imchap17 - 17-1 CHAPTER 17 Cash and Marketable Securities...

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Unformatted text preview: 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. 17-2 1. The transactionsmotive2. The precautionarymotive3. The speculativemotiveII. 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 17-3 A. Cash acceleration and deceleration techniques revolve around the concept of float. 1. Mailfloat2. Processingfloat3. Transitfloat4. DisbursingfloatB. 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 bothmail 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-authorizedchecks(PACs) also speed up the conversion of receipts into working cash....
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imchap17 - 17-1 CHAPTER 17 Cash and Marketable Securities...

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