GROUP 3

WORKING CAPITAL
MANAGEMENT
(CURRENT ASSETS)

AGUYAOY, LORRAINE PEARL B. MARQUEZ, JAMES RAZEL M.

BERNAL, XYNTH GWYNETH M PADAOAN, MAYRELENE A.
DATANG, GILLIANE MHAYE P. ROLDAN, RAINIER T.
EUGENIO, BRYAN T. VIDAD, LIEZEL L.
INOCENCIO, JAZEL QUIAMBAO, CHYNA G.
 01 02 03
Net Working Cash Inventory
Capital Conversion Management
Fundamentals Cycle

04 05
Accounts Management of
Receivable Receipts and
Management Disbursement
 MAS 3

NET WORKING CAPITAL

FUNDAMENTALS
QUIAMBAO, CHYNA G.
BERNAL, XYNTH GWYNETH M.
 NET WORKING CAPITAL
- is defined as the difference between the firm's current
assets and its current liabilities. When current assets exceed
current liabilities, the firm has positive net working capital. When
current assets are less than current liabilities, the firm has
negative net working capital.
 WORKING CAPITAL MANAGEMENT
- is associated with short -term financial decision making. To
manage each of the firm's current assets and current liabilities
to achieve a balance between profitability and risk that
contributes positively to the firm's value.
 SHORT-TERM FINANCIAL LONG-TERM FINANCIAL
DECISIONS DECISIONS

- involve cash inflows and - involved when a firm purchases a

outflows that occur within a year special equipment that will reduce
or less. operating costs over, say, the next
five years.
 REASONS WHY WORKING CAPITAL MANAGEMENT
IS IMPORTANT
Working capital constitutes a significant portion of a firm's total assets.
Manufacturing and trading industries typically allocate over half of their assets to
current assets.
The financial manager holds considerable responsibility and control over
managing the level of current assets and liabilities.
Effective working capital management directly influences the firm's long-term
growth and survival.
Higher levels of current assets are necessary to support production and sales
expansion.
Liquidity and profitability are directly impacted by working capital management.
Insufficient liquidity may hinder the firm's ability to meet its liabilities as they
come due.
Financing of current assets involves interest expenses, affecting profitability.
FACTORS AFFECTING THE FIRM'S WORKING
CAPITAL POLICY
 FACTORS AFFECTING THE FIRM'S
WORKING CAPITAL POLICY

1. Nature of Operations
2. Volume of Sales
3. Variation of Cash Flows
4. The Operating Cycle Period
 MAS 3

CASH CONVERSION
CYCLE
ROLDAN, RAINER T.
MARQUEZ, JAMES RAZEL M.
 OPERATING CYCLE
The length of time in which the
firm purchases or produce
inventory, sell it and receive
cash.
CASH CONVERSION CYCLE
The length of time funds are tied up in
working capital or the length of time
between paying for working capital and
collecting cash from the sale of
inventory.

Inventory Conversion Period
Average Collection Period
Payables Deferral Period
The average time required to
purchase merchandise or to
purchase raw materials and
convert them into finished goods
and then sell them
The average length of time
required to convert the firm’s
receivable into cash
The number of days that a
company takes to convert its
accounts payable into cash
Operating cycle:

Operating Inventory Average

Cycle Conversion Period Collection Period

Or
Operating Account Receivable x 365
Inventory x 365
Cycle Cost of Sales Credit Sales
EXAMPLE:

Suppose that Akin na lisensiya mo Industries has

annual sales of P1 million, cost of goods sold of
P650,000, Average inventories of P116,00, and
average accounts receivable of P150,000. Assuming
that all Akin na lisensiya mo Industries sales on
credit, what will be the firm’s operating cycle?
EXAMPLE:

Inventories: 116,000
Accounts receivable: 150,000
Cost of Sales: 650,000
Credit Sales: 1,000,000
Solution:

Operating Inventory x 365 Account Receivable x 365

Cycle Cost of Sales Credit Sales

116,000 x 365 150,000 x 365

650,000 1,000,000
65.14 days 54.75 days

119.89 days
THE CASH CONVERSION CYCLE

Operating
CCC Average
Cycle PaymentPeriod

OR
Operating Account Payable x 365
CCC Cycle
Cost of Sales
SOLUTION:

