Chapter 6: Cash and

Marketable Securities
 Learning Objectives
• Discuss why firms hold cash and marketable
securities, and how the levels they hold of each
relate to those motives.
• Demonstrate the three basic strategies for the
efficient management of cash using the firm’s
operating and cash conversion cycles.
• Explain float, including its three basic
components, and the firm’s major objectives with
respect to collection float and disbursement float.
 Learning Objectives
• Review popular techniques for speeding up
collections and slowing down disbursements, the
role of banking relationships, and international
cash management.
• Understand the basic characteristics of
marketable securities and the key features of
popular government and non-government issues.
• Describe the Baumol model and Miller-Orr model
and how they can be used to determine the
optimum quantity in which to convert marketable
securities and cash.
 Cash and Marketable
Securities
• Cash is often called liquid assets or
nonearning assets.
• It is needed to pay salaries, raw materials,
repayment of loan and others.
• Specifically there are 3 major motives of
holding cash which are:
• Transaction Motives
• Precautionary Motives
• Speculative Motives
Purpose for Holding Cash
Transaction ∙ The level of funds required due to the ordinary course of
motives business
∙ It is needed to meet ordinary payment such as paying
bills, employees’ salaries, creditors and etc
Precautionary ∙ The funds needed to meet contingency requirement
motives ∙ Funds needed to reserve for emergency needs, unforeseen
fluctuation in cash flows or unexpected seasonal needs
∙ It serves as a safety cushion against the unexpected cash
drain that may arise because of risk and uncertainty
regarding the future
Speculative ∙ To hold sufficient cash to enable the firm to take
motives advantage of any unexpected bargain or opportunities
which may arise from time to time such as trade discounts
or some short term investments
Compensating ∙ Are necessary to compensate financial institutions for
balances providing loans and services.
∙ Requires the firm to maintain a minimum level of money it
its bank account, normally based on a certain percentage
of the loans taken.
 Cash Management
Techniques
• It involves having the optimum amount of
cash in hand at the right time
• It will also help the firm hold its cash longer
and collect cash more quickly
• Reasons to have an efficient cash
management techniques are:
• To establish proper procedures for collection
from debtors and payment to creditors
• To establish adequate cash floats and minimum
cash balances
• To synchronize cash inflows and outflows
 Cash Management Activity
• The goal of cash management is to
minimize the cash balance while
maintaining a certain level of
liquidity.
• Too much liquidity reduces return,
whereas too little, increases risk
exposure.
Cash Management Activity

Cash Flow Management

Estimation Cash Requirements

Developing Borrowing/ Investment Strategies

 Cash Flow Management
• Involves the process of controlling
the movement, inflows, and
outflows, of the firm to minimize the
cash required to support working
capital.
• Slowing disbursements and speeding
up collections can do this.
 Estimation Cash
Requirements
• The estimation of cash requirements
involves the preparation of cash
budget, which allow the firm to plan,
coordinate, and control the actual
cash flow through the firm.
• Once the cash flow has been
estimated, the appropriate level of
cash holdings can be established.
 Developing Borrowing or
Investment Strategies
• With the establishment of the
appropriate cash balance, the
strategies to finance any cash
shortfalls can be developed ahead of
time.
• In case of cash excess, efficient
investment strategies can be
developed to use idle temporary
liquidity and earn return.
 Cash Management Activity
Speeding up
receipts

Slowing up Management of Cash

disbursement firm’s cash flow budgeting

Maintaining Determining the

good banking optimal cash
relationship balances

Short-term
Marketable securities
financing
investment strategies
strategies for cash
for cash excess
shortfalls

The cash will take care of the profits if the firm takes care of the cash.
Strategies for Efficient cash
Management
• Make all payments as late as
possible. However, take advantage
of any favorable discounts offered by
suppliers.
• Make all collections as soon as
possible without losing future sales
and use cash discounts to encourage
early payments.
Strategies for Efficient cash
Management
• Turn over the inventory as quickly
as possible and avoid stockouts
that might result in shutting down
the production line or any loss in
sales.
 Determining Minimum
Operating Cash
• The objective of a firm is to run the
business effectively without running
out of cash.
• Therefore the firm must keep a
minimum cash balance.
• MOC will allow the firm to invest in
various alternatives and to repay
their debts when they are due.
MARKETABLE SECURITIES
 Marketable Securities
• Are near-cash items and considered
as part of cash.
• Acts as a cushion against technical
insolvency.
• It is as liquid as cash as it takes a
relatively short time for conversion
to cash without losing face value.
 Estimating Desirable Cash
Balances
• Like other financial decisions, the goal of the firm
is to maintain the level of cash and marketable
securities that maximizes shareholder and firm
value.
• Balances that are too high will diminish
profitability -- and balances that are too low will
accentuate risk.
• Although the more sophisticated mathematical
estimation models are beyond our scope, the
overriding objective is to balance risk against
return.
 The Level of Marketable
Securities Investment
• In addition to earning a return on
temporarily idle funds, marketable
securities serve as a safety stock of cash
that can be deployed to satisfy unexpected
demands for funds.
• For example, if a company wishes to
maintain $70,000 of liquid funds and a
transactions balance of $50,000 -- $20,000
would be held as marketable securities.
 Marketable Securities
• Marketable securities are short-term,
interest bearing money market
instruments that can easily be
converted into cash.
• Securities that are most
commonly-held as part of a
marketable securities portfolio can be
segmented into two groups --
government issues and
non-government issues.
 Marketable Securities
• Reasons for holding marketable
securities:
• As a substitute for cash
• For precautionary purposes as a cushion
against unexpected shortage of bank credit
and other emergency cash outflows.
• As a temporary investment
• Investments in marketable securities to:
• Finance seasonal or cyclical need for cash; and
• Meet known future financial requirements.
 Marketable Securities
• Marketable securities portfolio
consists of different types of
securities that differ in:

