Oracle CE

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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.)