Operating Account Payable x 365

CCC Cycle Cost of Sales

119.89 120,000 x 365

650,000

52.5 days
 The cash conversion cycle (CCC) may also be calculated as follows:

Inventory Average Inventory 116,000

conversion period Cost of Sales 650,000 65.14 days
365 days 365 days

Average Accounts
Average Receivable 150,000
collection period 54.75 days
Credit Sales 1,000,000
365 days 365 days

Payables Average Payables 120,000

67.38 days
Deferral Period Cost of Sales 650,000
365 days 365 days
The cash conversion cycle (CCC) may also be calculated as follows:

Inventory Average Payables

CCC Conversion Period Collection Period Deferral Period

CCC 65.14 54.75 67.38 52.51 days

 FUNDING REQUIREMENTS OF THE CASH
CONVERSION CYCLE
I. PERMANENT FUNDING
is a constant investment in operating
assets resulting from constant sales
over time.
minimum level of operating assets
II. SEASONAL FUNDING
is an investment in operating
assets that varies over time as a
result of cyclic sales.
range between the highest and
lowest level of operating asset
 Nicholson Company holds, on average, $50,000 in cash and marketable securities,
$1,250,000 in inventory, and $750,000 in accounts receivable. Nicholson's business is
very stable over time, so its operating assets can be viewed as permanent. In addition,
Nicholson's accounts payable of $425,000 are stable over time.

Cash and Marketable Securities 50 000

Inventory 1 250 000
Accounts receivable 750 000
Accounts payable (425 000)
Permanent investment operating assets 1 625 000
 In contrast, Semper Pump Company, which produces bicycle pumps, has sea- sonal
funding needs. Semper has seasonal sales, with its peak sales being driven by the
summertime purchases of bicycle pumps. Semper holds, at minimum, $25,000 in cash
and marketable securities, $100,000 in inventory, and $60,000 in accounts receivable.
At peak times, Semper's inventory increases to $750,000, and its accounts receivable
increase to $400,000. To capture production effi- ciencies, Semper produces pumps at
a constant rate throughout the year. Thus accounts payable remain at $50,000
throughout the year.
Cash and MS 25 000 Cash and MS 25 000
Inventory 100 000 Inventory 750 000
Accounts Receivable 60 000 Accounts Receivable 400 000
Accounts Payable (50 000) Accounts Payable (50 000)
Minimum need 135 000 Maximum need 1 125 000

1 125 000
135 000
Permanent 135 000 Seasonal 990 000
 SEASONAL FUNDING STRATEGIES

I. AGGRESSIVE FUNDING II. CONSERVATIVE FUNDING

STRATEGIES
A funding strategy over which the
firm funds its seasonal requirements
with short-term debt and its
permanent requirements with long
term debt.
STRATEGIES
A funding strategy under which
the firm funds both its seasonal
and its requirement with long-
term debt.
 If Semper can borrow short-term funds at 6.25% and a long-term funds at 8%,
and if it can earn 5% on the investment of any surplus balances, then the annual
cost of an aggressive strategy for seasonal funding will be:

Cost of short-term financing = 0.0625 * 101 250 = 6 328.13

+ Cost of long-term financing = 0.0800 * 135 000 = 10 800
- Earnings on surplus balances = 0.0500 * 0 =0
Total cost of aggressive strategy 17 128.13
 Alternatively, Semper can choose a conservative strategy, under which surplus
cash balances are fully invested. (In Figure 15.3, this surplus will be the difference
between the peak need of $1,125,000 and the total need, which varies between
$135,000 and $1,125,000 during the year.) The cost of the conservative strategy
will be

Cost of short-term financing = 0.0625 * 0 =0

+ Cost of long-term financing = 0.0800 * 1 125 000 = 90 000
- Earnings on surplus balances = 0.0500 * 888 750 = 44 437.50
Total cost of conservative strategy 45 562.50
 MAS 3

