An Assessment of Corporate Cash Management Practices

Author(s): Lawrence J. Gitman, Edward A. Moses and I. Thomas White

Source: Financial Management, Vol. 8, No. 1 (Spring, 1979), pp. 32-41
Published by: Wiley on behalf of the Financial Management Association International
Stable URL: https://www.jstor.org/stable/3665408
Accessed: 07-03-2019 05:31 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Financial Management Association International, Wiley are collaborating with JSTOR to

digitize, preserve and extend access to Financial Management

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
 An Assessment of Corporate Cash
Management Practices

Lawrence J. Gitman, Edward A. Moses,

and I. Thomas White

Lawrence J. Gitman and Edward A. Moses are Associate

Professors of Finance in the College of Business Administration
at the University of Tulsa. I. Thomas White is a mechanical
engineer with Mobil Pipeline Company in Dallas, Texas. The cost
of preparation, distribution, and other clerical chores required
by this study was funded through a University of Tulsa
Faculty Research Grant.

Introduction The Evolution of Cash Management2

Practitioners often criticize academicians for devot- Only during the Great Depression of the late 1920s
and early 1930s were managers first concerned with
ing too much research activity to the development of
theory,1 and too little time to the development liquidity.
of Before this, they paid more attention to
mechanisms to link theory and practice. It is choosing appropriate financing instruments and con-
worthwhile to assess the techniques and preferences sidering
of their impact on capital structure. The severe
decline in revenues experienced during the 1929-1933
practitioners in order to determine what, if any,
benefit they are deriving from the research effortsperiod
of and the consequent failures of many highly-
levered firms showed very clearly the importance of
academicians. Although there is a lack of published
information on actual management practices in many liquidity management.
areas, this paper concerns itself with only one impor-
tant area - the management of cash. 2See J. Fred Weston [38, Chapter 2] for an excellent discussion of
the overall evolution of the finance function. A number of historic
facts included in this part of the paper were extracted from this
'The word "theory" is used rather loosely in this paper to refer source.
to The reader is also referred to Arthur Stone Dewing's Finan-
cial Policy of Corporations [10] for a history of the development of
what in a stricter sense would include any of the following: theory,
concept, model, or computational scheme. financial management from the turn of the century through 1950.

t 1979 Financial Management Association 32

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
GITMAN ET AL./CASH MANAGEMENT PRACTICES 33

