Cash Management Flashcards
(28 cards)
Why should businesses hold cash?
Transactions motive
Precautionary motive
Investment/speculative motive
What is transactions motive?
Cash required to meet day to day expenses.
What is precautionary motive?
Cash held to cushion against unplanned expenditure
What is investment/speculative motive?
Cash kept available to take advantage of market investment opportunities. (e.g. buy a rival)
What factors to consider when looking at dealing with a cash surplus?
Size of surplus
Available options
Maturity
Return
Risk
Liquidity
What is meant by size of surplus?
Determine how much cash surplus is expected. Can be done by preparing a detailed cash forecast.
What is meant by available options?
Cash can be invested into a range of short term interest earning investments, such as interest bearing bank accounts, negotiable instruments, short dated government bonds, corporate bonds or commercial paper.
What is meant by maturity?
A short term investment might involve investing an amount of money for a specific time and receiving the interest and the payment of a certain amount at a future date.
What is meant by return?
Return or yield on investment.
What is meant by risk?
Some investments are riskier than others. A possibility that the investment might fall in value.
What is meant by liquidity?
The ease with which an investment can be ‘cashed in’ quickly without any significant loss of value or interest.
What is diversification?
A rule where investors should not put all their eggs in one basket, therefore Halfpenny should be mindful of this and maybe invest in a range of different investments.
What is a certificate of deposit?
A negotiable instrument that provides evidence of a short term deposit with a bank for fixed term and earning a specific amount of interest.
What is normally the maturity of a certificate of deposit?
Usually 90 days or less (could be longer)
What is usually the minimum amount of a certificate of deposit?
At least 100k, usually larger.
Is a certificate of deposit high risk?
No, usually a very low risk investment, fixed term bank deposit accounts with a specified interest rate.
Can you negotiate and trade a certificate of deposit?
Yes, which makes it more appealing if the cash was needed earlier.
What is a money market deposit?
An amount deposited through a bank in the money markets.
Are money markets high risk?
No, low risk like CDs. Administered through banks.
Are money markets popular?
Yes, the interest yields in the inter-bank are reasonably attractive and is common for large entities with spare cash surplus to arrange their bank to have the money deposited into the money markets.
When can you withdraw your money market cash?
Cannot be withdrawn until the deposit matures. Money should not be invested for a period longer than the investors expected cash surplus.
How long can you deposit to the money market for?
Can be for a very short period of time, as little as one day up to several months (even up to a year)
Note - very short term amounts must be of high value for the interest to justify the fees and effort.
Is a money market good for Halfpenny
Could argue no as it may not make the deposit worthwhile. Also if the worst was to happen, we need to release the cash immediately.
What does a factor with recourse mean?
Halfpenny to bear the loss of any irrecoverable debt and would have to reimburse the factor
