imchap17 - CHAPTER 17 Cash and Marketable Securities...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
17-1 CHAPTER 17 Cash and Marketable Securities Management CHAPTER ORIENTATION This chapter initiates our study of cash management, focusing on the cash flow process and the reasons why a firm holds cash balances. Cash management systems are explored, as is the topic of investing excess cash in marketable securities. CHAPTER OUTLINE I. Why a company holds cash A. Sound cash management techniques are based on a thorough understanding of the cash flow process. 1. Cash holdings are increased from several external sources on an irregular basis. 2. Irregular cash outflows reduce the firm's cash balance. 3. Other major sources of cash arising from internal operations occur on a rather regular basis, i.e., accounts receivable collections. B. Three motives for holding cash balances have been identified by Keynes.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
17-2 1. The transactions motive 2. The precautionary motive 3. The speculative motive II. Cash management objectives and decisions A. The risk return trade off 1. Strike an acceptable balance between holding too much cash and holding too little cash. 2. A large cash investment minimizes insolvency, but penalizes profitability. 3. A small cash investment frees excess balances for investment in more profitable assets, which increase profitability. B. The objectives 1. On-hand cash must be sufficient to meet disbursal needs. 2. Idle cash balances must be reduced to a minimum. C. The decisions 1. How to speed up cash collections and slow down cash outflows? 2. What should be the composition of the marketable securities portfolio? 3. How should the investment in liquid assets be split between actual cash holdings and marketable securities? D. Perspective on collection and disbursement procedures III. Collection and disbursement procedures
Image of page 2
17-3 A. Cash acceleration and deceleration techniques revolve around the concept of float . 1. Mail float 2. Processing float 3. Transit float 4. Disbursing float B. Float reduction can result in (l) usable funds that are released for company use and (2) increased returns produced on these freed-up balances. C. Several techniques are available to improve the management of the firm's cash inflows and may also provide for a reduction in float. 1. The lock-box arrangement expedites cash gathering. a. The objective is to reduce both mail and processing float. b. The procedure includes rental of a local post office box and authorization of a local bank in which a demand deposit account (DDA) is maintained to pick up remittances from the box. c. The arrangement provides for (l) increased working cash, (2) elimination of clerical functions, and (3) early knowledge of dishonored checks. d. Added costs must be evaluated. 2. Pre-authorized checks (PACs) also speed up the conversion of receipts into working cash. a. The objective is to reduce mail and processing float.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern