Cash and Marketable Securities Management

Liquid Asset Management

CASH- motives for holding cash:

• Transactions: to meet cash needs

that arise from doing business.
• Precautionary: having cash on hand
for unexpected needs.
• Speculative: to take advantage of
potential profit-making situations.
 Liquid Asset Management
Cash

• Trade Off: cash decreases risk of

insolvency, but earns no returns!
 Cash Management

Managing Cash Inflow

• Lockbox System

Instead of mailing checks to the firm, customers mail

checks to a nearby P.O. Box.

A commercial bank collects and deposits the checks.

This reduces mail float, processing float and transit float.

 Cash Management

Managing Cash Inflow

• Preauthorized Checks (PACs)

Arrangement that allows firms to create checks to collect

payments directly from customer accounts .

This reduces mail float and processing float.

 Cash Management

Managing Cash Inflow

Depository Transfer Checks (DTCs)

Moves cash from local banks to concentration

bank accounts.

Firms avoid having idle cash in multiple banks in

different regions of the country.
 Cash Management

Managing Cash Inflow

• Wire Transfers

Moves cash quickly between banks.

Eliminates transit float.
 Cash Management

Managing Cash Outflow

• Zero Balance Accounts (ZBAs)

Different divisions of a firm may write checks from

their own ZBA.

Division accounts then have negative balances.

Cash is transferred daily from the firm’s master

account to restore the zero balance.

Allows more control over cash outflows .

 Cash Management

Managing Cash Outflow

• Payable-Through Drafts (PTDs)

Allows the firm to examine checks written

by the firm’s regional units.
Checks are passed on to the firm, which can
stop payment if necessary.
 Cash Management

Managing Cash Outflow

Remote Disbursing

Firm writes checks on a bank in a distant town.

This extends disbursing float.
 Marketable Securities

Considerations

• Financial Risk - uncertainty of expected returns due to changes in

issuer’s ability to pay.

• Interest rate risk - uncertainty of expected returns due to changes

in interest rates.
 Marketable Securities

Considerations

• Liquidity - ability to transform securities into

cash.

• Taxability - Taxability of interest income and

capital gains.

• Yield - Influenced by the previous 4

considerations.
 Marketable Securities

Types

• Treasury Bills - short term securities issued by

the government.
 Marketable Securities

Types
• Bankers’ Acceptances - short term securities used in
international trade. Sold on discount basis.

• Negotiable CDs - short-term securities issued by banks,

with typical deposits
 Marketable Securities

Types

• Commercial Paper - short-term unsecured “IOUs” sold

by large reputable firms to raise cash.
• Repurchase Agreements - an investor acquires short-
term securities subject to a commitment from a bank to
repurchase the securities on a specific date.
 Marketable Securities
Types

• Money Market Mutual Funds - a pool of money

market securities, divided into shares, which
are sold to investors.
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