Bài giảng Financial Management - Chapter 9: Cash and Marketable Securities Management

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. Describe the three segments of the marketable securities portfolio and note which securities are most appropriate for each segment and why.

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Chapter 9Cash and Marketable Securities ManagementList 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 disbursementsIdentify 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. Describe the three segments of the marketable securities portfolio and note which securities are most appropriate for each segment and why. After Studying Chapter 9, you should be able to:Motives for Holding CashSpeeding Up Cash ReceiptsS-l-o-w-i-n-g D-o-w-n Cash PayoutsElectronic CommerceCash and Marketable Securities ManagementOutsourcingCash Balances to MaintainInvestment in Marketable SecuritiesCash and Marketable Securities ManagementTransactions Motive – to meet payments arising in the ordinary course of businessSpeculative Motive – to take advantage of temporary opportunitiesPrecautionary Motive – to maintain a cushion or buffer to meet unexpected cash needsMotives for Holding CashCollectionsDisbursementsMarketable securitiesinvestmentControl through information reporting= Funds Flow= Information FlowCash Management SystemExpedite preparing and mailing the invoiceAccelerate the mailing of payments from customersReduce the time during which payments received by the firm remain uncollectedCollectionsSpeeding Up Cash ReceiptsCollection Float: Total time between the mailingof the check by the customer and the availabilityof cash to the receiving firm.ProcessingFloatAvailabilityFloatMailFloatDeposit FloatCollection FloatMail Float: Time the check is in the mail.Customer mails checkFirmreceives checkMail FloatProcessing Float: Time it takes a companyto process the check internally.Firmdeposits checkFirmreceives checkProcessing FloatAvailability Float: Time consumed in clearingthe check through the banking system.Firmdeposits checkFirm’s bankaccount creditedAvailability FloatDeposit Float: Time during which the check received by the firm remains uncollected funds.Processing FloatAvailability FloatDeposit FloatAccelerate preparation and mailing of invoicescomputerized billinginvoices included with shipmentinvoices are faxedadvance payment requestspreauthorized debitsEarlier BillingPreauthorized debit The transfer of funds from a payor’s bank account on a specified date to the payee’s bank account; the transfer is initiated by the payee with the payor’s advance authorization.Preauthorized PaymentsTraditional LockboxA post office box maintained by a firm’s bank that is used as a receiving point for customer remittances.Electronic LockboxA collection service provided by a firm’s bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.Lockbox SystemsCustomers are instructed to mail their remittances to the lockbox location.Bank picks up remittances several times daily from the lockbox.Bank deposits remittances in the customers account and provides a deposit slip with a list of payments.Company receives the list and any additional mailed items.* Based on the traditional lockbox systemLockbox Process*DisadvantageCost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances.AdvantageReceive remittances sooner which reduces processing float.Lockbox SystemCompensating BalanceDemand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans.Cash ConcentrationThe movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank.Concentration BankingReduces availability float associated with check clearing.Accounts Receivable ConversionA process by which paper checks are converted into ACH debits at lockboxes or other collection sites.So what is the Benefit of ARCs?Collections ImprovementsCheck Clearing for the 21st Century Act“Check 21”: US, Federal law that facilitates electronic check exchange by enabling banks to exchange check image files electronically and, where necessary, to create legally equivalent paper “substitute checks” from images for presentment to banks that have not agreed to accept checks electronically. Collections ImprovementsCheck 21Driven by September 11, 2001 attacksMeant to foster innovation and encourage the move from paper checks to electronic payment processing to create cost and time benefits for financial institutionsRequires banks to accept substitute checks (a paper copy of an electronic image of both sides of the original check) as the legal equivalent of the original paper checkCleared the legal path to allow ‘remote deposit capture’Collections ImprovementsImproves control over inflows and outflows of corporate cash.Reduces idle cash balances to a minimum.Allows for more effective investments by pooling excess cash balances.Moving cash balances to a central location:Concentration BankingDefinition: A non-negotiable check payable to a single company account at a concentration bank.Funds are not immediately available upon receipt of the DTC.