OPERATING CYCLE VS CASH CONVERSION CYCLE

CASH MANAGEMENT
Concentration Banking vs Lockbox System

In a lockbox system, customers' payments are physically collected close to them and much of the processing
takes place close to the bank, but in concentration banking both physical collection and processing take
place close to the bank.
MONEY MARKET INSTRUMENTS

A banker's acceptance is an instrument representing a promised future payment by a bank. The payment is
accepted and guaranteed by the bank as a time draft to be drawn on a deposit. The draft specifies the amount
of funds, the date of the payment (or maturity), and the entity to which the payment is owed.
https://en.wikipedia.org › wiki › Banker's_acceptance

How It Works. Banker's acceptances are time drafts that a business can order from the bank if it wants
additional security against counterparty risk. The financial institution promises to pay the exporting firm a
specific amount on a specific date, at which time it recoups its money by debiting the importer's account.
https://www.investopedia.com › investing › bankers-acceptance-101

Treasury Bills (or T-Bills for short) are a short-term financial instrument. The issuing company creates these
instruments for the express purpose of raising funds to further finance business activities and expansion. When
an investor buys aTreasury Bill, they are lending money to the government.

CERTIFICATE OF DEPOSITS
COMMERCIAL PAPER

REPURCHASE AGREEMENTS

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the
case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them
back the following day at a slightly higher price.

A repurchase agreement (RP) is a short-term loan where both parties agree to the sale and
future repurchase of assets within a specified contract period. The seller sells a Treasury bill or other
government security with a promise to buy it back at a specific date and at a price that includes an interest
payment.
EURODOLLAR

The term eurodollar refers to U.S. dollar-denominated deposits at foreign banks or at the overseas branches of
American banks. Because they are held outside the United States, eurodollars are not subject to regulation by
the Federal Reserve Board, including reserve requirements.

Eurodollar, a United States dollar that has been deposited outside the United States, especially in Europe.
Foreign banks holding Eurodollars are obligated to pay in U.S. dollars when the deposits are withdrawn.
Dollars form the largest component of all currencies in which such deposits are held and which are generally
known as Eurocurrency. The name originated in the early 1960s when eastern European countries wishing to
hold dollar deposits outside the United States deposited them in European banks. Later the market involved
many non-European countries.

By accepting a Eurodollar deposit, a bank actually receives a balance with a United States bank. The receiving
bank is then able to make dollar loans to customers. Most such loans are used to finance trade, but many
central banks also operate in the market.

SELECTING SECURITIES FOR THE PORTFOLIO SEGMENTS

The Decision to invest cash in marketable securities involves not only the amount to invest but also the type of
security in which to invest. Our earlier partitioning of the firms marketable securities portfolio into three
segments helps us in making these determinations. An evaluation of the firms expected future cash-flow
patterns and the degree of uncertainty associated with them is needed to help determine the size of the
securities balances to be found in each segment.

For securities comprising the ready cash segment (R$), safety and an ability to convert quickly into- cash are
primary concerns. Because they are both the safest and most marketable of all money market instruments,
Treasury bills make an ideal choice to met the unexpected needs for ready cash. Short-term, high-quality
repos and certain highly liquid, short-term municipals can also play a role. If, for example, overnight repos are
secured by Treasury securities and continually rolled over (reinvested into other repos), funds can remain
invested while providing continuing liquidity and safety of principle.
The second segment of the securities portfolio, the controllable cash segment (CS), holds securities
earmarked for meeting controllable (knowable) outflows, such as payroll, payables, taxes, and dividends. Here
the presumption is that the required conversion date to cash is known (or, at least, can be forecast to fall within
very narrow limits). Thus, securities in this segment would not necessarily have to meet the same strict
requirement for immediate marketability as those in the ready cash segment.

The portfolio manager may attempt to choose securities whose maturities more accurately coincide with
particular known cash needs — like a quarterly dividend payment or a large bill due on the 15th of the month.
For this segment, federal agency issues, CDs, commercial paper, repos, bankers acceptances, euro-dollar
deposits, and MMPs would warrant consideration. Also, though safety and marketability would still be
important i0ssues of concern, the portfolio manager would place more emphasis on the yield o-f the securities
in this segment than would be placed on securities in the ready cash segment.

Finally for securities forming the free cash segment (FS) of its securities portfolio the date of needed
conversion into cash is not known in advance just like for the ready cash segment but there is no overriding
need for quick conversion. The portfolio manager may feel that yield is the most important characteristics of
securities to be considered for this segment.
Higher yields can generally be achieved by investing in longer term, less marketable securities with greater
securities with greater default risk. Although the firm should always be concerned with marketability, some
possibility of loss of principal is tolerable, provided the expected return is high enough. Thus, in this segment
(as in the other two), the firm faces the familiar trade-off between risk and return.

NET FLOAT

Sum of disbursement float and collection float. http://www.finance-lib.com/financial-term-net-float.html

Net float is the combination of the mail float, processing float, and availability float, and so represents the full
duration of all types of check payment float. The net float is important when a business makes payments and
receives payments primarily with checks. It is not an issue when electronic payments are used.