From Keynes Through 1950 Balances; 2) Cash Collections; 3) Cash Disburse-

ments; and 4) Cash Planning and Budgeting. Some of
Keynes [17, pp. 170-74] has described the key
the major contributions in the area of cash balance
motives for holding cash balances as transactions,
were made by Baumol [2], Tobin [36], Beranek [3, pp
precautionary, and speculative. Transactions balances
345-87], Archer [1], Miller and Orr [22, 23, and 24]
are maintained to meet the payment of known obliga-
Weitzman [37], Calman [6], Pogue, Faucett, and
tions. The level of these balances depends largely upon
Bussard [29], Orgler [27], Neave [26], Sastry [30]
both the prevailing interest rate and the costs
Eppen and Fama [11], Hausman and Sanchez-Bel
associated with investing idle balances. Precautionary
[16], and Mehta [21]. In the area of cash collections
balances are held as a cushion for uncertainty. Their
Levy [20], Stancill [33], and Kraus, Janssen, an
level depends primarily upon the opportunity cost of
McAdams [18] made significant contributions.
funds. Speculative balances are held with the expecta-
Notable contributions in the area of cash disburse-
tion of purchasing desired financial instruments more
ments were provided by Shanker and Zoltners [32]
cheaply (i.e., to yield a higher return) at some future
and Gitman, Forrester, and Forrester [15]. A large
date. Although Keynes did not deal with the ap-
number of significant and interesting developments in
propriate levels of these balances, he established the
the area of cash planning and budgeting can be found
foundation for the development of cash balances
in the literature; key among them are those of Stone
theory.
and Wood [35], Lerner [19], Budin and Eapen [4],
During the late 1930s and early 1940s, firms
Chervany [7], Stone [34], Moore and Scott [25], and
expanded rapidly in order to fulfill diversified war-
Gitman and Cook [14]. A review of this literature
time needs. Predictability of cash flows and general
clearly points out the significant historical strides in
liquidity of the firms improved during this period
cash management theory provided by academicians in
because the government was a major customer. Dur-
the post-1950 period. In the next section, the results of
ing the period of economic expansion and readjust-
a survey are used as a basis of assessing the state of
ment following the war, the threat of another reces-
cash management practice.
sion stimulated firms to devote greater attention to the
preservation of cash flows. Forecasting and budgeting
of cash was necessary to provide the liquidity
An Assessment of Cash Management
Practices
necessary to maintain the firm's solvency. For the first
time, managers paid as much attention to cash flows To assess the current practice of cash management,
as to profits. Growing concern over cash flows during a questionnaire-type survey of a sample of leading
this period may have provided the key base upon firms was performed. The results of the survey provide
which the study of financial management was to some evidence as to how much benefit the practioners
become differentiated from the study of accounting. It are deriving from academic research.
was the attention first directed toward cash flows that
provided the stimulus for the development of the body Sample Characteristics
of knowledge currently referred to as "cash
management." The firms sampled in this study were the top 150
and bottom 150 firms on the Fortune [12, 31] list of
From 1950 to Present
the 1000 largest firms. The Fortune rankings are
based on sales figures for the year ending December
Key developments in cash management began 31,
in 1975.
the We selected a sample of different-sized firms
1950s. The basic question was: "How do we provide
in order to determine if firms of differing size display
adequate cash to meet bill and debt obligations at differences
notable a in their cash management prac-
minimum cost?" Greatly compounding this problem
tices. In addition, we expected the combined sample of
was the uncertainty attached to the receipt as well as
300 firms to give us a general feel for the types of cash
management practices used by large-to-moderate size
the disbursement of cash. The tenets of cash manage-
ment toward which most theory was developed
firms.
therefore centered around "cash conservation." Questionnaires were mailed to the treasurer of each
Numerous theoretical contributions to cash
company with the request that the person most in-
formedof
management occurred simultaneously in a variety about cash management decisions complete
areas during the period from 1950 to the present.
the questionnaire. There were 98 responses. All but
These developments occurred in four areas: 1)
oneCash
of the respondents claimed to be active in financial

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
34 FINANCIAL MANAGEMENT/SPRING 1979

management decisions within the firm. Fifty-seven of Exhibit 1. Average Number of Banks Used by
the top 150 firms (38%) and 41 of the bottom 150 Respondents
firms (27%) responded to the questionnaire for an
overall response rate of 32.6%. While we have Average Number of Banks Top 150 Bottom 150 Overall
categorized the results below in terms of the responses
of the "larger" and "smaller" companies, these labels Used for Borrowing 22.4 7.9 15.9
(21.3)* (16.6) (20.5)
may be deceiving. The largest firm in the sample had
1975 sales more than 480 times that of the smallest Used for Checking 48.3 12.7 31.8
firm, but the smallest firm's sales of nearly $93 million (73.5) (23.4) (59.1)
are still large by any standard. Used for Collections 130.5 5.3 77.3

Of the firms responding to the questionnaire, 88 (264.1) (10.7) (209.6)

