Cash and Marketable Securities Management

Cash and Marketable Securities Management

Cash - A Definition

In a narrow sense, cash includes coins, currency notes, cheques, bank drafts & demand deposits. In a broad sense, cash includes “near-cash assets” such as marketable securities & time deposits with banks.

Motives For Holding Cash

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Transaction Motive: To meet cash needs that arise from doing business.

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Precautionary Motive: Having cash on hand for unexpected purposes.

Motives For Holding Cash 

Speculative Motive: To take advantage of potential profit-making situations.

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Compensating Motive: Compensating To maintain a minimum balance of cash at banks to compensate for providing services & loans.

Objectives of Cash Management 

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To meet cash disbursement needs of the firm on a continuous & regular basis. To minimize funds in the form of cash balance which remains idle. To prevent bankruptcy Good relation with bank 

Objectives of Cash Management 

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Good relation with trade creditors & suppliers. To lead strong credit rating

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To meet unexpect unexpected ed unexpecte d cash expenditure expenditure

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To maintain balance level

Importance of Cash Management 

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To maintain adequate cash balance Helps in identifying surplus cash & investing them in marketable m arketable securities. Helps in identifying the points of shortfalls & to plan & arrange adequate cash Improves the profitability of the firm

Importance of Cash Management 

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Keeps the bank overdraft limit under control Strike a balance between liquidity & profitability Make instant cash payments & avail of the facilities of cash discounts. To take advantage of speculative opportunities

Cash Management Models Baumol’s Model Baumol suggested that cash may be managed in the same way as any other inventory & stated that the Economic Order Quantity (EOQ) could be applied to cash management.

Cash Management Models Miller- Orr Model The Miller- Orr Model specifies the following 2 limits: d) Upper Control Limit (UCL) Marketable securities are sold f) Lower Control Limit (LCL) Marketable securities are bought

Ways of Improving Cash Flow 

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Increase sales (particularly cash sales) Reduce direct & indirect costs & overhead expenses Increase prices specially to slow payers Become more selective when granting credit Reduce the amount/time of credit given to customers

Ways of Improving Cash Flow 

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Improve systems for billing & collection Improve systems for paying suppliers Use the 80/20 rule to control inventories, receivables & payables Add late payment charges or fees where possible Use more pro-active collection techniques techniques

Marketable Securities Meaning: Marketable securities consist of  investments that are both readily marketable & are expected to be converted into cash within a year. They should possess 2 basic characteristics: 

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Ready market & safety of principal Little or no loss in the value over time.

Types of Marketable Securities 

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Term deposits with scheduled banks Treasury Bills Certificates of deposit Certificates Commercial papers Bill discounting Mutual Fund Scheme Municipal Bonds Inter-Corporate Deposits Inter-Corporate

Cash Budget 

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Cash Budget is the most important tool in cash management It is a device to help a firm to plan & control the use of cash Cash Budget may be prepared annually, halfyearly, quarterly, monthly, fortnightly, weekly or even on a daily basis

Purpose of Cash Budget 

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To co-ordinate the timings of cash needs It pinpoints the period when there is likely to be excess cash It enables a firm to take advantage of excess cash available It helps to arrange needed funds on the most favorable terms

Thank You….