(1) Depository Transfer Check (DTC)Concentration Services for Transferring FundsDefinition: An electronic version of the depository transfer check (DTC). (1) Electronic check image version of the DTC. (2) Cost is not significant and is replacing DTC.(2) Automated Clearinghouse (ACH) Electronic TransferConcentration Services for Transferring FundsDefinition: A generic term for electronic funds transfer using a two-way communications system, like Fedwire.Funds are available upon receipt of the wire transfer. Much more expensive.(3) Wire TransferConcentration Services for Transferring Funds “Playing the Float” Control of DisbursementsPayable through Draft (PTD)Payroll and Dividend DisbursementsZero Balance Account (ZBA)Remote and Controlled DisbursingS-l-o-w-i-n-g D-o-w-n Cash PayoutsYou write a check today, which is subtracted from your calculation of the account balance. The check has not cleared, which creates float. You can potentially earn interest on money that you have “spent.”Net Float -- The dollar difference between the balance shown in a firm’s (or individual’s) checkbook balance and the balance on the bank’s books. “Playing the Float”Solution:Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process.Firms should be able to:1. shift funds quickly to banks from which disbursements are made.2. generate daily detailed information on balances, receipts, and disbursements.Control of DisbursementsDelays the time to have funds on deposit to cover the draft.Some suppliers prefer checks.Banks will impose a higher service charge due to the additional handling involved.Payable Through Draft (PTD):A check-like instrument that is drawn against the payor and not against a bank as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment.Methods of Managing DisbursementsMany times a separate account is set up to handle each of these types of disbursements.A distribution schedule is projected based on past experiences. [See the next slide]Funds are deposited based on expected needs.Minimizes excessive cash balances.Payroll and Dividend DisbursementsThe firm attempts to determine when payroll and dividend checks will be presented for collection.Methods of Managing DisbursementsF M T W H F M and after(Payday)Percent ofPayroll Collected100%75%50%25%0%The firm may plan onpayroll checks beingpresented in a similarpattern every pay period.Percentage of Payroll Checks Collected Eliminates the need to accurately estimate each disbursement account. Only need to forecast overall cash needs.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.Methods of Managing DisbursementsExample: A Vermont business pays a Maine supplier with a check drawn on a bank in Montana.This may stress supplier relations, and raises ethical issues.Remote Disbursement – A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float. Remote and Controlled DisbursingLate check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis.Controlled Disbursement – A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day. Remote and Controlled DisbursingMessaging systems can be:1. Unstructured – utilize technologies such as faxes and e-mails 2. Structured – utilize technologies such as electronic data interchange (EDI).Electronic Commerce – The exchange of business information in an electronic (non-paper) format, including over the Internet. Electronic CommerceElectronic Data Interchange – The movement of business data electronically in a structured, computer-readable format. EDIElectronic Funds Transfer (EFT)Financial EDI (FEDI)Electronic Data Interchange (EDI)Electronic Funds Transfer (EFT) – the electronic movements of information between two depository institutions resulting in a value (money) transfer. EDISubsetElectronic Funds Transfer (EFT)Society of Worldwide Interbank Financial Telecommunications (SWIFT)Clearinghouse Interbank Payments System (CHIPS)Electronic Funds Transfer (EFT)EFT RegulationIn 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 situationsElectronic Funds Transfer (EFT)Financial EDI – The movement of financially related electronic information between a company and its bank or between banks. Financial EDI (FEDI)Examples include:Lockbox remittance informationBank balance informationEDISubsetFinancial EDI (FEDI)CostsComputer hardware and software expendituresIncreased training costs to implement and utilize an EDI systemAdditional expenses to convince suppliers and customers to use the electronic systemLoss of floatBenefitsInformation and payments move faster and with greater reliabilityImproved cash forecasting and cash managementCustomers receive faster and more reliable serviceReduction in mail, paper, and document storage costsCosts and Benefits of EDIReducing and controlling operating costs Improve company focus (close 2nd)Freeing resources for other purposes * The Outsourcing Institute, 2005Outsourcing – Subcontracting a certain business operation to an outside firm, instead of doing it “in-house.”Why might a firm outsource?