were involved mainly in some form of manufacturing, Total Used 272.8 15.7 169.7
with distribution and energy a distant second and (373.3) (17.3) (313.2)
third. To insure anonymity, we did not identify the
*Standard Deviation around the mean value
firms responding to the questionnaire. Thus, it was
impossible to examine the data for non-response bias.
It is for this reason that we have refrained from mak-
Aside from borrowing, checking, and collections,
ing inferences about the population from the sample
results. the respondents indicated they use other types of cash-
related banking services. Exhibit 2 shows that vir-
Approximately 80% of the firms were organized
tually 100% of the respondents used banks for wire
with a centralized finance function. This organiza-
fund transfers. More of the larger companies availed
tional structure did not vary with the size of the firm
themselves of zero-balance accounts, while more of
even though the larger firms in the sample had, on the
the smaller companies used the services of their banks
average, major installations in almost four times as
for short-term investing.
many U.S. cities as did the smaller firms.
Exhibit 3 shows that the sources from which banks
are compensated for services provided vary according
Banking Relationships
to the size of the firm. For the larger firms, compen-
A portion of the questionnaire was devoted to sating balances account for, on the average, ap-
assessing the relationships the respondents maintain proximately 92% of the total compensation paid banks
with their banks. On the average, the large companies for services. For the smaller firms, this percentage is
use many more total banks than the smaller com- slightly less than 75%. Overall, indirect compensation
panies. Based on specific uses, Exhibit 1 indicates that for bank services accounts for, on the average, almost
the largest difference occurs in the use of banks for 85% of total bank compensation.
collection purposes.3 A chi square (X2) test of the rela-
tionship between the size of the firm and the various Cash Management
bank uses revealed a significant difference at the 5%
As shown in Exhibit 4, the respondents ranked
level. In other words, the larger firms responding to
"speeding up collection of accounts receivable" as the
the questionnaire are more likely to use more banks
most important cash management policy, with "slow-
for borrowing, checking, and collections than would
ing payment of accounts payable" as the least impor-
the smaller firms. In order to perform the x2 test the
tant of the four areas listed. While there is no
data were catalogued in a different format from that
shown in Exhibit 1.4 difference (based on the weighted-average response) in
the rankings of cash management policies according
to firm size, the smaller firms do seem to place some-
3In order to guard against the effect of outliers on the results, the
standard deviations of the distributions of the number of banks for what greater emphasis on accounts receivable collec
the sample were computed. All responses for which the number of tion and inventory control, and relatively less
banks used exceeded by 2a or more the original mean number of emphasis on "minimizing bank balances" and "slow-
banks for the sample were removed from the count and the values in
Exhibit 1 were recalculated. Since these revised results do not ing payment of accounts payable" than do the large
significantly affect the conclusions obtained from Exhibit 1, firms.
they
have not been included.
Given the similarity in the rankings of cash manage-
'A x2 test was performed, where appropriate, on the classifications
ment policies, with only minor differences in
shown in the remaining exhibits of this paper. The results indicated
that, at the 5% level of significance, the characteristic examined wasemphasis, it is interesting to examine the techniques
independent of the size of the firm (i.e., Top 150 or Bottom 150).used by the respondents in managing their working

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
GITMAN ET AL./CASH MANAGEMENT PRACTICES 35

Exhibit 2. Banking Services Used by Respondents

Top 150 Bottom 150 Overall

Banking Services Number Percent Number Percent Number Percent

Wire Fund Transfers 56 100.0 41 100.0 97 100.0

Payroll Management 22 39.3 14 34.1 36 37.1
Zero-Balance Accounts 47 83.9 19 46.3 66 68.0
Short-Term Investing 41 73.2 35 85.4 76 78.4
Other 7 12.5 2 4.9 9 9.3

capital. The respondents were

Exhibit 3. Sources of Bank Compensation for Services
techniques Provided
listed in Exhibit 5 t
their working capital. As can be
a much higher Bank
proportion of
Compensation Top 150 Bottom 150 Overall the
more sophisticated techniques
ing capital Compensating Balances 92.4% 74.7%
management, which84.7% i
would expect larger firms(15.7)* (40.2) (30.1)
to be
and utilize the more
Direct advanc
Fees 6.9 21.6 13.3
techniques. (15.6) (37.6) (28.2)
Responses to questions about specific systems used Tax Deposit 0.8 2.0 1.3
in collections and payments (Exhibits 6 and 7) further (3.3) (12.5) (8.5)
reveal the apparent differences in cash management *Standard Deviation around the mean values
policies adopted by different size firms. Exhibit 6 in-
sophisticated utilization of float requires only the
dicates that a higher percentage of the larger firms
recognition of its existence while the use of the rather
employ advanced systems for collections of accounts
sophisticated tools of cash management indicated in
receivable. For example, virtually all the top 150 firms Exhibit 7 necessitates that the firm undertake an ac-
responding to the questionnaire use a lock box system,
tive cash management policy. On the other hand,
and approximately 73% use concentration banking. while 93% of the larger firms said they prepared a
For the smaller firms, these percentages are almost
detailed cash budget, only 83% of the smaller firms in-
76% and 44% respectively.
dicated they did. Further, when questioned as to
Exhibit 7 shows that the smaller firms seem to be
whether or not the firm assigns an opportunity cost
less likely to use sophisticated techniques to slow (i.e., interest rate) to cash when evaluating alternative
payments. For example, while almost 79% of the levels of liquidity, only 41% of the smaller firms
larger firms used centralized payables, only 61% of the
responded positively, as compared to 72% for the
smaller firms used this method for slowing payments.
larger firms.
This difference cannot be attributed to the organiza-
The cash management policies of the firm involve
tion of the finance function. As we noted earlier, ap-
establishing optimal levels of accounts payable, inven-
proximately 80% of all the firms had a centralized
tory, and accounts receivable by considering the
organization for performing the finance function.
economic tradeoffs that exist with respect to them.
While larger firms appear to make more frequentThe effectiveness of the firm in managing these ac-
use of the rather sophisticated and expensive tech- counts can therefore be assessed by evaluating the
niques of cash management, how do different size
length of its cash cycle5 which reflects, on average, the
firms compare in their use of less sophisticated and length of time the firm's cash is invested in inventory
less costly tools of cash management? Exhibit 8and accounts receivable - both nonearning assets.
reveals the frequencies with which the larger and Questionnaire responses show that the more
smaller firms take advantage of different types of float
sophisticated the cash management policies, other
when establishing collection and payment policies.things being equal, the shorter the cash cycle. Exhibit
The two groups appear to utilize float similarly. The9 indicates that this is the case for the larger firms.
smaller firms appear to take advantage of the different
types of float more readily than implementing a more5Cash cycle for purposes of this paper is defined as: average number
of days accounts receivable on the books plus the average number of
sophisticated system for slowing the payment of ac-
days inventory on the books less the average number of days ac-
counts payable. The apparent contradiction betweencounts payable on the books. See Gitman [13] for a detailed discus-
Exhibits 7 and 8 is not surprising, since the un-sion of this topic.