INVENTORY
MANAGEMENT
DATANG, GILLIANE
AGUYAOY, LORRAINE
INTRODUCTION
inventories are an essential part of virtually all business
operations and must be acquired ahead of sales. The main
classifications of inventories are:

For Manufacturing Firms:

Raw materials
Goods-in-process
Finished goods
Factory supplies

For Trading Firms

Merchandise
General Disposition Toward Inventory Levels

Financial Manager Marketing Manager

ensure that the firm’s money is would like to have large
not being unwisely invested in inventories of the firm’s finished
excess resources products

Manufacturing Manager Purchasing Manager

implement the production plan so concerned solely with the raw
that it results in the desired amount materials inventories
of finished goods of acceptable
quality available on time at a low
cost
 OBJECTIVE OF INVENTORY MANAGEMENT

Inventory is the stockpile of the product the firm is offering for

sale and the components that make up the product. It is the
responsibility of the financial officer to maintain a sufficient
amount of inventory to insure the smooth operation of the
firm’s production and marketing functions and at the same
time avoid tying up funds in excessive and slow-moving
inventory
 FUNCTIONS OF INVENTORIES
Pipeline or Organizational Seasonal or Batch or lot- Safety or
transit or decoupling anticipation size buffer

Inventories which are inventories that are are built up in are inventories that are these inventories are
being moved or maintained to provide anticipation of heavy maintained whenever maintained to protect
transported from one each link in the selling season or in the user makes or buys the company from
location to another production-distribution anticipation of price material in larger lots uncertainties such as
and they fill supply chain a certain degree increase or as part of than are needed for unexpected customer
pipelines between of independence from promotional sales his immediate purpose demand, delays in
stages of the entire the others. These will campaign delivery of goods
production-distribution also take care of ordered, etc.
system random fluctuations in
supply and/or demand
COST ASSOCIATED WITH INVESTMENT IN
INVENTORY

I. Carrying Costs II. Ordering Costs

Cost of capital tied up in inventory Cost of placing order including
Storage and handling cost production and setup costs
Insurance
Property taxes Shipping and handling costs
Depreciation and obsolescence
Administrative costs

III. Cost of running short

Loss of sales
Loss of customer goodwill
Description of production
schedules
 1 ABC Inventory System

INVENTORY 2 Economic Order Quantity

MANAGEMENT 3 Just in time System
TECHNIQUES
4 Materials Requirement Planning
 ABC Inventory System
The ABC inventory system is an inventory management technique that
divides inventory intro three groups:

1. A items - highest possible controls, including most complete, accurate

records, and regular review of top supervisor. This group includes item with
the largest investment. Consists of 20% of the firm’s inventory but 70-80%
of its investment in inventory
2. B items - normal controls involving good records and regular attention.
Consists of items that account for the next largest investment in the
inventory
3. C items - simplest possible controls such as periodic review of physical
inventory with no records. No EOQ or order point calculations. Consists of
a large number of items that requires relatively small investment
 INVENTORY PLANNING

Inventory Planning involves the determination of what

inventory quality, quantity, timing, and location should be in
order to meet future business requirements

The approach and mathematical techniques that may be used

in determining inventory order size, timing, etc. include EOQ
model, Reorder Point
 Economic Order Quantity (EOQ)
The Economic Order Quantity (EOQ) is an inventory management system
that ensures a company orders the right amount of inventory that meets the
demand for the product

It is part of inventory management that ensures the inventory is always

monitored. It ensures that a company orders a fixed quantity every time
the inventory attains a specific reorder point
Economic Order Quantity (EOQ) is the quantity required to avoid
running out of stocks. It limits the risk of understocking or overstocking
of products

The reorder point (ROP) is the minimum stock level a specific product can
reach before you’re prompted to order more inventory
 Economic Order Quantity (EOQ) FORMULA

