Chapter 9

Cash and Marketable

Securities
Management

9-1
 Cash and Marketable
Securities Management

● Motives for Holding Cash

● Speeding Up Cash Receipts
● S-l-o-w-i-n-g D-o-w-n
Cash Payouts
● Electronic Commerce

9-2
 Cash and Marketable
Securities Management

● Outsourcing
● Cash Balances to Maintain
● Investment in Marketable
Securities

9-3
 Motives for Holding Cash
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
9-4
 Cash Management System

Collection Disbursements
s

Marketable securities
investment

Control through information reporting

= Funds = Information
9-5
Flow Flow
 Speeding Up
Cash Receipts
Collections
● 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

9-6
 Collection Float

Mail Processing Availability

Floa Float Float
t
Deposit
Float
Collection Float: total time between the mailing
of the check by the customer and the
availability
9-7 of cash to the receiving firm.
 Mail Float

Customer Firm
mails check receives check

Mail Float: time the check is in the

mail.

9-8
 Processing Float

Firm Firm
receives check deposits check

Processing Float: time it takes a

company
to process the check internally.

9-9
 Availability Float

Firm Firm’s bank

deposits check account credited

Availability Float: time consumed in

clearing
the check through the banking system.

9-10
 Deposit Float

Processing Availability Float

Float
Deposit Float: time during which the check
received by the firm remains uncollected
funds.

9-11
 Earlier Billing
Accelerate preparation and
mailing of invoices
● computerized billing
● invoices included with shipment
● invoices are faxed
● advance payment requests
● preauthorized debits

9-12
 Preauthorized Payments
Preauthorized debit
The transfer of funds from a payor’s
bank account on a specified date to
the payee’s bank account; the
transfer is initiated by the payee
with the payor’s advance
authorization.
9-13
 Lockbox System
Lockbox
A post office box maintained by a
firm’s bank that is used as a
receiving point for customer
remittances.

9-14
 Lockbox Process
● Customers 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.
9-15
 Lockbox System
Advantage
Receive remittances sooner which
reduces processing float.

Disadvantage
Cost of creating and maintaining a
lockbox system. Generally, not
advantageous for small remittances.
9-16
 Concentration Banking
Cash Concentration
The movement of cash from lockbox or
field banks into the firm’s central cash
pool residing in a concentration bank.
Compensating Balance
Non-interest-bearing demand deposits
maintained by a firm to compensate a
bank for services provided, credit lines,
9-17
or loans.
 Concentration Banking
Moving cash balances to
a central location:
● 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.
9-18
 Concentration Services
for Transferring Funds
(1) Depository Transfer Check (DTC)

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.
9-19
 Concentration Services
for Transferring Funds
(2) Automated Clearinghouse
(ACH) Electronic Transfer
Definition: 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.
9-20
 Concentration Services
for Transferring Funds
(3) Wire Transfer
Definition: A generic term for electronic
funds transfer using a two-
way communications system,
like Fedwire.
Funds are available upon receipt of the
wire transfer. Much more expensive.
9-21
 S-l-o-w-i-n-g D-o-w-n
Cash Payouts
● “Playing the Float”
● Control of Disbursements
● Payable through Draft (PTD)
● Payroll and Dividend
Disbursements
● Zero Balance Account (ZBA)
● Remote and Controlled Disbursing
9-22
 “Playing the Float”
Net Float -- The dollar difference between
the balance shown in a firm’s (or
individual’s) checkbook balance and the
balance on the bank’s books.
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 that
you have “spent.”
9-23
 Control of Disbursements
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.
Solution:
Centralize payables into a single (smaller
number of) account(s). This provides better
9-24
control of the disbursement process.
 Methods of Managing
Disbursements
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 payment.
● Delays the time to have funds on deposit
to cover the draft.
● Some suppliers prefer checks.
● Banks will impose a higher service charge
due to the additional handling involved.
9-25
 Methods of Managing
Disbursements
Payroll and Dividend Disbursements
The firm attempts to determine when payroll and
dividend checks will be presented for collection.
● Many times a separate account is set up to
handle each of these types of disbursements.
● A distribution scheduled is projected based on
past experiences. [See slide 9-27]
● Funds are deposited based on expected needs.
● Minimizes excessive cash balances.
9-26
 Percentage of Payroll
Checks Collected
100%
The firm may plan on
75% payroll checks being
presented in a similar
Percent of

Collected
Payroll

50% pattern every pay period.

25%

0%
F M T W H F M and
after
(Payday)
9-27
 Methods of Managing
Disbursements
Zero Balance Account (ZBA):
A corporate checking account in which a zero
balance is maintained. The account requires a
master (parent) account from which funds are
drawn to cover negative balances or to which
excess balances are sent.
● Eliminates the need to accurately
estimate each disbursement account.
● Only need to forecast overall cash needs.
9-28
 Remote and
Controlled Disbursing
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.

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
issues.
9-29
 Remote and
Controlled Disbursing
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 that day.
Late check presentments are minimal, which
allows more accurate predicting of
disbursements on a day-to-day basis.
9-30
 Electronic Commerce
Electronic Commerce -- The exchange of
business information in an electronic (non-
paper) format, including over the Internet.
Messaging systems can be:
1. Unstructured -- utilize technologies
such as faxes and e-mails
2. Structured -- utilize technologies such
as electronic data interchange (EDI).
9-31
 Electronic Data
Interchange (EDI)
Electronic Data Interchange -- The
movement of business data electronically
in a structured, computer-readable format.