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
36 FINANCIAL MANAGEMENT/SPRING 1979

Although the results are not statistically significant,
the average cash cycle for the larger firms, based on
the mean responses, is 82.9 days as opposed to 95.3
days for the smaller firms.
Of course, we can make no definitive conclusions
from the sample results, but only observe measures of
tendency. Although the cash cycle appears shorter for
the larger firms, this may be due to the industry credit
policies of the respondents, not to differences in their
cash management policies.

Exhibit 4. Ranking of Cash Management

Policies (1 = Most Important; 4 = Least
Important)

Top 150 Bottom 150 Overall

Cash Management Policies 1 2 3 4 1 2 3 4 1 2 3 4

Speeding Collection of 31 17 5 2 26 10 4 0 57 27 9 2
Accounts Receivable (1.600)* (1.450) (1.537)
Minimizing Investment 17 13 11 9 13 12 6 8 30 25 17 17
in Inventory (2.240) (2.231) (2.609)
Minimizing Bank Balances 12 14 16 10 3 12 15 10 15 26 31 20
(2.462) (2.800) (2.236)
Slowing Payment of 1 8 15 19 1 7 11 18 2 15 26 37
Accounts Payable (3.209) (3.243) (3.225)
Other 1 1 0 1 0 0 1 0 1 1 1 1
(2.333) (3.000) (2.500)

*Weighted-average response is calculated as the sum of the pr

responding rank divided by the total number of respondents
response for "speeding up collection of accounts receivable" f
(17X2) + (5X3) + (2X4)] / (31+17+5+2).

Exhibit 5. Working Capital Management Tech

Top 150 Bottom 150 Overall

Techniques Number Percent Number Percent Number Percent

Quantitative Models 27 55.1 13 39.4 40 48.8

Statistical Models 36 73.5 16 48.5 52 63.4
Simulation 8 16.3 5 15.2 13 15.9
Sensitivity Analysis 10 20.4 3 9.1 13 15.9
Other 2 4.1 2 6.1 4 4.9
None 1 2.0 0 0.0 1 1.2
Total Respondents 49 100.0 33 100.0 82 100.0

Exhibit 6. Systems Used to Speed the Collection of Accounts Rece

Top 150 Bottom 150 Overall

Systems Number Percent Number Percent Number Percent

Lock-Box 56 100.0 31 75.6 87 89.7

Concentration Banking 41 73.2 18 43.9 59 60.8
Special Handling of
Large Remittances 36 64.3 16 39.0 52 53.6
None 0 0.0 3 7.3 3 3.1
Other* 5 8.9 0 0.0 5 5.2
Total Respondents 56 100.0 41 100.0 97 100.0

*Usually wire transfer of funds

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
GITMAN ET AL./CASH MANAGEMENT PRACTICES 37

