Cash and Marketable Securities Management
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Cash and Marketable Securities Management

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Questions and Answers

What is the primary goal of cash and marketable securities management?

  • To ensure sufficient liquidity for short-term obligations (correct)
  • To maximize investment returns only
  • To maintain a fixed level of cash regardless of business operations
  • To minimize all liabilities the company holds

    • A shorter cash conversion cycle generally indicates what for a company?

  • Decreased profitability potential
  • Higher accounts payable days
  • Increased inventory holding periods
  • More efficient cash conversion from inventory to receivables (correct)

    • What does the optimal cash balance primarily aim to optimize?

  • Liquidity and opportunity cost of holding cash (correct)
  • Overall company profits without concern for liquidity
  • Investment into high-risk assets exclusively
  • Maintaining the highest level of cash reserves at all times

    • Which of the following factors does NOT contribute to the calculation of the cash conversion cycle?

    <p>Cost of Goods Sold</p> Signup and view all the answers

    Why is a longer cash conversion cycle considered disadvantageous for a company?

    <p>It typically requires more external financing, increasing costs.</p> Signup and view all the answers

    What does Payables Days measure in the cash conversion cycle?

    <p>The time taken to pay off accounts payable</p> Signup and view all the answers

    Which of the following best describes an optimal cash balance?

    <p>It varies widely depending on company circumstances and market conditions.</p> Signup and view all the answers

    In relation to liquidity and cash management, which statement is accurate?

    <p>Increased holdings of cash can result in missed investment opportunities.</p> Signup and view all the answers

    What is the primary reason for holding cash in a company?

    <p>To maintain sufficient liquidity for operational needs</p> Signup and view all the answers

    Which of the following correctly defines 'Collection Float'?

    <p>The time lag between selling goods on credit and receiving payment</p> Signup and view all the answers

    What component of a cash management system involves predicting future cash flows?

    <p>Cash Forecasting</p> Signup and view all the answers

    Which cash management strategy might involve negotiating with suppliers?

    <p>Slowing disbursements</p> Signup and view all the answers

    What is the effect of a strong precautionary cash balance for a company?

    <p>Ability to weather unexpected events</p> Signup and view all the answers

    What is the relationship between Average Cash Balance and Opportunity Cost in calculating Holding Costs?

    <p>Holding costs increase with average cash balance multiplied by opportunity cost</p> Signup and view all the answers

    Which strategy can enhance the liquidity of a company during cash management?

    <p>Reducing collection float</p> Signup and view all the answers

    In what way can a company manage 'disbursement float' effectively?

    <p>By optimizing payment cycles to minimize cash tied up</p> Signup and view all the answers

    What does the term 'opportunity cost' refer to in the context of holding cash?

    <p>Lost interest income from idle cash</p> Signup and view all the answers

    Which motive causes a company to hold cash above its immediate operational needs?

    <p>Precautionary motive</p> Signup and view all the answers

    Which of the following actions does NOT contribute to collecting cash faster?

    <p>Neglecting customer communication</p> Signup and view all the answers

    What financial risk does an effective cash management system aim to mitigate?

    <p>Cash flow fluctuations</p> Signup and view all the answers

    What is the correct formula for calculating transaction costs?

    <p>Number of transactions x Cost per transaction</p> Signup and view all the answers

    What is the primary purpose of maintaining safety stock in inventory management?

    <p>To protect against stockouts</p> Signup and view all the answers

    Which formula would be used to calculate the total carrying costs of inventory?

    <p>Average inventory x Carrying cost per unit</p> Signup and view all the answers

    What is a characteristic of commercial paper as a source of short-term funds?

    <p>It often has a maturity of 270 days or less</p> Signup and view all the answers

    What is one of the main drawbacks of relying on short-term funds?

    <p>They can result in immediate repayment pressure</p> Signup and view all the answers

    When calculating the reorder point in inventory management, what does the 'Daily Usage' represent?

    <p>The average quantity of goods used each day</p> Signup and view all the answers

    Which of the following is NOT a source of short-term funds?

    <p>Equity financing</p> Signup and view all the answers

    What does the Effective Annual Rate (EAR) consider when estimating the cost of a loan?

    <p>Interest rate and any fees or charges</p> Signup and view all the answers

    The formula for calculating the total ordering cost includes which of the following components?

    <p>Number of orders during the period x Ordering cost per order</p> Signup and view all the answers

    What is the relationship between safety stock and reorder point?

    <p>Safety stock is added to the reorder point calculation</p> Signup and view all the answers

    Why might businesses prefer short-term funds over long-term funds?

    <p>They can be obtained quickly and offer flexibility</p> Signup and view all the answers

    What is the primary objective of effective receivables management?

    <p>To ensure timely collection of receivables and minimize bad debts</p> Signup and view all the answers

    Which of the following describes the purpose of an inventory control system?

    <p>To manage inventory through set policies and procedures</p> Signup and view all the answers

    What does the Economic Order Quantity (EOQ) model help determine?

    <p>The most economical order quantity for a product</p> Signup and view all the answers

    Which factor is NOT typically included in the carrying costs of inventory?

