Cash managementdetermining:

Optimal size of firms liquid asset balance

Appropriate types and amounts of
short-term investments
Most efficient methods of controlling
collection and disbursement of cash

Why maintain minimum cash balance?
Transactions demand: need money to pay bills
(employees, suppliers, utility/phone, etc.)

Precautionary demand: to handle emergencies
(unforeseen expenses)

Speculative demand: to take advantage of
unexpected opportunities (purchase of raw
materials that are on sale)

Cash doesnt earn a return
Want to maintain liquidity
Take cash discounts
Maintain firms credit rating
Minimize interest costs
Avoid insolvency
Good cash management implies maintaining
adequate liquidity with minimum cash in bank
Can place portion of cash balance into marketable
securities (AKA: near cash or cash equivalents
Transactional
Speculative
Precautionary
Both speculative
and
precautionary
are permanent in
nature
In the event of a cash deficiency, the
companys treasurer should activate
various financing line like accelerated
collections, disposal of nonperforming
assets, seek financing through credit and
additional investment by the
stockholders. Factoring of receivables,
discounting of notes and inventory float
can be used to generate cash.
In the event that the company will have
an excess, the treasurer will decide
whether the excess is permanent or
temporary.
Permanent cash excesses can be
investment into long-term, high yielding
investments while temporary cash excess
cash be put into cash equivalents or
short term money market placements.
Cash inflows and outflows should be
synchronized to effect a harmonious
cash position and excellent cash
management.
The attitude of management towards an
efficient operating cash flows is to speed
up collection an maximize timing of cash
payments.
Techniques applied in speeding
collections from customers
High standards on credit approval
Shorter trade discount and credit
period
Effective and efficient billing system
Cost effective collection system
Frequency of collection follow-up
Visibility of collection period
Use of specialized postal
system/LOCKBOX
Electronic fund transfer
Concentration banking
Automatic debit/credit
Depository check
The use of FLOAT
Use of Check and Voucher System
Payroll system
Mail Float
delay between when check is sent to a payee
and is received by payee

Processing Float
time between receipt of payment by a payee
and the deposit of the payment in the payees
account

Clearing Float
time between depositing a check and having
available spendable funds

When you pay a bill,
You write check and mail to payee (2-3 days
of mail float)
Payee receives check and performs internal
processing (1 day of processing float)
Payee deposits check in its own bank (1 day
of processing float)
Payees bank sends check into interbank
clearing system which processes check (3
days of clearing float)
Excess cash can be invested in
marketable securities/short-term
investments
Can be easily converted to cash
Earn higher interest
Minimize transaction cost rather than
issue securities or borrowing
Ready cash to take advantage of
bargain purchases and growth