Short-Term Investments to fulfill some combination of motives.6 The responses

The investment of idle cash balances is another for the larger firms were similar to those of the smaller
firms, with the smaller firms reporting a slightly larger
important aspect of a firm's cash management ac-
percentage of balances held for transactions and the
tivities. The survey respondents were asked to indicate
larger firms reporting a slightly larger percentage of
the percentages of their cash and marketable security
balances held for precautionary motives.
balances they held for transactions, precautionary,
and speculative motives. As one would expect, ap-
6It is important to recognize that, regardless of which of the Keynes-
proximately 88% of the cash and marketable securities ian motives underlies carrying cash and marketable security
balances were held for transactions reasons (60.6%) orbalances, cash balances are likely to be serving a dual purpose by
precautionary reasons (27.3%), while only 2% wereactng as compensation for loans and other banking services. This
duality of purpose is consistent with Exhibit 3 which indicated that
held for speculation. The remaining 10% of theseapproximately 85% of the payment to banks for services provided
balances were believed to be held by the respondents
comes in the form of compensating balances.

Exhibit 7. Systems Used to Slow the Payment of Accounts Payable

Top 150 Bottom 150 Overall

Systems Number Percent Number Percent Number Percent

Centralized Payables 44 78.6 25 61.0 69 71.1

Selected Disbursing
Points 31 55.4 14 34.1 45 46.4
Payable Drafts 18 32.1 7 17.1 25 25.8
None 3 5.4 7 17.1 10 10.3
Other 2 3.6 1 2.4 3 3.1
Total Respondents 56 100.0 41 100.0 97 100.0

Exhibit 8. Types of Float

Top 150 Bottom 150 Overall

Float Type Number Percent Number Percent Number Percent

Check-clearing 56 98.2 37 90.2 93 94.9

Mail-time 52 91.2 36 87.8 88 89.8
Handling or Processing 41 71.9 17 41.5 58 59.2
Other 3 5.3 0 0.0 3 3.1
None 1 1.8 3 7.3 4 4.1
Total Respondents 57 100.0 41 100.0 98 100.0

Exhibit 9. Average Cash Cycle (Days)

Average Ages of: Top 150 Bottom 150 Overall

Accounts Receivable on the Books 37.1 48.6 42.6

(17.6)* (22.0) (20.5)
PLUS:
Inventory on the Books 77.5 83.2 79.9
(35.3) (47.5) (42.1)
MINUS:
Accounts Payable on the Books 31.7 36.5 34.3
(13.8) (14.2) (14.1)
EQUALS:
Cash Cycle 82.9 95.3 88.2

*Standard deviation around the mean values

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
38 FINANCIAL MANAGEMENT/SPRING 1979

policies of their firms (see Exhibit 4), the respondents

The respondents were asked to indicate which types
ranked speeding up the collection of accounts
of marketable securities they purchase with their idle
receivable as the most important cash management
cash balances. Responses are shown in Exhibit 10.
policy and slowing the payment of accounts payable as
Overall, the most popular marketable security is com-
mercial paper, with repurchase agreements, treasury least important. The evidence in Exhibits 1, 6, and 7
securities, and negotiable certificates of deposit lends further support to the belief that firms place
following. greater emphasis on use of more sophisticated systems
Although generally the larger and smaller firms of collection than payment. The larger firms were
purchase similar types of securities, there are a few found to use many more banks for collection purposes
noticeable differences. On the average, larger firms in- than for checking accounts or borrowing. One of the
vest in six different types of securities, while the reasons the larger firms use so many banks can be at-
smaller ones have only three types of securities in their tributed to the finding that virtually 100% of these
portfolios. Larger firms appear much more likely to firms use a lock box system to speed the collection of
have foreign short-term securities in their portfolios. accounts receivable. In addition, approximately 73%
It is also interesting to note that six (11%) of the larger of these firms use a system of concentration banking.
firms and three (7%) of the smaller firms indicated Among the smaller firms in the sample, the use of
that they do not purchase marketable securities at all. these two systems of collection, while important, was
Finally, the respondents were asked to rank their in- not nearly as widespread.
vestment critiera for marketable securities. As shown Further evidence suggesting the lack of attention
in Exhibit 11, they ranked market price stability as the firms give to payments can be found in the cash cycles
most important investment criterion, with market- in Exhibit 9. The average number of days the accounts
ability a close second. Yield and maturity were con- payable were on the books was some 8.3 days less than
sidered to be of secondary importance when evaluat- the average number of days the accounts receivable
ing possible marketable security investments. The were on the books (42.6 days minus 34.3 days). While
most noticeable difference between the larger and a number of interpretations could be given to this
smaller firms was their average ranking of the difference, one possible explanation is that firms do
maturity and yield criteria. The larger firms preferred not attempt to stretch accounts payable for as long as
maturity (i.e., lower weighted-average response), possible but rather that they prefer to concentrate on
while the smaller firms ranked yield above maturity. shortening the average collection period.

