CASH MANAGEMENT

Prepared by:
Dr. Rolando E. Robledo
 OBJECTIVES OF CASH
MANAGEMENT
 Discuss three basic cash management strategies
and their impact on firm’s minimum operating
cash, using the cash cycle method

 Describe basic cash management

techniques including popular collection and
disbursement procedures
 Define float, including its three basic
components and explain the levels of
collection and disbursement float
 CASH MANAGEMENT
DEFINED

 Is the process of managing liquid assets

 Refers to planning and controlling the level

of cash balances over a specified time
interval
 Is the most effective way of handling cash
or its equivalent, in a manner intended to
result in its most efficient use
 DECISIONS AREAS IN CASH
MANAGEMENT

 Managing cash collections and disbursement

 Determining appropriate cash balances

 Investing idle cash

 Financing
 FUNCTIONS OF CASH
MANAGEMENT
 Cash Custodianship

 Cash Flow Control

 Obtaining Financing Services

 Cash Surplus Investment

 THREE TYPES OF CASH

 Operating Cash

 Accommodation Cash

 Excess Cash
 CASH MANAGEMENT
STRATEGIES
 Stretching Accounts Payable
 Efficient Inventory Production
Management

 Accelerating the Collection of accounts

Receivable

 Aggressively Search for Productive use of

Idle Cash
 Cash Management Issues

 Cash level
• sufficient to cover all needs
• low enough to allow for alternative uses of
cash
 What variables influence the optimal level of
cash?
 What are the sources of cash?
 What variables influence the cost of carrying
cash?
 Cash Management Issues

What variables influence the optimal level of

cash?
 Uncertainty of timing of cash inflows and
outflows
 Variability in cash requirements throughout
the year
 Ability to arrange short-term financing
 Bond and loan covenants
 Cash Management Issues

What are the sources of cash?

 Sale of equity or debt instruments
 Sale of unneeded or unproductive assets
 Normal operations

• Reduce inventory
• Increase A/R turnover
• Decelerate payments
 Cash Management Issues

What variables influence the cost of

carrying cash?
 Cost of borrowing and cost of issuing
equity capital
 Opportunity costs of holding cash
 CASH MANAGEMENT TECHNIQUES TO
SPEED COLECTIONS AND SLOW
DISBURSEMENTS

 Float

 Collections Techniques

 Disbursement Techniques
 FLOAT DEFINED

 Length of time from when a

check is written until the actual
recipient can draw upon or use
the “GOOD FUNDS”
 TWO MAJOR TYPES OF
FLOAT
 Negative or Collection Float
• Mail Float
• Processing Float
• Clearing Time Float

 Positive or disbursement
 TYPES OF COLLECTION
TECHNIQUES

 Letter
 Telephone Calls
 Personal Visits
 Collection Agencies
 Legal Action
 COLLECTION TECHNIQUES

 Bill promptly and accurately

 Send invoices from a location near the
customer
 Use concentration banking
 Use of a lockbox system
 Change the paying behavior of customers
 Use wire transfer
 Utilize direct send
 Receipt of post-dated checks
 DISBURSEMENT
TECHNIQUES
 Delay payments to suppliers (Controlled Disbursing)

 Establish a zero-balance system

 Use drafts to pay bills
 Match transfer with check clearing (playing
the float)

 Use remote disbursements

 CASH CYCLE DEFINED

 Is the period of time between the purchase

of raw materials and the collection of
accounts receivable generated in the sale of
final product

 Is computed by:
average-age of inventory +average collection
period-average payment period
 CASH TURNOVER DEFINED

 Is the number of times each year the firm’s cash

is actually turned into a marketable product and
then back into cash

 Is computed by:
360 days/cycle
 CASH BUDGET

 Is a projection of cash
receipts and cash
disbursements over some of
time
 SYSTEM OF CASH CONTROL

 Assigning responsibility for handling cash

receipts
 Separation of handling and recording cash
receipts
 Immediate deposit of all cash receipts
 Voucher system to control cash
disbursement
 Internal audits at irregular interval