Maturity Liquidity

Returns
 Portfolio Selection
• The choice of securities in the
portfolio is in accordance to the
s
le
ed
nature of cash available forab
ne
investment:
ict
sh
ed
ca
pr
e
Ready Cash e
iat
Segment ar
ed
es
at
m
os
Controllable th
im
rp
Cash Segment s
rpu
• re
Fo
ve
Free Cash itu
ati
Segment
nd
ul
pe
ec
 • Represe
nts the
tradeoff
betwee
Yields
n risk
• Refers
and
to the
returns.
• ease
Concer of
converti
ned
ng
withthe
securiti
the
es to
Liquidity
safety
cash
of
without
principa
losing
l
the face
investm
value.
ent due
to the
Security
risk of
default
in
principa
Securities
l or
interest
choice of Marketable
paymen
t and
capital
Factors influencing the
 Types of Marketable
Securities
• Treasury Bills (T-Bills)
• Treasury Notes (T-Notes)
• Negotiable Certificate of Deposits
(NCDs)
• Commercial Paper (CP)
• Banker’s Acceptance (BA)
 Malaysian Government
Treasury Bills (MGTB)

• It is a Government Issue and represents

the obligation of the Treasury
Department.
• Maturities not exceeding one year; most
of the T-bills mature in 91 – 182 days,
with longer maturity such as 9 months
and one year.
• The treasury holds weekly acution at a
discount with the smallest denomination
of RM1,000 and are considered as
risk-free.
 Malaysian Government
Treasury Bills (MGTB)

• Payable to order and entitle the holder

the payment of a fixed deposit sum on
maturity.
• Provides investment outlets for short
term surplus funds of commercial
banks, merchant banks, discount
houses and finance companies.
• Evaluation: High liquidity with strong
secondary market, lowest risk, and low
return.
 Treasury Notes
• Similar to T-Bills in that it is the
obligation of the treasury Department.
• Maturity is between 1 – 7 years.
• T-notes are part of marketable
securities because of its security and
liquidity.
• Evaluation: High liquidity with strong
secondary market, lowest risk, and
return is slightly higher than T-bills.
 Negotiable Certificate of
Deposit
• A certificate of deposit, USA, 1932
 Negotiable Certificate of
Deposits (NCDs)

• A document which certifies that a

certain sum of Ringgit has been
deposited with a financial institution
at a specified rate of interest with a
specified maturity period.
• Is a negotiable instrument as an
evidence of deposit in a commercial
bank.
 Negotiable Certificate of
Deposits (NCDs)

• The amount (smallest RM100,000)

and the maturity (commonly 30
days) are dependant on the
investor’s (depositor’s) needs.)
• Evaluation: High liquidity with strong
secondary market, moderate risk
that depends on the bank involved
and high return.
 Commercial Paper
• A short-term unsecured promissory note
issued by a large firm with high credit
standing.
• Maturity ranging from 3 – 270 days.
• Longer maturity requires a formal
registration.
• Evaluation: Low liquidity with weak
secondary market, moderate risk
(depending on the issuer) and return is
slightly lower than NCDs.
 Bankers Acceptance

• Bills of exchange which are drawn on

and accepted by commercial or
merchant banks in Malaysia.
• Created out of a bona fide trade
transaction such as to finance import
and export of goods to/from Malaysia
and sale and purchase of goods and
services within Malaysia.
• Similar to cashier’s check payable in the
future with typical maturity of 30 days
or 180 days.
 Bankers Acceptance

• Arises from a short-term arrangement

between a purchaser and its bank for
financing of certain transactions.
• The purchaser with its bank approval,
issues a draft, on which payment is
contingent on some events, to the seller
for the amount purchased.
• The seller who holds the BA may then sell
it at a discount in the secondary market to
obtain immediate funds.
Summary of Marketable
Securities
Other Marketable Securities
• In the Malaysian money market,
major securities are:
• Bankers Acceptance
• Negotiable Money Market Instruments
• Malaysian Government Securities
• Malaysian Government Treasury Bills
• Cagamas Bonds
 Conclusion
• The cash management and
marketable securities are highly
dependant on each other, therefore it
must be managed concurrently.
• These two liquid assets represent the
firm’s liquidity that will determine its
long-term viability and ability to
increase stockholders’ wealth.
 References
1. Financial Analysis by Omar Samad
and Mohd Sabri Hj Mohd Amin,
InED, UiTM Shah Alam.
2. Financial Management by Rohani A.
Ghani and Mohd Sabri Hj Mohd
Amin, InED, UiTM Shah Alam.
3. Financial Market and Institution by
Rohani A. Ghani and Ibrahim Ab.
Rahman, InED, UiTM.
End of Chapter 6

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