Reconciling Theory and Practice The Use of Quantitative Analysis

Although there have been major advances in cash
The application of quantitative analysis to working
management theory, as put forth by the academicians,
capital management techniques seems to be
it is quite difficult to assess whether or not prac-
widespread among the survey respondents. This was
titioners, in general, have used, or have found useful,
particularly true of the larger firms responding to the
many of these contributions. An earlier work by Petty
questionnaire and is consistent with Daellenbach's
and Bowlin [28, p. 40] found that the use of
findings [9]. For example, Exhibit 5 shows that 73.5%
sophisticated financial decision-making techniques
of the larger firms use some statistical models for the
"appears to be growing, even if at a fairly slow rate."
management of working capital, while 48.5% of the
Two areas in our study in which we can make a
smaller firms use these techniques. While no direct
general comparison of theory and practice are in cash
conclusions can be drawn from a comparison with the
collections/disbursements and the use of quantitative
Petty and Bowlin study [28], it is interesting to note
analysis.
that only 49.3% of their respondents use statistical
techniques as tools in the management of the firm's
Cash Collections/Disbursements
working capital. Conversely, some 33.6% of their
The academic literature has given more attention torespondents use simulation techniques, while only
cash collection than to cash disbursement. The results15.9% of the respondents in our study use simulation
as a technique for working capital management.
of this survey tend to suggest that practitioners place
greater emphasis on the cash collection function than This apparent willingness on the part of some
on the cash disbursement function. For example, when managements to implement quantitative techniques
for cash management purposes is in contrast to the
asked to rank in importance the cash management

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
GITMAN ET AL./CASH MANAGEMENT PRACTICES 39

conclusions drawn in some earlier academic studies. appears to be widest among the smaller firms. The
Daellenbach [8, p. 623], for example, concluded from firms surveyed in this paper seem aware of the basic
his study of nonstationary cash flow that "a very large cash management strategies, although they appear to
amount of research - albeit academically interesting pay greatest attention to collections, while paying
research - was directed into a problem that offers no least attention to payments. Actually, this emphasis
economic returns for small- and medium-size firms parallels that in the cash management literature. The
and very limited returns for large firms." Budin and apparent failure of some firms to more directly adapt
Van Handel [5, p. 88] concluded that "rules of thumb cash management theories may be attributable either
rather than 'rational economic' choices tend to to a lack of the quantitative sophistication required to
dominate the cash balance decisions of firms." understand and apply these theories or the belief that
the high cost of implementing certain theoretical
developments may not justify the potential benefits.
Summary and Conclusions Both these possibilities seem to be confirmed by the
Although academicians have developed a great deal fact that the large firms surveyed appeared to utilize
of theory on cash management, there may still be a more sophisticated techniques and as a result turned
gap - although perhaps narrowing - between the over their cash more quickly than did the smaller
theory and practice of cash management. This gap firms.

Exhibit 10. Types of Marketable Security Investments

Top 150 Bottom 150 Overall

Type Number Percent Number Percent Number Percent

Treasury Securities 46 80.7 25 61.0 71 72.4

Federal Agency Issues 34 59.6 11 26.8 45 45.9
Bankers' Acceptances 41 73.7 15 36.6 57 58.2
Commercial Paper 47 82.5 29 70.7 76 77.6
Repurchase Agreements 48 84.5 25 61.0 73 74.5
Negotiable C.D.s 47 82.5 21 51.2 68 69.4
Federal Funds 5 8.8 3 7.3 8 8.2
Foreign Short-Term
Securities 15 26.3 2 4.9 17 17.3
Other 11 19.3 1 2.4 12 12.2
None 6 10.5 3 7.3 9 9.2
Total Respondents 57 100.0 41 100.0 98 100.0

(1 = Most
Exhibit 11. Ranking of Investment Criteria for Im-
Marketable Securities
portant; 4 = Least Important)

Top 150 Bottom 150 Overall

Investment Criterion 1 2 3 4 1 2 3 4 1 2 3 4

Market Price Stability 29 11 3 15 17 4 4 8 46 15 7 23

(2.069)* (2.091) (2.077)
Marketability 13 18 10 7 14 8 5 6 27 26 15 13
(2.229) (2.091) (2.173)
Maturity 8 12 20 12 4 8 17 7 12 20 37 19
(2.692) (2.750) (2.716)
Yield 9 12 14 17 4 15 9 7 13 27 23 24
(2.750) (2.543) (2.667)
Other 1 0 0 1 0 0 0 1 1 0 0 2
(2.500) (4.000) (3.000)

