Cash and marketable securities management


Firms and individuals hold cash to meet transactions as well as for speculative and precautionary motives.

Cash management involves the efficient collection ad disbursement of cash and any temporary investment of cash while it resides with the firm.

The firm will generally benefit by “speeding up� cash receipts and “s-l-o-w-i-n-g d-o-w-n� cash payouts. The firm wants to speed up the collection of accounts receivable so that it can have the use of money sooner. It wants to pay accounts payable as late as is consistent with maintaining the firm’s credit standing with suppliers so that it can make the most use of the money it already has.

To accelerate collections, the firm may utilize a number of methods, including computerized billing, preauthorized debits, and lockboxes.

Large firms are likely to engage in the process of cash concentration to improve control over corporate cash, reduce idle cash balances, and provide for more effective short-term investing.

The concentration process depends on three principals methods to move funds between banks (1) depository transfer checks (DTC) (2) automated clearing house (ACH) transfers, and (3) wire transfers.

Methods used by corporations to control disbursements include the use of payable through drafts (PTD), the maintenance of separate disbursement accounts, zero balance accounts (ZBA) and controlled (or possibly remote) disbursing.

Electronic data interchange (EDI), and two of its subsets, electronic funds transfer (EFT) and financial EDI (FEDI), are all key elements of electronic commerce (EC).

All the major areas of cash management collections, disbursements, and marketable-securities management are candidates for outsourcing.

The optimal level of cash should be the larger of (1) the transactions balances required when cash management is efficient or (2) the compensating balance requirements of commercial banks with which the firm has deposit accounts.

It is useful to think of the firm’s portfolio of short-term marketable securities as if it were a pie cut into three (not necessarily equal) pieces:

1. Ready cash segment (R$): optimal balance of marketable securities held to take care of probable deficiencies in the firm’s cash account.

2. Controllable cash segment (C$): marketable securities held for meeting controllable (knowable) outflows, such as taxes and dividends.

3. Free cash segment (F$): “free� marketable securities (i.e. available for as yet unassigned purposes).

When considering the purchase of marketable securities, the firm’s portfolio manager must understand how each potential security relates to safety of principal, marketability, yield, and maturity

The firm’s marketable securities portfolio manager usually restricts purchases to money market instruments. Common money market instruments include Treasury securities, repurchase agreements, federal agency securities, bankers’ acceptances (BAs), commercial paper, negotiable, certificates of deposit (CDs) Eurodollars, short-term municipals, and money market preferred stock (MMP).

In selecting securities for the various marketable securities portfolio segments (R$,C$, and F$) , the portfolio manager tries to match alternative money market instruments with the specific needs relating to each segment, after taking into- account such consideration as safety, marketability, yield and maturity. In short, the composition of the firm’s short-term marketable securities account is determined while keeping in mind the trade-off that exists between risk and return.

Money market mutual funds (MMF) make it possible for even small firms (and individuals) to hold a well-diversified portfolio of marketable securities.

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