Post on 03-Jun-2018
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Cash Management
Cash Cycle
Factors that influence the desired level
of cash
Optimal cash inventories
Short-term investment strategies
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The Manager
Resource Decisions
Information
Decisions
FinancingDecisions
Investment Decisions
Human Resources
Decisions
Managing an entitys Resources
Cash ManagementInventory Management
Working Capital Management
Investment in Human Capital
Long-term Assets
Accounts Receivable
Economics of Information
Database Management
Data Modeling
IS Planning & Development
Debt vs. Tax Financing
Cost of
Capital
Discount Rate
Value
Creation
Financial
Markets
Cash Inflows
Operating
Decisions
Recruitment, Selection
Training, Productivity
Performance Appraisal
Compensation
Unions & Labor Relations
Life cycle effects,
Business cycle,
public events,
etc.
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Overview
ST finl planning = deals w/ short-lived assets and liabilities
(working capital management);
concerned w/ 1) size of investment in CA like cash, A/R,
Inventorya tool is cash budgetanalysis and 2) how to
finance ST assetsa tool is performing credit analysis
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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
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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 areinputs to a cash budget and how they affectthe cash balance
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Objectives of Public Money
Managers
Bringing the entitys cash resourceswithin control
Achieving optimum conservation andutilization of the funds
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Key areas of Public Cash
ManagementOrganization
Collection and disbursement of funds
Netting of interagency paymentsInvestment of excess funds
Optimal level of cash balances
Cash planning and budgetingBank relations
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Treasury Management of
Cash Balances
Operate with smaller amount of cash
Supervision is centralized
Better service from banks
Proper allocation of funds
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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)
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The size of the minimumcash
balance depends on:
How quickly and cheaply a organization can raisecash when needed.
How accurately managers can predict cashrequirements. (Cash Budget helpful)
How much precautionary cash the managers needfor emergencies.
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The organizations maximumcash
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 makingan investment
Demand for Cash for daily transactions (Cash Budget helpful)
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Consider Cash an Inventory
Grantsvil le has a daily demand for cash of $10,000.
Grantsvilles treasurer invests excess cash in the state investment pool
that earns .01% per day. I n order to transfer funds from the state pool,
Grantsvil le must pay a transaction cost of $20. How much cash should
it transfer when it runs out. (Grantsvil le can complete the cash transfer
electronical ly so it waits unti l the cash balance is zero).
An inventory approach to CashBalance decisions:
the trade-offs: -hold little cash = investremainder in M/S to earn interest
- if hold too little cash = incur transactionscosts to meet cash needs
- hold lots of cash = forgo investing in M/S
and earning interest
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50000000 1002 504 339.3333333 258 210
Order Quantity (Z)
Cost ($)
Z*
Total Costs
Holding Costs:(Z/2)*r
Order Costs:(M /Z)* TC
Optimal Cash Balance via Baumol Model
Z*Z*= [(2M*TC)/r]
M = $10,000 r = .01% .0001 TC = $20
Z = $63,246
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Problems with the Baumol Model
Cash flows may not be very predictable, much less
constant
Treasurers may want a safety stock of cash
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The Miller - Orr Model
The Miller-Orr Model provides a formula fordetermining the optimum cash balance (Z), the
point at which to sell securities to raise cash
(lower limit L) and when to invest excess cash bybuying securities and lowering cash holdings(upper limit H).
Depends on:
transaction costs of buying or selling securities variability of daily cash (incorporates uncertainty)
return on short-term investments
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Days of the Month
The Miller - Orr Model
Lower L imit
Upper L imi t
Z
Sell Secur ities
Buy Secur ities
H
L
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The Miller-Orr Model
- Target Cash Balance (Z)
3 x TC x V
4 x rZ = + L
3
where: TC = transaction cost of buyingor selling securities
V = variance of daily cash flowsr = daily return on short-term
investmentsL = minimum cash requirement
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Example: Suppose that short-term securities yield5% per year and it costs the organization $50 eachtime it buys or sells securities (TC). The dailyvariance of cash flows is $1000 (V) and your bank
requires $1,000 minimum checking accountbalance (L).*
The Miller-Orr Model
- Target Cash Balance (Z)
3 x 50 x 10004 x .05/360Z = + $1,000
= $3,000 + $1,000 = $4,000
3
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The Miller-Orr Model
- Upper Limit The upper limit for the cash account (H) is
determined by the equation:
H = 3Z - 2Lwhere:
Z = Target cash balance
L = Lower limit In the previous example:
H = 3 ($4,000) - 2($1,000) = $10,000
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Days of the Month
The Miller - Orr Model
Lower L imit
Upper L imi t
$4000
Sell Secur ities
Buy Secur ities
$10,00
$1000
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Cash Pooling
Centralized cash management involves transfer
of an agencys cash in excess of minimal
operating requirements into a centrallymanaged
account also known as a cash pool.
Procedure
andBenefits
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Investment of excess funds
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The Collection & Disbursement of Public Funds
Controll ing Cash
Collection &
Disbursement
Dual responsibility
Receipts maintained in a
location separate from
cash & checks Certification of vouchers
Managing Cash Balances
Safety
Liquidity
Maximize pool of funds
available for investment
Concentration Accounts
Zero-balance accounts
Highest yield
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Collection of funds
Need for accelerating collections
How to accelerate collection of receivables
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Disbursement of fundsImportance of disbursement of funds
Review of disbursements
Payment instruments being used (checks,drafts, wire transfers, etc.)
Bank charges and internal costs
Techniques being used
Time involved for processing of instruments
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Payments Netting in PublicCash Management
Need for payments netting
Procedure involved
Only netted amount is transferred (bilateralnetting)
Netting center (multilateral netting)
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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 areinputs to a cash budget and how they affectthe cash balance
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Stop Here
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Payments netting in Public
Cash Management (contd.)
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Payments Netting in Public
Cash Management (contd.)
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Cash Planning and Budgeting
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Cash Planning and Budgeting
(contd.)