*Weighted-average response

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
40 FINANCIAL MANAGEMENT/SPRING 1979

Whether academicians are to blame for the some- tions, 5th ed., Volumes I and II, New York, The Ronald
what limited application of theory because they have Press Company, 1953.
not considered the practical cost-benefit aspects of 11. Gary D. Eppen and Eugene F. Fama, "Three Asset
their models, or whether the fault lies with the prac- Cash Balance and Dynamic Portfolio Problems," Man-
agement Science (January 1971), pp. 311-19.
titioners for not adapting and applying these theories,
12. "The Fortune Directory of the 500 Largest U.S. In-
are questions that this paper has not tried to address.
dustrial Corporations," Fortune (May 1976), pp.
One possible explanation may be that these 316-24.
differences in disposition toward cash management 13. Lawrence J. Gitman, "Estimating Corporate Liquidity
result from the fact that, while academicians tend to Requirements: A Simplified Approach," The Financial
develop precise theoretically-correct models, prac- Review (1974), pp. 79-88.
titioners need generalized easy-to-use managerial 14. Lawrence J. Gitman and Thomas M. Cook, "Cash
models whose application can be justified on the basis Budgeting: A Simulation Approach," Journal of the
of cost. The growth in data bases accompanying the Midwest Finance Association (1973), pp. 87-100.
15. Lawrence J. Gitman, D. Keith Forrester, and John R.
rapid expansion of computer information-processing
Forrester, Jr., "Maximizing Cash Disbursement Float,"
technology should favorably affect future ability to
Financial Management (Summer 1976), pp. 15-24.
apply new developments in practice. At the same time,
16. W. H. Hausman and A. Sanchez-Bell, "The Stochastic
the types of models needed will rapidly change
Cash Balance Problem with Average Compensating
because of a variety of environmental factors, the Balance Requirements," Management Science (April
most obvious being changes in banking laws and the 1975), pp. 849-57.
procedures used to make and receive payments. We 17. John Maynard Keynes, The General Theory of Employ-
hope such advancements in technology may allow the ment, Interest, and Money, New York, Harcourt, Brace
practitioner to more effectively apply new cash and Co., 1936.
management theory. 18. A. Kraus, C. Janssen, and A. McAdams, "The Lock-
Box Location Problem," Journal of Bank Research
References (Autumn 1970), pp. 50-58.
19. Eugene M. Lerner, "Simulating A Cash Budget,"
California
1. Stephen H. Archer, "A Model for the Determination of Management Review (Winter 1968), pp.
Firm Cash Balances," Journal of Financial and Quan- 79-86.
titative Analysis (March 1966), pp. 1-11. 20. Ferdinand K. Levy, "An Application of Heuristic
2. William J. Baumol, "The Transactions Demand for Problem Solving to Accounts Receivable Manage-
Cash: An Inventory Theoretic Approach," Quarterly ment," Management Science (February 1966), pp.
Journal of Economics (November 1952), pp. 545-56. 236-44.
3. William Beranek, Analysis of Financial Decisions, 21. Dileep R. Mehta, Working Capital Management,
Homewood, Ill., Richard D. Irwin, 1963. Englewood Cliffs, N.J., Prentice-Hall, Inc., 1974.
4. Morris Budin and A. T. Eapen, "Cash Generation in 22. Merton H. Miller and Daniel Orr, "An Application of
Business Operations: Some Simulation Models," Jour- Control-Limit Models to the Management of Corporate
nal of Finance (December 1970), pp. 1091-1107. Cash Balances," in Financial Research and Manage-
5. Morris Budin and Robert J. Van Handel, "A Rule-of- ment Decisions, Alexander A. Robichek, ed., New
Thumb Theory of Cash Holdings by Firms," Journal of York, John Wiley & Sons, Inc., 1967, pp. 133-51.
Financial and Quantitative Analysis (March 1975), pp. 23. Merton H. Miller and Daniel Orr, "The Demand for
85-108. Money by Firms: Extension of Analytic Results," Jour-
6. Robert F. Calman, Linear Programming and Cash nal of Finance (December 1968), pp. 735-69.
Management/CASH ALPHA, Cambridge, Mass.,24. Merton H. Miller and Daniel Orr, "A Model of the De-
MIT Press, 1968. mand for Money by Firms," Quarterly Journal of
7. Norman L. Chervany, "A Simulation Analysis of Economics (August 1966), pp. 413-35.
Causal Relationships Within the Cash Flow Process," 25. Laurence J. Moore and David F. Scott, "Simulation of
Journal of Financial and Quantitative Analysis Cash Budgets," Journal of Systems Management
(December 1970), pp. 445-68. (November 1973), pp. 28-33.
8. H. G. Daellenbach, "Are Cash Management Optimiza- 26. Edwin H. Neave, "The Stochastic Cash-Balance
tion Models Worthwhile?" Journal of Financial and Problem with Fixed Costs for Increases and
Quantitative Analysis (September 1974), pp. 607-26. Decreases," Management Science (March 1970), pp
9. H. G. Daellenbach, "How Widely are Cash Manage- 472-90.
ment Optimization Models Used?" Interfaces 27. Yair E. Orgler, Cash Management, Belmont, Mass.,
(February 1975), pp. 69-73. Wadsworth Publishing Co., 1970.
10. Arthur Stone Dewing, The Financial Policy of Corpora- 28. J. William Petty and Oswald D. Bowlin, "The Financial