Electronic Funds Transfer (EFT)

ED
Financial EDI (FEDI)
I
9-32
 Electronic Funds
Transfer (EFT)
Electronic Funds Transfer (EFT) -- the electronic
movements of information between two
depository institutions resulting in a value
(money) transfer.

Electronic Funds Transfer (EFT)

EDI Society of Worldwide Interbank
Subset Financial Telecommunications (SWIFT)
Clearinghouse Interbank Payments
System (CHIPS)
9-33
 Electronic Funds
Transfer (EFT)

New Regulation
In January 1999, a new regulation requires
ALL federal government payments be made
electronically.* This will:
• provide more security than paper checks and
• be cheaper to process for the government.

* Except tax refunds and special waiver situations

9-34
 Financial EDI (FEDI)
Financial EDI -- The movement of
financially related electronic information
between a company and its bank or
between banks.
Financial EDI (FEDI)
EDI Examples include:
Subset Lockbox remittance information
Bank balance information
9-35
 Costs and Benefits of EDI
Costs Benefits
● Computer hardware and ● Information and payments
software expenditures move faster and with
● Increased training costs greater reliability
to implement and utilize ● Improved cash
an EDI system forecasting and cash
● Additional expenses to management
convince suppliers and ● Customers receive faster
customers to use the and more reliable service
electronic system ● Reduction in mail, paper,
● Loss of float and document storage
costs
9-36
 Outsourcing
Outsourcing -- Subcontracting a certain
business operation to an outside firm,
instead of doing it “in-house.”
Why might a firm outsource?*
● Reducing and controlling operating
costs
● Improving company focus
● Access to world-class capabilities
* The Outsourcing
9-37 Institute, 1998
 Cash Balances to Maintain
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.
9-38
 Investment in
Marketable Securities
Marketable Securities are shown
on the balance sheet as:
1. Cash equivalents if maturities are
less than three (3) months at the
time of acquisition.
2. Short-term investments if remaining
maturities are less than one (1) year.

9-39
 The Marketable
Securities Portfolio

Ready Cash
Segment (R$)
F$
Optimal balance of
R$ marketable securities
held to take care of
C$ probable deficiencies
in the firm’s cash
account.
9-40
 The Marketable
Securities Portfolio
Controllable Cash
Segment (C$)
F$
Marketable securities
R$ held for meeting
controllable
C$ (knowable) outflows,
such as taxes and
dividends.
9-41
 The Marketable
Securities Portfolio
Free Cash
Segment (F$)
F$
“Free” marketable
R$ securities (that is,
available for as yet
C$ unassigned
purposes).

9-42
 Variables in Marketable
Securities Selection
Safety
Refers to the likelihood of getting back the
same number of dollars you originally
invested (principal).
Marketability (or Liquidity)
The ability to sell a significant volume of
securities in a short period of time in the
secondary market without significant price
concession.
9-43
 Variables in Marketable
Securities Selection
Interest Rate (or Yield) Risk
The variability in the market price of a
security caused by changes in
interest rates.
Maturity
Refers to the remaining life of the
security.
9-44
 Common Money
Market Instruments
Money Market Instruments
All government securities and short-term
corporate obligations. (Broadly defined)
➢ Treasury Bills (T-bills): Short-term,
non-interest bearing obligations of
the U.S. Treasury issued at a discount
and redeemed at maturity for full face
value. Minimum $1,000 amount and
$1,000 increments thereafter.
9-45
 Common Money
Market Instruments
➢ Treasury Notes: Medium-term
(2-10 years’ original maturity)
obligations of the U.S. Treasury.

➢ Treasury Bonds: Long-term

(more than 10 years’ original
maturity) obligations of the U.S.
Treasury.
9-46
 Common Money
Market Instruments
➢ Repurchase Agreements (RPs; repos):
Agreements to buy securities
(usually Treasury bills) and resell
them at a higher price at a later date.
➢ Bankers’ Acceptances (BAs): Short-
term promissory trade notes for
which a bank (by having “accepted”
them) promises to pay the holder the
face amount at maturity.
9-47
 Common Money
Market Instruments
➢ Commercial Paper: Short-term, unsecured
promissory notes, generally issued by
large corporations (unsecured IOUs). The
largest dollar-volume instrument.

➢ Federal Agency Securities: Debt securities

issued by federal agencies and
government-sponsored enterprises
(GSEs). Examples: FFCB, FNMA, and
FHLMC.
9-48
 Common Money
Market Instruments

➢ 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 period
of time.

9-49
 Common Money
Market Instruments
➢ Eurodollars: A U.S. dollar-
denominated deposit -- generally in a
bank located outside the United
States -- not subject to U.S. banking
regulations
➢ Money Market Preferred Stock:
Preferred stock having a dividend
rate that is reset at auction every 49
days.
9-50
 Selecting Securities for
the Portfolio Segments

Ready Cash
Segment (R$)
F$
Safety and ability to
R$ convert to cash is
most important.
C$ Select U.S.
Treasuries for this
segment.
9-51
 Selecting Securities for
the Portfolio Segments
Controllable Cash
Segment (C$)
F$
Marketability less
R$ important. Possibly
match time needs.
C$ May select CDs,
repos, BAs, euros for
this segment.
9-52
 Selecting Securities for
the Portfolio Segments
Free Cash
Segment (F$)
F$ Base choice on yield
R$ subject to risk-return
trade-offs.
C$ Any money market
instrument may be
selected for this
segment.
9-53