The aggregate amount of net float in a bank account related to both outgoing and incoming cash flows can be
calculated by subtracting paid funds not yet deducted from the account from funds deposited but not yet
cleared.
https://www.accountingtools.com/articles/2017/5/12/net-float
In banking and finance, the term float refers to the temporary inaccuracy of a bank balance in an account that
occurs due to the period between when a check is deposited and when the issuing bank acknowledges that
deposit. During this latent period, both banks claim ownership of the funds. A given bank account may have
disbursement float, spent money that the bank has not yet removed from the account, and collections float,
deposited money that the bank has not yet cleared into the account. The net float is the sum of the two kinds of
float in an account. An account holder can calculate an accurate bank balance by adding the net float from the
previous account balance.

For example, Joe’s Hot Dog Stand has a previous account balance of $10,000 U.S. Dollars (USD).
Joe has written three checks, totaling $2,000 USD, which have not cleared the bank. He has
deposited some checks, totaling $3,000 USD, which have not cleared into his account. The net float
for the account is calculated by subtracting the disbursement float, the $2,000 USD, from the $3,000
USD collections float, yielding a net float of $1,000 USD. Joe’s Hot Dog Stand has a current account
balance of $11,000 USD, the sum of the net float and the previous balance.

Before electronic banking and debit cards, a few bank customers would illegally engage in check kiting, a
practice that capitalizes on float time. A customer would write a check for more money than his account
contained. Just before the check would clear, resulting in an overdrawn account, the customer would deposit a
check from another account into the overdrawn account, again with nonexistent funds, or make a real deposit
into the account. If convicted, a bank account holder who has kited checks can be fined up to $1 million USD
and sentenced to up to 30 years in prison. The Check Clearing for the 21st Century Act, enacted in October
2004, sped up the processing of checks between banks, increasing the likelihood of bounced checks if funds
are not immediately available to cover the check.

Although banks may receive funds electronically soon after a deposit is made, the funds are not available for
use by the account holder until the next day. This money, called negative float, may be invested by the bank
overnight to generate revenue for the bank. Although the Check Clearing for the 21st Century Act sped up the
processing of checks, it did not speed up the process of the bank making the deposited funds available.

WHAT IS A COMPENSATING BALANCE?

A compensating balance is a minimum balance that must be maintained in a bank account, used to offset the
cost incurred by a bank to set up a loan.

The compensating balance is not available for company use, and may need to be disclosed in the borrower’s
notes to the financial statements. The bank is free to loan the compensating balance to other borrowers and
profit from differences between interest rates.

How Compensating Balances Work

Compensating balances can be held by individuals, but is most common with corporate loans. When a
borrower agrees to hold a compensating balance, it promises a lender to maintain a minimum balance in an
account.

The compensating balance required by a lender is usually a percentage of the loan balance. The funds are
generally held in a deposit account such as a checking or savings account, a certificate of deposit (CD), or
another holding account.

By requiring money to be deposited to offset some of the costs of a loan, the bank is able to extend other loans
and pursue other investment opportunities, while the business is charged a lower interest rate on a loan. This
also increases the cost of capital for the borrower. That's because the borrower doesn't have access to the full
amount of the loan, but is still charged interest on the entire balance.

There may be different reasons why a lender requires a borrower to hold a compensating balance before
issuing a loan. A consumer may have a low or poor credit rating or a company may be in financial duress.
Either way, a compensating balance cuts down on the risk to the lender, and also provides surety that some of
the funds may be recovered in case the borrower defaults on the loan.

E-COMMERCE

E-commerce (electronic commerce) is the buying and selling of goods and services, or the transmitting of
funds or data, over an electronic network, primarily the internet. These business transactions occur either as
business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer or consumer-to-business.
ELECTRONIC DATA INTERCHANGE (EDI)

Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized
format; a process which allows one company to send information to another company electronically rather than
with paper. Business entities conducting business electronically are called trading partners.
ELECTRONIC FUND TRANSFER

Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly to another
without any paper money changing hands. It is used for both credit transfers, such as payroll payments, and
for debit transfers, such as mortgage payments.
WHAT IS FINANCIAL EDI?

Electronic data interchange involves the electronic transfer of information in a standardized, machine-readable
format. Similarly, financial EDI is the electronic transfer of payments, payment-related information, or other
financial documents in a standardized, machine-readable format.
This service facilitates payments from business to business. The payment is pre-validated prior to delivery to
the respective financial institutions of your payments beneficiaries. The payment most often is delivered for
processing on the same day except when dealing with non-standard banks.

OUTSOURCING

BUSINESS PROCES OUTSOURCING

Business process outsourcing (BPO) is the practice of contracting a specific work process or processes to an
external service provider. ... Front-office services pertain to the contracting company's customers, such as
marketing and tech support. BPOs can combine these services so that they work together, not independently.
MINDANAO STATE UNIVERSITY
GRADUATE SCHOOL
General Santos City

Financial Management
Prepared by: MGA
March 16, 2020