Cash Management

Topics: Investment, Inventory, Balance sheet Pages: 7 (1155 words) Published: June 15, 2013
Cash Management
Cash Cycle Factors that influence the desired level of cash Optimal cash inventories Short-term investment strategies

The Manager

Managing an entity’s Resources
Cash Management Inventory Management Working Capital Management Investment in Human Capital Long-term Assets Accounts Receivable

Resource Decisions
Investment Decisions Operating Decisions Human Resources Decisions

Life cycle effects, Business cycle, public events, etc.

Recruitment, Selection Training, Productivity Performance Appraisal Compensation Unions & Labor Relations

Cash Inflows

Value Creation

Information Decisions

Economics of Information Database Management Data Modeling IS Planning & Development

Discount Rate

Financing Decisions

Debt vs. Tax Financing

Cost of Capital

Financial Markets

ST fin’l planning = deals w/ short-lived assets and liabilities (working capital management); concerned w/ 1) size of investment in CA like cash, A/R, Inventory…a tool is cash budget analysis and 2) how to finance ST assets…a tool is performing credit analysis

Managing WC involves determing:
• How much to invest in CA? - CA vs. FA - Nature of activities/programs •

In each CA? - Cash, A/R, Inventory - Cash Mgt - A/R is Credit Mgt - Inv = POM & Cash balance models

Our objectives
• Learn about the Cash Cycle • Understand the factors that influence the desired level of cash • Learn two models that calculate the optimal level of cash • Gain an overview of what factors/areas are inputs to a cash budget and how they affect the cash balance

Objectives of Public Money Managers
Bringing the entity’s cash resources within control Achieving optimum conservation and utilization of the funds

Key areas of Public Cash Management
Organization Collection and disbursement of funds Netting of interagency payments Investment of excess funds Optimal level of cash balances Cash planning and budgeting Bank relations

Treasury Management of Cash Balances
Operate with smaller amount of cash Supervision is centralized Better service from banks Proper allocation of funds

How much cash should a organization keep on hand?
• Enough cash to make payments when needed. (transactions motive) – (Daily or Weekly Cash Budget helpful)

• Additional cash may be held for unexpected requirements. (precautionary motive)

The size of the minimum cash balance depends on:
• How quickly and cheaply a organization can raise cash when needed. • How accurately managers can predict cash requirements. – (Cash Budget helpful)

• How much precautionary cash the managers need for emergencies.

The organization’s maximum cash balance depends on:
• Available (short-term) investment opportunities
– e.g. money market funds, CDs, commercial paper

• Expected return on investment opportunities.
– e.g. If expected returns are high, organizations should be quick to invest excess cash

• Transaction cost of withdrawing cash and making an investment • Demand for Cash for daily transactions – (Cash Budget helpful)

Consider Cash an ‘Inventory’
the trade-offs: --hold little cash = invest An inventory approach invest the trade-offs: hold little cash = to Cash remainder in M/S to decisions: remainder in M/S toearn interest Balance earn interest Grantsville has a daily demand for cash of $10,000. Grantsville’s too little cash = incur transactions state investment pool invests excess cash in the --if hold treasurercash = incur transactions if hold too little that earns to meet cash needsorder to transfer funds from the state pool, costs .01% per day. In costs to meet cash needs Grantsville must pay a transaction cost of $20. How much cash should it transfer when it runs out. (Grantsville can complete the cash transfer electronically so it waits-hold lots of cash = forgo investing in M/S - until the cash balance is zero). hold lots of cash = forgo investing in M/S and earning interest and earning interest

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