Cash and Marketable Securities Management

 

Motives for Holding Cash 

Economist John Maynard Keynes identified three main reasons why individuals and companies hold cash:

1. Transactions Motive – Companies need cash to make routine payments such as wages, supplier payments, taxes, and dividends.
2. Speculative Motive – Businesses may hold extra cash to take advantage of unexpected opportunities, like purchasing raw materials at a discounted price.
3. Precautionary Motive – Companies keep cash as a safety net for unexpected expenses or economic downturns. The more predictable a company’s cash flow, the less cash it needs for emergencies.

How Firms Manage Cash

While companies do hold cash, they often invest excess cash in marketable securities (short-term, low-risk investments) or maintain borrowing capacity (like a credit line from a bank) to meet financial needs.

Role of Cash Management

Cash management ensures that a company has enough cash to cover expenses while also making the best use of excess funds. The treasurer’s department is responsible for:

• Efficient cash collection and disbursement.
• Temporary investment of surplus cash.
• Monitoring daily cash balances and major transactions.

A cash budget is essential for forecasting and controlling cash flows, helping businesses determine how much cash they will have and when. Large companies often use computerized systems to track cash balances, investments, and upcoming financial obligations.

Goal of Cash Management: Ensure safe and efficient access to cash while earning reasonable returns on temporary investments.

Speeding Up Cash Receipts

Efficient cash management involves accelerating cash inflows while delaying outflows to optimize liquidity. Companies employ various techniques to speed up the collection of accounts receivable while delaying payments to suppliers to maximize available cash.

Key Strategies for Speeding Up Cash Receipts:

1. Reducing Collection Float: Collection float includes mail float (time for a check to reach the firm) and deposit float (time taken to process and clear the check). Minimizing this float enhances cash flow.
2. Earlier Billing: Sending invoices promptly—via electronic billing, fax, or preauthorized debit agreements—can accelerate payments.
3. Lockbox Systems: Companies use banks to collect payments from post office boxes multiple times a day, reducing processing float and ensuring faster deposits.
4. Electronic Payments: The use of electronic lockboxes, automated clearing houses (ACH), and digital check processing improves collection efficiency.

Modern Collection Innovations:

• 1️⃣ Accounts Receivable Conversion (ARC)

  Imagine a business receives a check from a customer. Instead of physically taking it to the bank, the company converts the check into an electronic payment (ACH debit). This means the payment is processed digitally, making it faster and more efficient than handling paper checks.

  2️⃣ Check 21 Act

  Before this law, checks had to physically travel from bank to bank for processing. Check 21 allows banks to use digital images of checks instead of the actual paper checks, reducing delays and speeding up check clearing.

  3️⃣ Remote Deposit Capture (RDC)

  Think of RDC as mobile check deposit for businesses. Companies can scan a check using a scanner or smartphone and send the digital copy to the bank, instead of going to the bank in person. This saves time and speeds up fund availability.

  In short:
  📌 ARC – Converts paper checks into digital payments 💻
  📌 Check 21 – Replaces physical check transportation with digital images 📷
  📌 RDC – Lets businesses deposit checks electronically 🏦

Cash Concentration for Better Control:
Firms with multiple collection points use concentration banking to consolidate funds from various banks into a central account, reducing idle balances and optimizing short-term investments.

Fund Transfer Methods:

• Depository Transfer Checks (DTCs): Used to move funds between accounts but involve delays.
• Automated Clearing House (ACH) Transfers: Faster than DTCs, providing availability within a business day.
• Wire Transfers: The fastest method, but costly, making them suitable for high-value transactions.

By employing these strategies, firms improve liquidity management, reduce idle cash, and enhance operational efficiency.

Slowing Down Cash Payouts

Companies aim to speed up cash collections while delaying cash disbursements to maximize available cash. This strategy involves:

🔹 Playing the Float – The difference between a firm's book cash balance and its bank balance due to the delay in check clearing. Companies can estimate float to invest surplus cash before payments clear.

🔹 Control of Disbursements – Efficient management of payments prevents excess idle cash in bank accounts. Firms may centralize payments, use automated transfers, or outsource cash management to optimize funds.

🔹 Payable Through Drafts (PTD) – A payment method that delays fund withdrawal since banks require issuer approval before processing. This helps maintain smaller bank balances.

🔹 Payroll & Dividend Disbursements – Companies forecast check clearing patterns to keep minimal funds in payroll and dividend accounts, ensuring efficient cash usage.

🔹 Zero Balance Account (ZBA) – A system where all disbursement accounts maintain a zero balance, with the master account funding payments only when checks clear, reducing idle cash.

🔹 Remote & Controlled Disbursing – Companies issue checks from distant banks to extend the time before funds are withdrawn, maximizing disbursement float. However, this can strain supplier relationships.

This strategy enhances liquidity and cash efficiency, allowing firms to invest funds rather than keeping them idle.