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms
 GITMAN ET AL./CASH MANAGEMENT PRACTICES 41

Manager and Quantitative Decision Models," Financial Determination with a Financial Statement Simulator: A
Management (Winter 1976), pp. 32-41. Cash Report on Short-Term Financial Planning," Jour-
29. Gerald A. Pogue, Russell B. Faucett, and Ralph N. nal of Financial and Quantitative Analysis (November
Bussard, "Cash Management: A Systems Approach," 1973), pp. 711-30.
Industrial Management Review, Vol. II, No. 2 (1970),35. Bernell K. Stone and Robert A. Wood, "Daily Cash
pp. 55-74. Forecasting: A Simple Method for Implementing the
30. A. S. Rama Sastry, "The Effect of Credit on Transac- Distribution Approach," Financial Management (Fall
tions Demand for Cash," Journal of Finance 1977), pp. 40-50.
(September 1970), p. 135. 36. James Tobin, "The Interest Elasticity of Transactions
31. "The Second 500 Largest Industrial Corporations," Demand for Cash," Review of Economics and Statistics
Fortune (June 1976), pp. 227-33. (August 1956), pp. 241-47.
32. Roy J. Shanker and Andris A. Zoltners, "The Cor- 37. Martin Weitzman, "A Model of the Demand for
porate Payment Problem," Journal of Bank Research Money by Firms: Comment," Quarterly Journal of
(March 1972), pp. 47-53. Economics (March 1968), pp. 161-64.
33. James McN. Stancill, Jr., "A Lock-Box Model," 38. J. Fred Weston, The Scope and Methodology of
Management Science (October 1968), pp. B-84-87. Finance, Englewood Cliffs, N.J., Prentice-Hall, Inc.,
34. Bernell K. Stone, "Cash Planning and Credit-Line 1966.

Time for a hange? Try BPI. -

Business
Financial
Management,
Revised Edition
George N. Engler, California State University,
Los Angeles
This Revised Edition allows students to gain insight into
how the financial manager uses the decision process to solve
complex financial problems. A base of financial tools is pre-
sented along with the relevant financial theory and institu-
tional material. A series of flow diagrams help integrate the
financial theory and institutional material into a framework
of financial management.
Study Guide and Workbook / Instructor's Manual.
Recently published
Managing
Personal
Finance
Holley H. Ulbrich and T. Bruce Yandle, Jr., both of
Clemson University
Written for the college undergraduate with limited back-
ground in economics or finance, this volume is intended to
serve both as a textbook and as a reference book in personal
finance. It is organized around the major financial decisions
which are made in an individual's life. A lifestyle approach
is emphasized, and a framework is provided within which
students can incorporate their own tastes, values, habits,
career, and family situation.
Recently published

Business Publications, Inc. Examination copies for adoption consideration available on

13773 N. Central Expressway Dallas, Texas 75243 request. Please indicate course title and text presently used.

This content downloaded from 1.186.42.68 on Thu, 07 Mar 2019 05:31:44 UTC
All use subject to https://about.jstor.org/terms