    <p>Cost of expediting orders</p> Signup and view all the answers

    What is a precautionary cash balance used for?

    <p>To act as a financial buffer against unforeseen events</p> Signup and view all the answers

    How can companies analyze the effectiveness of receivables management policies?

    <p>Through incremental analysis of costs and benefits</p> Signup and view all the answers

    Which of the following is a component of cash risk management?

    <p>Diversifying cash investments</p> Signup and view all the answers

    What does the term 'collection float' refer to?

    <p>The period funds remain in accounts receivable before collection</p> Signup and view all the answers

    What should a company's credit policy primarily take into account?

    <p>Customer creditworthiness and payment history</p> Signup and view all the answers

    Which strategy aids in optimizing cash disbursement?

    <p>Automating payments to streamline processes</p> Signup and view all the answers

    What is the formula to calculate the average balance of accounts receivable?

    <p>Average balance = Credit sales x Receivables days / 360</p> Signup and view all the answers

    What is the main purpose of offering early payment discounts?

    <p>To incentivize customers for quicker payments and improve cash flow</p> Signup and view all the answers

    Which of the following best describes stock-out costs?

    <p>Costs associated with running out of inventory</p> Signup and view all the answers

    Study Notes

    Cash and Marketable Securities Management

    • Cash conversion cycle (CCC) measures the time to convert inventory into cash.

      • Calculated as: Inventory Days + Receivables Days - Payables Days
      • Shorter CCC is better for increased liquidity and profitability.
      • Longer CCC increases need for external financing and financing costs.

    • Optimal cash balance (OCB) balances liquidity and profitability.

      • Determined by a trade-off between holding costs and transaction costs.
      • Calculated using the Baumol Model: Total Costs = Holding Costs + Transaction Costs.

    • Reasons for Holding Cash

      • Transaction motive: To cover daily operational expenses.
      • Precautionary motive: To buffer against unexpected events.
      • Speculative motive: To seize investment opportunities.
      • Contractual motive: To meet loan agreement requirements (compensating balances).

    Cash Management Strategies

    • Accelerating collections: Faster receipt of payments from customers.

      • Methods include: offering early payment discounts, using electronic payment systems, and implementing a lockbox system.

    • Slowing disbursements: Strategic management of outgoing payments.

      • Methods include: negotiating longer payment terms with suppliers, taking advantage of early payment discounts from suppliers, and optimizing payment cycles.

    • Reducing precautionary idle cash: Investing surplus cash in short-term, highly liquid instruments.

      • Examples include money market funds and short-term government bonds.

    Collection Float vs. Disbursement Float

    • Collection float (negative float): Time lag between selling on credit and receiving payment.
    • Disbursement float (positive float): Time between issuing a payment and the funds actually being withdrawn.

    Cash Management System (CMS)

    • Goal: Efficiently manage cash flow, marketable securities, and short-term financial activities.
    • Benefits: Improved liquidity, enhanced profitability, and reduced risk.
    • Key Components:
      • Cash forecasting
      • Cash budgeting
      • Cash collection
      • Cash disbursement
      • Cash investment
      • Cash risk management

    Receivables Management

    • Goal: Ensure timely collection of receivables and minimize bad debt risk.

    • Average Balance of and Investment in Accounts Receivable:

      • Calculated by: Average balance of AR = Credit sales x Receivables days/360 (or 365).
      • Investment in AR = Average balance of AR x Cost ratio.

    Strategic Policies for Effective Receivables Management

    • Credit Policy: Clear guidelines for extending credit.
    • Collection Policy: Structured approach for collecting outstanding invoices.
    • Discounts for Early Payment: Incentives to encourage faster payments.

    Inventory Management

    • Goal: Ensure the right amount of inventory is available at the right time, minimizing costs.
      • Focuses on minimizing: carrying costs, ordering costs, and stockout costs.

    Inventory Control System

    • Economic order quantity (EOQ) model: Determines the optimal order quantity.

      • Formula: EOQ = √(2QO/C)
        • EOQ = economic order quantity
        • Q = annual quantity used
        • O = cost per order
        • C = carrying cost per unit

    • Reorder point: The inventory level at which a new order should be placed.

      • Formula: Reorder point = (Daily Usage × Lead Time) + Safety Stock.
      • Safety stock is a buffer against fluctuating usage or delays in lead time.

    Sources of Short-Term Funds

    • Common sources:
      • Trade credit
      • Bank loans
      • Commercial paper
      • Receivable factoring
      • Credit lines

    Estimating Cost of Short-Term Funds

    • Annual cost of trade credit: Calculates the cost of forgoing the discount for early payment.

      • Formula: Annual Nominal Rate = (Discount % / (100% - Discount %)) x (360 / (Payment days - Discount days)).

    • Effective annual rate (EAR): The actual annual cost of a loan, including interest rates and fees.

      • Formula: EAR = (1 + (Interest Rate / Number of compounding periods))^Number of compounding periods - 1.

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    Description

    This quiz focuses on the management of cash and marketable securities, including key concepts such as the cash conversion cycle and the optimal cash balance. It explores the reasons for holding cash and various cash management strategies. Test your knowledge on enhancing liquidity and profitability.

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