For Midterm 2 Flashcards
(47 cards)
This involves the maintenance of the appropriate level of cash and investment in marketable securities to meet the firm’s cash requirements and to maximize income on idle funds.
Cash and Marketable Securities
are subject to significant control risk
Liquid Assets
are the primary concerns of the treasurer when dealing with highly liquid assets
Liquidity and Safety
are held because of their ability to facilitate routine operations of the company.
Cash and short-term Investments
These assets are not held for purposes of achieving investment returns.
Cash and Short-term Investments
The following are reasons why the Company would need to hold cash :
Transaction Purpose
Compensating Balance Requirements
Precautionary Reserves
Potential Investment Opportunities
Speculation
cash balances needed to conduct the ordinary business transactions
Transaction Purpose
the amount left in the checking balance to be maintained at all times as part of a loan agreement.
Compensating Balance requirements
This amount compensates the bank for services
rendered by providing it with deposits of funds.
Compensating Balance requirements
these are used to handle unexpected problems and contingencies due to the uncertain pattern of cash
inflows and outflows.
Precautionary reserves
used to build up in anticipation of a future investment opportunity such as a major capital expenditure project.
Potential investment opportunities
to a practice of delaying purchases and store up cash for use later to take advantage of possible changes in prices of exchange rates.
Speculation-
the difference between the bank’s balance for a firm’s account and the balance that the firm shows on its own books
Bank statement vs book balance
two aspects of float
1.the time it takes a company to process its checks internally
2.The time consumed in clearing the check through banking system
Types of float
- Positive Float
- Negative Float
- Mail float
- Processing Float
Clearing Float
occurs when the bank balance exceeds the book balance
Positive Float
occurs when the book balance exceeds the bank balance. It shows that there is more cash tied up in the collection cycle
Negative Float
occurs when the payment has already been mailed by a customer but not yet received by the Company.
Mail Float
occurs when customers’ payments have been received but not yet deposited.
Processing Float
occurs when customers’ checks have been deposited but not yet cleared.
Clearing Float
Cash Management Strategies
- Accelerate Cash collections
- Control or slow down cash disbursement
3.Reduce the need for precautionary cash balance
o Bill customers promptly o Offer cash discounts for prompt payment
o Use of lockbox system
o Establish local collection office
o Ask customers to make direct payments to the firm’s depository bank
o Use of automatic fund transfer or electronic fund transfer
Accelerate cash collections
● Stretch payables
● Maintain zero-balance accounts (ZBA)
● Play the float
● Less frequent payroll and schedule issuance of checks to suppliers.
Control or slow down Cash Disbursement
● More accurate cash budgeting
● Have ready lines of credit
● Invest idle cash in highly liquid, short-term investments instead of holding idle precautionary cash balances.
Reduce the need for pre cautionary cash balance
