Chapter_13

Chapter_13 - CASH MANAGEMENT AND MONEY MARKET SECURITIES...

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CASH MANAGEMENT CASH MANAGEMENT AND AND MONEY MARKET SECURITIES MONEY MARKET SECURITIES
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CASH MANAGEMENT CASH MANAGEMENT Why should a firm worry about having             too much cash too much cash ? ? Because cash is about the most  unproductive asset  unproductive asset  of all!
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CASH MANAGEMENT CASH MANAGEMENT How much cash should a firm keep in its  CHECKING (Cash) ACCOUNT  ? First divide your checks into two categories: Random - A/R’s, A/P’s, Cash Sales Controllable - Payroll, taxes, capital exp.'s. Using the  random  items only, construct a  histogram of the  daily change  in the CASH  ACCOUNT. (Do this as far back in time as it is  indicative of the future.) Thus:
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CASH MANAGEMENT CASH MANAGEMENT 0 - + Daily  Change  in the Cash Balance Random Variables Only $’s No. of Days
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CASH MANAGEMENT CASH MANAGEMENT Next, ask the question “ What chance are you willing to  take of running out of cash ?” The answer to this  question is a function of : Relationship with the bank, and Aversion to running out of cash. If you pick, say, 2%  - one day in 50 -, then find the cash  balance in the  negative  tail of the histogram that  corresponds to 2% of the observations. Thus:
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CASH MANAGEMENT Daily  Change  in the Cash Balance Random   Variables Only 0 - + d m $’s Where   d m    equals “Daily Opening Cash Balance” 2% No. of 
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Chapter_13 - CASH MANAGEMENT AND MONEY MARKET SECURITIES...

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