Annual Costs
Demand per
1. Economic Order Quantity = 2 x x
in Units order

Carrying costs per unit

a. Total Inventory Costs = Total Ordering cost + Total Carrying cost

b. Total Ordering Costs = Annual Demand in units x Ordering Costs

EOQ or order size per order
 Economic Order Quantity (EOQ) FORMULA

c. Total Carrying Costs = Average Inventory x Carrying costs per unit

d. Average Inventory = EOQ or Order Size

2

2. Reorder point = Lead Time Usage + Safety Stock

 Illustrative Problem: Economic Order
Quantity Determination

Assume that a local gift shop is attempting to determine how many sets of wine
glass to order. The store feels it will sell approximately 800 sets in the next year
at a price of P18 per set. The wholesale price that the store pays per set is P12.
Costs of carrying one set of wine glasses are estimated at P1.50 per year while
ordering costs are estimated at P25

a. Determine the economic order quantity for the sets of wine glasses
b. Determine the annual inventory costs for the firm if it orders in this quantity
 Illustrative Problem: Economic Order
Quantity Determination

2 x 800 x 25
EOQ =
1.50

40,000
= 1.50

A. EOQ = 163 units per order

 Illustrative Problem: Economic Order
Quantity Determination

TOTAL ORDERING COST TOTAL CARRYING COST

= 800/163 x 25 = 163/2 x 1.50
= 122.70 = 122.25

B. TOTAL INVENTORY COST

= 122.70 + 122.25
= 244.95
 Illustrative Problem: Economic Order
Quantity, Reorder Point Determination
The following inventory information and relationships for the Baguio Corporation are
available:
1. Orders can be placed only in multiples of 100 units
2. Annual unit usage is 300,000 (Assume a 50-week year in your calculations)
3. The carrying cost is 30% of the purchase price of the goods
4. The purchase price per unit is P10
5. The ordering cost is P50 per order
6. The desired safety stock is 1,000 units (This does not include delivery-time stock)
7. Delivery time is two weeks

a. What is the optimal EOQ level?

b. How many orders will be placed annually?
c. At what inventory level should a reorder be made?
 Illustrative Problem: Economic Order
Quantity, Reorder Point Determination
A. What is the Optimal EOQ level?

EOQ = 2 x 300,000 x 50
10 x 0.30

30,000,000
=
3

A. EOQ = 3,162 units but since order must be placed

in multiples of 100 units, the effective EOQ is 3,200
 Illustrative Problem: Economic Order
Quantity, Reorder Point Determination

B. How many orders to be C. At what inventory level should

place annually? a reorder be made?

Number of orders Reorder point

= 300,000/3,200 = (300,000/50weeks x 2) + 1,000
= 93.75 orders per year = 12,000 + 1,000
= 13,000 units
 Just-in-Time Inventory System

The JIT system is used to minimize inventory system.

The philosophy is that materials should arrive exactly the time they
are needed for production.

The goal of the Just-in-Time system is manufacturing efficiency.

It uses inventory as a tool for attaining efficiency by emphasizing

quality of materials used and their timely delivery.
 Just-in-Time Inventory System

PROS CONS
Reduces Inventory Supply Chain
Waste Disruptions
Decrease Warehouse Supplier Dependence
Holding Cost Time Pressure
Improve Efficiencies Unpredictable Events in
Increase Productivity Nature
 Material Requirements Planning (MRP) System

It is an inventory management technique that applies EOQ

concepts and a computer to compare production needs to
available inventory and determine when orders should be placed
for various items on a product's bill of materials.

The objective of this system is to lower the firm's inventory without

impairing production.

MRP simulates each product's bill of materials, inventory status,

and manufacturing process.
 Material Requirements Planning

Manufacturing resource Planning II (MRP II)

A sophisticated computerized system that integrates data from
numerous areas such as financing, accounting, marketing, engineering,
and manufacturing and generates production plans as well as numerous
financial and management reports.
Enterprise Resource Planning (ERP)
A computerized system that electronically integrates external
information about the firm's suppliers and customers with the firm's
departmental data so that information on all available resources- human
and material- can be instantly obtained in a fashion that eliminates
production delays and control costs
 Material Requirements Planning

PROS
Proper Implementation leads
to results
Increased productivity
Better Material Planning
Optimization of Resources
CONS
Implementation takes resources
Heavy Reliance on inpute data
accuracy
Lack of flexibility in the
production schedule
Less capable than an overall
ERP system
 GROUP 3

