,Payable Through Draft (PTD): A check-like instrument that is drawn against the payor and not against a bank as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse
22、payment.,Methods of Managing Disbursements,Many times a separate account is set up to handle each of these types of disbursements. A distribution schedule is projected based on past experiences. See the next slide Funds are deposited based on expected needs. Minimizes excessive cash balances.,Payrol
23、l and Dividend Disbursements The firm attempts to determine when payroll and dividend checks will be presented for collection.,Methods of Managing Disbursements,F M T W H F M and after,(Payday),Percent of Payroll Collected,100%,75%,50%,25%,0%,The firm may plan on payroll checks being presented in a
24、similar pattern every pay period.,Percentage of Payroll Checks Collected,Eliminates the need to accurately estimate each disbursement account.Only need to forecast overall cash needs.,Zero Balance Account (ZBA): A corporate checking account in which a zero balance is maintained. The account requires
25、 a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.,Methods of Managing Disbursements,Example: A Vermont business pays a Maine supplier with a check drawn on a bank in Montana. This may stress supplier relations, and raises ethical i
26、ssues.,Remote Disbursement A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float.,Remote and Controlled Disbursing,Late check presentments are minimal, which allows more
27、 accurate predicting of disbursements on a day-to-day basis.,Controlled Disbursement A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account
28、 that day.,Remote and Controlled Disbursing,Messaging systems can be: 1. Unstructured utilize technologies such as faxes and e-mails 2. Structured utilize technologies such as electronic data interchange (EDI).,Electronic Commerce The exchange of business information in an electronic (non-paper) for
29、mat, including over the Internet.,Electronic Commerce,Electronic Data Interchange The movement of business data electronically in a structured, computer-readable format.,EDI,Electronic Funds Transfer (EFT),Financial EDI (FEDI),Electronic Data Interchange (EDI),Electronic Funds Transfer (EFT) the ele
30、ctronic movements of information between two depository institutions resulting in a value (money) transfer.,EDI Subset,Electronic Funds Transfer (EFT),Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS),Electronic Funds Transfer (EFT),E
31、FT Regulation,In January 1999, a regulation that required ALL federal government payments be made electronically.* This:provides more security than paper checks andis cheaper to process for the government.* Except tax refunds and special waiver situations,Electronic Funds Transfer (EFT),Financial ED
32、I The movement of financially related electronic information between a company and its bank or between banks.,Financial EDI (FEDI),Examples include: Lockbox remittance information Bank balance information,EDI Subset,Financial EDI (FEDI),Costs Computer hardware and software expenditures Increased tra
33、ining costs to implement and utilize an EDI system Additional expenses to convince suppliers and customers to use the electronic system Loss of float,Benefits Information and payments move faster and with greater reliability Improved cash forecasting and cash management Customers receive faster and
34、more reliable service Reduction in mail, paper, and document storage costs,Costs and Benefits of EDI,Reducing and controlling operating costs Improve company focus Freeing resources for other purposes * The Outsourcing Institute, 2005,Outsourcing Subcontracting a certain business operation to an out
35、side firm, instead of doing it “in-house.” Why might a firm outsource?*,Outsourcing,Business Process Outsourcing (BPO) A form of outsourcing in which the entire business process is handed over to a third-party service providerEntire function such as accounting might be handed over to the BPOTypicall
36、y found in low labor cost countriesMany are owned by large multinationals,Outsourcing,The optimal level of cash should be the larger of: (1) The transaction balances required when cash management is efficient. (2) The compensating balance requirements of commercial banks. P229,Cash Balances to Maint
37、ain,Compensating Balance,Demand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans.,Miller orr,cash,time,Note regarding the management of marketable securities.Marketable Securities are shown on the balance sheet as “Short-term Investments”,Investment in
38、 Marketable Securities,Ready Cash Segment (R$) Optimal balance of marketable securities held to take care of probable deficiencies in the firms cash account.,R$,F$,C$,The Marketable Securities Portfolio,Controllable Cash Segment (C$) Marketable securities held for meeting controllable (knowable) out
39、flows, such as taxes and dividends.,R$,F$,C$,The Marketable Securities Portfolio,Free Cash Segment (F$) “Free” marketable securities (that is, available for as yet unassigned purposes).,R$,F$,C$,The Marketable Securities Portfolio,Marketability (or Liquidity) The ability to sell a significant volume
40、 of securities in a short period of time in the secondary market without significant price concession.,Safety Refers to the likelihood of getting back the same number of dollars you originally invested (principal).,Variables in Marketable Securities Selection,Maturity Refers to the remaining life of
41、 the security.,Interest Rate (or Yield) Risk The variability in the market price of a security caused by changes in interest rates.,Variables in Marketable Securities Selection,BEY = (1000 990) / (990) * 365 / 91 BEY = 4.05%,T-Bills and Bond Equivalent Yield (BEY) Method:,BEY = (FA PP) / (PP) * 365
42、/ DM FA: face amount of security PP: purchase price of security DM: days to maturity of securityA $1,000, 13-week T-bill is purchased for $990 what is its BEY?,EAY = (1 + .0405/(365 / 91)365/91 - 1 EAY = 4.11%,T-Bills and Equivalent Annual Yield (EAY) Method:,EAY = (1 + BEY / (365 / DM) )365/DM - 1
43、BEY: bond equivalent yield from the previous slide DM: days to maturity of security Calculate the EAY of the $1,000, 13-week T-bill purchased for $990 described on the previous slide?,Treasury Bills (T-bills): Short-term, non-interest bearing obligations of the US Treasury issued at a discount and r
44、edeemed at maturity for full face value. Minimum $100 amount and $100 increments thereafter.,Money Market Instruments All government securities and short-term corporate obligations. (Broadly defined),Common Money Market Instruments,Treasury Bonds: Long-term (more than 10 years original maturity) obl
45、igations of the US Treasury.,Treasury Notes: Medium-term (2-10 years original maturity) obligations of the US Treasury.,Common Money Market Instruments,Bankers Acceptances (BAs): Short-term promissory trade notes for which a bank (by having “accepted” them) promises to pay the holder the face amount
46、 at maturity.,Repurchase Agreements (RPs; repos): Agreements to buy securities (usually Treasury bills) and resell them at a higher price at a later date.,Common Money Market Instruments,European Commercial Paper: See above, except maturities extend to one year and more active secondary market.,Comm
47、ercial Paper: Short-term, unsecured promissory notes, generally issued by large corporations (unsecured IOUs). The largest dollar-volume instrument in US. Maturities dont exceed 270 days to preclude SEC registration.,Common Money Market Instruments,Federal Agency Securities: Debt securities issued b
48、y federal agencies and government-sponsored enterprises (GSEs). Examples: FFCB, FNMA, and FHLMC.,Negotiable Certificate of Deposit: A large-denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified per
49、iod of time.,Common Money Market Instruments,Money Market Preferred Stock: Preferred stock having a dividend rate that is reset at auction every 49 days.,Eurodollars: A US dollar-denominated deposit generally in a bank located outside the United States not subject to US banking regulations,Common Money Market Instruments,Ready Cash Segment (R$) Safety and ability to convert to cash is most important. Select US Treasuries for this segment.,
