1 / 30

Cash and Marketable Securities Management - Motives, Methods, and Efficiency

Learn about the motives for holding cash, efficient cash management, speeding up cash receipts, controlling cash disbursements, electronic commerce, outsourcing, and investment in marketable securities.

klin
Download Presentation

Cash and Marketable Securities Management - Motives, Methods, and Efficiency

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 9 Cash and Marketable Securities Management

  2. After Studying Chapter 9, you should be able to: • 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 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 company’s cash collections and disbursements • Identify the key variables that should be considered before purchasing any marketable securities. • Define the most common money-market instruments that a marketable securities portfolio manager would consider for investment.

  3. 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

  4. Cash and Marketable Securities Management • Outsourcing • Cash Balances to Maintain • Investment in Marketable Securities

  5. 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

  6. Cash Management System Disbursements (Payments) Collections Marketable securities investment Control through information reporting = Funds Flow = Information Flow

  7. Speeding Up Cash Receipts Collections • Speed up preparing and mailing the invoice • Accelerate the mailing of payments from customers • Reduce the time during which payments received by the firm remain uncollected

  8. Management Of Receipts & Disbursements • Speeding Up Collections: • Techniques include: • EFTPOS & Bpay • Direct Deposits • Automated Periodic Payment Authorisations • Slowing Down Payments: • Techniques include: • Controlled Disbursing

  9. Management Of Receipts & Disbursements • Other Important Management Tools: • Overdrafts • Zero Balance Accounts • Automatic Periodic Payment Authorisations

  10. Earlier Billing Accelerate preparation and mailing of invoices • computerised billing • invoices included with shipment • invoices are faxed • advance payment requests • preauthorised debits

  11. Preauthorised Payments Preauthorised debit Direct Debit: The transfer of funds from a payor’s (the firm owing money) bank account on a specified date to the payee’s bank account; the transfer is initiated by the payee with the payor’s advance authorisation.

  12. S-l-o-w-i-n-g D-o-w-n Cash Payouts • “Playing the Float” • Control of Disbursements • In NZ, payments are made on the 20th of the month following the date of the invoice. For example, invoices dated on 30 April (or any other date in April) will be paid on 20 May.

  13. Control of Disbursements Firms should be able to: 1. shift funds quickly to bank accounts from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements.

  14. 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.

  15. 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 – utilise technologies such as faxes and e-mails 2. Structured– utilise technologies such as electronic data interchange (EDI).

  16. Electronic Data Interchange (EDI) Electronic Data Interchange– The movement of business data electronically in a structured, computer-readable format. Electronic Funds Transfer (EFT) EDI Financial EDI (FEDI)

  17. 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 Subset Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS)

  18. Electronic Funds Transfer (EFT) EFT Regulation • In January 1999, a regulation that required ALL federal government payments be made electronically.* This: • provides more security than paper checks and • is cheaper to process for the government. • * Except tax refunds and special waiver situations

  19. Financial EDI (FEDI) Financial EDI – The movement of financially related electronic information between a company and its bank or between banks.

  20. Costs Computer hardware and software expenditures Increased training costs to implement and utilise 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 more reliable service Reduction in mail, paper, and document storage costs Costs and Benefits of EDI

  21. Outsourcing Outsourcing – Subcontracting a certain business operation to an outside firm, instead of doing it “in-house.” For example, an entire function such as accounting might be handed over to the outsource provider Why might a firm outsource?* • Reducing and controlling operating costs • Improve company focus • Freeing resources for other purposes * The Outsourcing Institute, 2005

  22. Factoring Accounts Receivable • Involves the outright sale of accounts receivable at a discount to a bank or other financial institution (factor) in exchange for funds. • The factor provides the accounting function for the management of the debt. • Similar to borrowing with accounts receivable as capital. • Commonly used by small to medium sized businesses.

  23. Factoring Accounts Receivable Advantages • Allows the firm to turn accounts receivable immediately into cash. • Ensures a known pattern of cash flows. • Allows the firm to take advantage of early settlement discounts, or use cash to improve liquidity. • May lead to the elimination of credit and collection departments.

  24. 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.

  25. Investment in Marketable Securities • Marketable Securities are short term, interest earning, money market instruments that can easily be converted into cash. Shown on the balance sheet as “short-term investments” • Used to earn a return on temporarily idle funds. • Two types: • Government Issues • Non Government Issues

  26. 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 US Treasury issued at a discount and redeemed at maturity for full face value. Minimum $100 amount and $100 increments thereafter.

  27. T-Bills and Bond Equivalent Yield (BEY) Method: • BEY= [ (FA–PP) / (PP) ] *[ 365 /DM] • FA: face amount of security • PP: purchase price of security • DM: days to maturity of security • A$1,000, 13-weekT-bill is purchased for $990 – what is its BEY? BEY= [ (1000–990) / (990) ] *[ 365 / 91] BEY = 4.05%

  28. T-Bills and Equivalent Annual Yield (EAY) Method: • EAY = (1 + [ BEY / (365 / DM)] )365/DM- 1 • 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? EAY = (1 + [.0405/(365 / 91)])365/91- 1 EAY = 4.11%

  29. Common Money Market Instruments • Treasury Notes: Medium-term (2-10 years’ original maturity) obligations of the US Treasury. • Treasury Bonds: Long-term (more than 10 years’ original maturity) obligations of the US Treasury.

  30. Common Money Market Instruments • Commercial Paper: Short-term, unsecured promissory notes, generally issued by large corporations (unsecured IOUs). The largest dollar-volume instrument in US. Maturities don’t exceed 270 days to preclude SEC registration. • Eurodollars: A US dollar-denominated deposit – generally in a bank located outside the United States – not subject to US banking regulations

More Related