ACCOUNTS RECEIVABLE
MANAGEMENT

PADAOAN, MAYRELENE A.
DOMINGO, JAZEL I.
EXPECTED LEARNING OUTCOMES:

1. Understand the need to manage accounts

receivable.
2. Know the objectives of receivable
management.
3. Explain the nature of credit policy and
understand its elements.
4. Know the costs associated with the
investment in accounts receivable.
5. Understand the cost-benefit relationship in
credit and collection policies.
6. Analyze proposed changes in credit policy.
 INTRODUCTION

Accounts Receivable
— are financial assets that represent a contractual
right to receive cash or another financial asset from
another entity.
— consists of money owed to a firm for goods and
services sold on credit.

This type of credit basically takes two forms:

1. Trade or Commercial Credit. Credit which the firm extends

to other firms.
2. Consumer or retail credit. Credit which the firm extends to
its final customers.
 OBJECTIVES OF AR MANAGEMENT
The goal of accounts receivable management is to ensure that the
firm's investment in accounts receivable is appropriate and
contributes to shareholder wealth maximization.

It is therefore the responsibility of the finance officer to:

1 2 3 4

Evaluate the Finance the Implement the Enforce

pertinent costs firm's firm's credit collection.
and benefits investment in policy
related to credit accounts
extension receivable
 WHAT IS CREDIT POLICY?

Credit policy is a set of guidelines for extending

credit to customers.

It is generally covers the following variables:

01 Credit standards

02 Credit terms

03 Collection Policy

04 Delinquency
1. CREDIT STANDARDS

Credit standards refer to the minimum

financial strength of acceptable credit
customer and the amount available to
different customer.

Setting credit standards implicitly requires a measurement

of credit quality, which is defined in terms of the probability
of a customer's default. The probability estimate for a given
customer is for the most part a subjective judgment.
HOW TO MEASURE CREDIT QUALITY AND CUSTOMER'S
CREDIT WORTHINESS?

The following areas are generally evaluated (5Cs}:

1. Character. refers to the probability that the

customers will pay their debts. This Includes
background information on people and firms' past
performances from a firms' bankers, their other
suppliers, their customers, and even their competitors.

2. Capacity. refers to the judgment of customers'

abilities to pay. It is determined in part by the
customers' past records and business methods.

3. Capital. measured by the general financial

condition of a firm as indicated by an analysis of its
financial statements.
HOW TO MEASURE CREDIT QUALITY AND CUSTOMER'S
CREDIT WORTHINESS?

The following areas are generally evaluated (5Cs}:

4. Collateral. represented by assets that customers

may offer as security in order to obtain credit.

5. Conditions. refer both to general economic trends

and to special developments in certain geographic
regions or sectors of the economy that might affect
customers' abilities to meet their obligations.
2. CREDIT TERMS
Credit terms involve both the length of the credit
period and the discount given.

Credit period is the length of time buyers are given to pay

for their purchases.

Discounts. are price reductions for early payment.

Ex. "2/10, n30" means that a 2% discount is given if the bill is
paid on or before the 10th day after the date of invoice;
payment is due by the 30th day. (credit period is 30 days).

The credit period if lengthened generally results to an

increased product demand and vice versa.
3. COLLECTION POLICY

Collection policy refers to the procedures the

firm follows to collect past-due accounts.

Ex. A letter may be sent to customers when a bill is 10 days

past due; a more severe letter, followed by a telephone call,
may be used if payment is not received within 30 days; and the
account may be turned over to a collection agency after 90
days.
4. DELINQUENCY AND
DEFAULT
Whatever credit policies a business firm may adopt, there
will be some customers who will delay and others who
will default entirely, thereby increasing the total
accounts receivable costs.