* OutsourcingBusiness Process Outsourcing (BPO)A form of outsourcing in which the entire business process is handed over to a third-party service provider Entire function such as accounting might be handed over to the BPO Typically found in low labor cost countries Many are owned by large multinationalsOutsourcingThe 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.Cash Balances to MaintainNote regarding the management of marketable securities. Marketable Securities are shown on the balance sheet as “Short-term Investments”Investment in Marketable SecuritiesReady Cash Segment (R$)Optimal balance of marketable securities held to take care of probable deficiencies in the firm’s cash account.R$F$C$The Marketable Securities PortfolioControllable Cash Segment (C$)Marketable securities held for meeting controllable (knowable) outflows, such as taxes and dividends.R$F$C$The Marketable Securities PortfolioFree Cash Segment (F$)“Free” marketable securities (that is, available for as yet unassigned purposes).R$F$C$The Marketable Securities PortfolioMarketability (or Liquidity)The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession.SafetyRefers to the likelihood of getting back the same number of dollars you originally invested (principal).Variables in MarketableSecurities SelectionMaturityRefers to the remaining life of the security.Interest Rate (or Yield) RiskThe variability in the market price of a security caused by changes in interest rates.Variables in Marketable Securities SelectionTreasury 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.Money Market InstrumentsAll government securities and short-term corporate obligations. (Broadly defined)Common Money Market InstrumentsBEY = [ (1000 – 990) / (990) ] *[ 365 / 91 ]BEY = 4.05% T-Bills and Bond Equivalent Yield (BEY) Method:BEY = [ (FA – PP) / (PP) ] *[ 365 / DM ]FA: face amount of securityPP: purchase price of securityDM: days to maturity of securityA $1,000, 13-week T-bill is purchased for $990 – what is its BEY?EAY = (1 + [.0405/(365 / 91)])365/91 - 1EAY = 4.11% T-Bills and Equivalent Annual Yield (EAY) Method:EAY = (1 + [ BEY / (365 / DM) ] )365/DM - 1BEY: bond equivalent yield from the previous slideDM: days to maturity of securityCalculate the EAY of the $1,000, 13-week T-bill purchased for $990 described on the previous slide?Treasury Bonds: Long-term (more than 10 years’ original maturity) obligations of the US Treasury. Treasury Notes: Medium-term (2-10 years’ original maturity) obligations of the US Treasury.Common Money Market InstrumentsBankers’ Acceptances (BAs): Short-term promissory trade notes for which a bank (by having “accepted” them) promises to pay the holder the face amount at maturity.Repurchase Agreements (RPs; repos): Agreements to buy securities (usually Treasury bills) and resell them at a higher price at a later date.Common Money Market InstrumentsEuropean Commercial Paper: See above, except maturities extend to one year and more active secondary market.Commercial Paper: Short-term, unsecured promissory notes, generally issued by large corporations (unsecured IOUs). The largest dollar-volume instrument in US. Maturities don’t exceed 270 days to preclude SEC registration.Common Money Market InstrumentsFederal Agency Securities: Debt securities issued by federal agencies and government-sponsored enterprises (GSEs). Examples: FFCB, FNMA, and FHLMC.Negotiable Certificate of Deposit: A large-denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified period of time. Common Money Market InstrumentsMoney Market Preferred Stock: Preferred stock having a dividend rate that is reset at auction every 49 days.Eurodollars: A US dollar-denominated deposit – generally in a bank located outside the United States – not subject to US banking regulationsCommon Money Market InstrumentsReady Cash Segment (R$)Safety and ability to convert to cash is most important.Select US Treasuries for this segment.R$F$C$Selecting Securities for the Portfolio SegmentsControllable Cash Segment (C$)Marketability less important. Possibly match time needs.May select CDs, repos, BAs, euros for this segment.R$F$C$Selecting Securities for the Portfolio SegmentsFree Cash Segment (F$)Base choice on yield subject to risk-return trade-offs.Any money market instrument may be selected for this segment.R$F$C$Selecting Securities for the Portfolio Segments
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