This chapter is about how firms manage cash. The basic objective in cash management is to keep the investment in cash as low as possible while still keeping the firm operating efficiently and effectively. This goal usually reduces to the dictum “Collect early and pay late”. Accordingly, this chapter forcus discuss ways of accelerating collections and managing disbursements. | Chapter Outline Chapter 19 Cash and Liquidity Management Chapter Organization Reasons for Holding Cash Determining the Target Cash Balance Understanding Float Investing Idle Cash Summary and Conclusions Appendix: Cash Management Models CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. Key Issues: Cash and Liquidity Management Key issues: What is the tradeoff between carrying a large versus a small cash balance? What is the proper management of the cash balance? How does cash management differ from liquidity management? Preliminaries: understanding float Identifying the opportunity cost of float Decreasing the collection float Increasing disbursement float Reasons for Holding Cash Speculative Motive - the need to hold cash to take advantage of additional investment opportunities, such as bargain purchases. Precautionary Motive - the need to hold cash as a safety margin to act as a financial reserve. Transaction Motive - the need to hold cash to satisfy normal disbursement and collection activities associated with a firm’s ongoing operations. Compensating Balance Requirements - cash balances kept at commercial banks to compensate for banking services the firm receives. Determining the Target Cash Balance Optimal choice of cash balance is a trade-off of Carrying costs: Opportunity costs of holding cash instead of some other income-producing asset. versus Shortage costs: Cost of not having cash available on-hand,or having to rapidly get the cash. Other factors influencing the target cash balance Ability to borrow rather than marketable securities Scale economies in cash management - large firm advantage. Determining the Target Cash Balance (Figure ) Understanding Float Preliminaries: what is float? The difference between book cash and bank cash, representing the net effect of checks in the process of clearing. Types of Float Disbursement float The . | Chapter Outline Chapter 19 Cash and Liquidity Management Chapter Organization Reasons for Holding Cash Determining the Target Cash Balance Understanding Float Investing Idle Cash Summary and Conclusions Appendix: Cash Management Models CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. Key Issues: Cash and Liquidity Management Key issues: What is the tradeoff between carrying a large versus a small cash balance? What is the proper management of the cash balance? How does cash management differ from liquidity management? Preliminaries: understanding float Identifying the opportunity cost of float Decreasing the collection float Increasing disbursement float Reasons for Holding Cash Speculative Motive - the need to hold cash to take advantage of additional investment opportunities, such as bargain purchases. Precautionary Motive - the need to hold cash as a safety margin to act as a financial .