Again, the optimal credit policy that should be adopted is

the one that provides the greatest marginal benefit.
COSTS ASSOCIATED WITH
INVESTMENT IN AR

Aaron Loeb Aaron Loeb

Dani
Aaron
Martinez
Loeb
1. Credit Analysis,
Accounting and 2. Capital Costs
collection costs

3. Delinquency 4. Default Costs

Costs (Bad debts)
1. CREDIT ANALYSIS,
ACCOUNTING AND
COLLECTION COSTS
If the firm is extending credit in anticipation of
attracting more business, it incurs the cost of
hiring a credit manager plus assistants and
bookkeepers within the finance department; of
acquiring credit information sources and of
generally maintaining and operating a credit and
collection department.
2. CAPITAL COSTS
Once the firm extends credit, it must raise funds
in order to finance it. The interest to be paid if the
funds are borrowed or the opportunity cost of
equity capital will constitute the cost of funds that
will be tied up in the receivables.
3. DELINQUENCY COSTS
These costs are incurred when the customer is late
in paying. This delay adds collection costs above
those associated with a normal collection.

Delinquency also creates an opportunity cost for

any additional time the funds are tied up after the
normal collection period.
4. DEFAULT COSTS
(BAD DEBTS)
The firm incurs default costs when the customer
fails to pay at all.

In addition to the collection costs, capital costs

and delinquency costs incurred up to this point,
the firm loses the cost of goods sold not paid for. It
has to write off the entire sales once it decides the
delinquent account has defaulted and is no longer
collectible.
REFERENCE:
Financial Management
Comprehensive Volume
Ma. Elenita Balatbat Cabrera
SUMMARY OF TRADE-OFFS IN CREDIT AND COLLECTION POLICIES

Aaron Loeb Aaron Loeb

Dani
Aaron
Martinez
Loeb
1. MARGINAL OR
INCREMENTAL ANALYSIS
OF CREDIT POLICIES
Marginal analysis is performed in terms of
systematic comparison of the incremental returns
and the incremental cost resulting from a change
in the firm’s credit policy. Whenever the
incremental or profit from a proposed change in
the management of accounts receivables exceeds
the required return or incremental costs of the
additional investments, the changes should be
implemented. All things being equal, the decision
concerning the change in credit policy is made
using the following rules:
Aaron Loeb Aaron Loeb
Dani
Aaron
Martinez
Loeb
Illustrative Case 1. Relaxation of Credit Policy

Aaron Loeb Aaron Loeb

Dani
Aaron
Martinez
Loeb
Illustrative Case 2. Change in Credit Terms

Aaron Loeb Aaron Loeb

Dani
Aaron
Martinez
Loeb
 MAS 3

MANAGEMENT OF RECEIPTS
AND DISBURSEMENT
EUGENIO, BRYAN
VIDAD, LIEZEL
 Float
Float refers to funds that have been sent by the payer but are not yet usable funds to the payee. Float is important in the cash
conversion cycle because its presence lengthens both the firm’s average collection period and its average payment period.

Three Components of Float

Mail Float - is the time delay between when payment is placed in the mail
and when it is received.
Processing float - is the time between receipt of the payment and its
deposit into the firm's account.
Clearing float - The delay between deposit of a payment and when
spendable funds become available to the firm. This refers to the time it
takes for a cheque to clear.
Float = firm's available balance – firm's
book balance
For example, a company with $15,000 of float
outstanding for the first 14 days of the month,
and $19,000 for the last 17 days of the month
will calculate its average daily float as:

The float represents the net effect of checks in the process of clearing. A [($15,000 x 14) + ($19,000 x 17)] ÷ 31
common measure of a float is the average daily float, calculated by dividing = ($210,000 + $323,000) ÷ 31
the total value of checks in the collection process during a specified period = $533,000 ÷ 31
by the number of days in the period. The total value of checks in the = $17,193.55
collection process is calculated by multiplying the amount of float by the
number of days it is outstanding.
 Speeding Up Collections
Speeding up collections reduces customer collection float time and thus reduces the firm's average
collection period which reduce the investment the firm must make in its cash conversion cycle.

EXAMPLE, MAX Company had annual sales of S10 million and 8 days of
total collection float (receipt, processing,and collection time). If MAX can
reduce its float time by 3 days, it will reduce its investment in the cash
conversion cycle by $82,192 [$10,000,000 × (3 / 365)].

