Podcast
Questions and Answers
What is the primary goal of cash management?
What is the primary goal of cash management?
Which of the following is a reason for holding cash?
Which of the following is a reason for holding cash?
What is the Cash Budget used for?
What is the Cash Budget used for?
What does the Baumol Model balance?
What does the Baumol Model balance?
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What is the purpose of determining the target cash balance?
What is the purpose of determining the target cash balance?
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What is the precautionary motive for holding cash?
What is the precautionary motive for holding cash?
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What is the main goal of synchronizing cash inflows?
What is the main goal of synchronizing cash inflows?
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What is the definition of disbursement float?
What is the definition of disbursement float?
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What is an example of an interest-bearing security?
What is an example of an interest-bearing security?
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What is the primary function of a finance manager in accelerating cash collections?
What is the primary function of a finance manager in accelerating cash collections?
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What is a type of marketable security that is a short-term loan to commercial banks?
What is a type of marketable security that is a short-term loan to commercial banks?
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What is the main purpose of a Money Market Mutual Fund?
What is the main purpose of a Money Market Mutual Fund?
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Study Notes
Cash Management
- Cash management involves controlling cash receipts and payments to minimize non-earning cash balances.
- Reasons for holding cash include:
- Transaction facilitation (e.g., paying for supplies, payrolls, taxes, and interest on debts)
- Precautionary motive (due to unsynchronized cash inflows and outflows)
- Compliance with creditors' covenants (maintaining a certain percentage of borrowed funds in bank accounts)
- Investment opportunities (taking advantage of excess cash)
- Determining target cash balance involves:
- Cash budget
- Cash break-even chart
- Optimal cash balance using the Baumol Model or Miller-Orr Model
Cash Management Techniques
- Synchronizing cash inflows (coinciding with outflows to hold low transaction balances)
- Float:
- Defined as the difference between the balance shown in firm's books and the bank's record
- Types:
- Disbursement float (value of checks written but not yet deducted from firm's account balance)
- Collections float (amount of checks received but not yet credited to firm's account)
- Accelerating cash collections (speedy recovery from debtors through internal control)
- Controlling disbursement (slowing down disbursement of funds to reduce cash balance)
Marketable Securities Management
- Marketable securities are high-investment-grade instruments, including:
- Treasury bills
- Commercial paper
- Certificates of time deposits from commercial banks
- Money market notes
- Types of marketable securities:
- Money market instruments:
- Discount paper (sells for less than par value)
- Interest-bearing securities (pay interest based on par value and investment period)
- Treasury bills (short-term government securities with maturity of one year or less, issued at a discount)
- Other short-term commercial paper (issued by finance companies, banks, and corporations with maturities ranging from days to 270 days)
- Negotiable certificates of deposit (short-term loans to commercial banks with maturities from weeks to several years)
- Repurchase agreements (repos)
- Banker's acceptance (time draft drawn on and accepted by a bank)
- Money market mutual fund (open-ended fund that invests in money market instruments)
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Description
Understand the importance of cash management in business, including transaction facilitation and precautionary motives. Learn how to control cash receipts and payments to minimize non-earning cash balances.
