Escolar Documentos
Profissional Documentos
Cultura Documentos
Finance
Cash Management
Chapter Outline
27.1 Reasons for Holding Cash
27.2 Understanding Float
27.3 Cash Collection and
Concentration
27.4 Managing Cash Disbursements
27.5 Investing Idle Cash
Understanding Float
Float difference between cash balance recorded in the
cash account and the cash balance recorded at the
bank
Disbursement float
Generated when a firm writes checks
Available balance at bank book balance > 0
Collection float
Checks received increase book balance before the bank
credits the account
Available balance at bank book balance < 0
Cash Collection
Payment
Mailed
Payment
Received
Mailing Time
Payment
Deposited
Processing Delay
Cash
Available
Availability Delay
Collection Delay
Cash Collection
mailing time is an important component in
disbursement float
when collection float is calculated, mailing
time should not be considered
availability delay can be a matter of
negotiation between the bank and a
customer
Example
Instead of eliminating the float,
suppose Lambo can reduce it to one
day. What is the maximum Lambo
should be willing to pay for this?
Example
A large bank is willing to provide the
float reduction service for $175 per
year, payable at the end of each
year. The relevant discount rate is 8
percent. Should Lambo hire the
bank? What is the NPV of the
investment? How do you interpret
this discount rate? What is the most
per year that Lambo should be
willing to pay?
Costs
Daily cost = .1(15,000) + 3*10 = 1,530
Present value of daily cost = 1,530/.0001 =
15,300,000
Cash Disbursements
Slowing down payments can increase
disbursement float but it may not be
ethical or optimal to do this
Controlling disbursements
Zero-balance account
Controlled disbursement account
Investing Cash
Money market financial instruments with
an original maturity of one year or less
Temporary Cash Surpluses
Seasonal or cyclical activities buy
marketable securities with seasonal
surpluses, convert securities back to cash
when deficits occur
Planned or possible expenditures
accumulate marketable securities in
anticipation of upcoming expenses
the cash for a plant construction program,
dividend payment, or other large expenditure
Figure 27.6
Characteristics of Short-Term
Securities
Maturity firms often limit the maturity of shortterm investments to 90 days to avoid loss of
principal due to changing interest rates
Default risk avoid investing in marketable
securities with significant default risk
Marketability ease of converting to cash
Taxability consider different tax characteristics
when making a decision
Quick Quiz
What are the major reasons for holding
cash?
What is the difference between
disbursement float and collection float?
How does a lockbox system work?
What are the major characteristics of
short-term securities?