Lockbox System -A lockbox is a bank-operated mailing address or post office (PO) box that a
business can use to collect payments from its customers.
 Slowing Down Payments

Slowing Down Payments is a basic strategy of cash management is to

delay payments as long as possible without impairing the credit
rating/standing of the firm. In fact, slow disbursement represents a source of
funds requiring no interest payments.

Below are some strategies to slow down disbursements or payments:

Stretching Payables
Less Frequent Payroll
Pay Through Checks or Drafts
Zero-Balance Account
 Example of Slowing Down Payments

Megan Laurie, a 25-year-old nurse, works at a hospital that pays her every 2 weeks
by direct deposit into her checking account, which pays no interest and has no minimum
balance requirement. She takes home about $1,800 every 2 weeks—or about $3,600 per
month. She maintains a checking account balance of around $1,500. Whenever it exceeds
that amount she transfers the excess into her savings account, which currently pays 1.5%
annual interest. She currently has a savings account balance of $17,000 and estimates
that she transfers about $600 per month from her checking account into her savings
account.

Megan pays her bills immediately when she receives them. Her monthly bills
average about $1,900, and her monthly cash outlays for food and gas total about $900.
An analysis of Megan’s bill payments indicates that on average she pays her bills 8 days
early. Most marketable securities are currently yielding about 4.2% annual interest. Megan
is interested in learning how she might better manage her cash balances
 Example of Slowing Down Payments

Answer:
Rather than paying her bills immediately on receipt, Megan can pay her
bills nearer their due date. By doing this she can gain 8 days of disbursement
float each month, or 96 days per year (8 days per month 12 months), on an
average of $1,900 of bills. Assuming she can earn 4.2% annual interest on the
$1,900, slowing down her payments would save about $21 annually .
 Cash Concentration

Cash Concentration is a treasury management technique that involves

consolidating cash from various accounts into a single account to improve
cash visibility and control.

Below are steps on how Cash Concentration works:

1. Identify Cash Balances

2. Consolidating Cash Balance (Wire Transfers, ACH Transfers, Physical
transfers)
3. Reconciling Transactions
4. Investing Excess Cash
5. Managing Cash FLows
 Examples of Cash Concentration

A multinational corporation that has subsidiaries in several countries might use cash concentration to
centralize its cash management activities. This could involve consolidating all of its cash balances into a
single account, which is managed by a centralized treasury team.

A small business owner might use cash concentration to manage their cash flow more effectively. This
could involve sweeping all of the cash from their business checking account into a high-yield savings
account at the end of each day, in order to earn more interest on their cash balances.

A non-profit organization might use cash concentration to manage donations and other incoming funds
more efficiently. This could involve consolidating all incoming donations into a single account, and then
distributing funds to various programs and initiatives as needed.

A financial institution might use cash concentration to manage the cash balances of its customers. This
could involve providing a cash concentration service that allows customers to pool their cash balances into
a single account, which is managed by the financial institution.
 Zero - balance Account

Zero - balance Account or also known as ZBA are disbursement

accounts that always have an end -of-day balance of zero. The purpose is to
eliminate non-earning cash balances in corporate checking accounts. Zero -
balance Account or ZBA works well as a disbursement account under a cash
concentration system.
 Marketable Securities

Marketable Securities are short-term, interest-earning, money market

instruments that can easily be converted into cash. Marketable securities are
classified as part of the firm’s liquid assets. The firm uses them to earn a return on
temporarily idle funds. To be truly marketable, a security must have (1) a ready
market so as to minimize the amount of time required to convert it into cash, and (2)
safety of principal, which means that it experiences little or no loss in value over
time.

The securities that are most commonly held as part of the firm’s marketable
securities portfolio are divided into two groups: (1) government issues, which have
relatively low yields as a consequence of their low risk; and (2) nongovernment
issues, which have slightly higher yields than government issues with similar
maturities because of the slightly higher risk associated with them.
 Marketable Securities

Examples:
Government Securities (Treasury Bills or CBCI)
Commercial Papers
Certificate of Deposits
Money Market Funds

Factors in Choosing Marketable Securities:

Risk
Marketability
Time of Marturity