Cash and Marketable Securities Management
Cash and Marketable Securities Management
Cash and Marketable Securities Management
Note: Accounts payable reduce the number of days a firm’s resources are tied up in the operating cycle. The Payables
Deferral Period (PDP) is the time it takes to pay the accounts payable, measured in days. The operating cycle less the
average payment period yields the cash conversion cycle.
Illustration of Cash Conversion Cycle: Relationship of Inventory, Receivables, and Payable Days
2. Amidamaru Co.’s inventory is worth 10,000 and its receivable from customer, 4,000. Its daily sales averages 100.
Its daily cost of goods sold is 50. Also, Amidamaru Co. owes 3,000 to its suppliers. An average of 50 worth of
purchases is made daily. Compute:
a. Inventory Conversion Period/ Days inventory 200 days
b. Receivable Collection Period/ Days receivable 40 days
c. Payment Cycle/ Days payable 60 days
d. Cash Conversion Cycle 180 days
Note: Other pertinent formula under Baumol Model and Cash Management, especially if the firm has a cash buffer, is
presented in separate solution of the problem below.
PROBLEMS
Dursley’s evaluation of its cash outlay required indicates that it needs 20,000 for the year. Regardless of the amount. It
incurs 18.75 to convert marketable securities to cash. The marketable securities earn an annual rate of 7.5%.
Case 2: Dursley maintain buffer cash of 20,000 all throughout the year
1. How much is the optimal transaction size? 100,000
2. How much is the average cash balance? 70,000
3. How much is the annual holding cost as a result of keeping cash in bank (instead of putting it in
marketable securities)? 5,250
4. How many transactions should be there in a year? 200
5. How much transaction cost are incurred throughout the year? 3,750
6. How much is the total annual cost of cash? 9,000
Float
• funds that have been sent by the payer but are not yet usable funds to the payee
• critical in the cash conversion cycle because its presence lengthens both the firm’s average collection period and
its average payment period.
• Three components or parts:
o mail float - the time delay between when payment is placed in the mail and when it is received.
o processing float - the time between receipt of the payment and its deposit into the firm’s account.
o clearing float - the time between deposit of the payment and when spendable funds become available
to the firm. This is attributable to the length of time required to clear checks within the banking system.
Pertinent Formulas:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐷𝑖𝑠𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡 𝐹𝑙𝑜𝑎𝑡 = (𝑀𝑎𝑖𝑙 𝑇𝑖𝑚𝑒 + 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑇𝑖𝑚𝑒 + 𝐶𝑙𝑒𝑎𝑟𝑛𝑔 𝑇𝑖𝑚𝑒) 𝑥 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑃𝑎𝑦𝑚𝑒𝑛𝑡
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝐹𝑙𝑜𝑎𝑡 = (𝑀𝑎𝑖𝑙 𝑇𝑖𝑚𝑒 + 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑇𝑖𝑚𝑒 + 𝐶𝑙𝑒𝑎𝑟𝑛𝑔 𝑇𝑖𝑚𝑒) 𝑥 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛
𝑁𝑒𝑡 𝐹𝑙𝑜𝑎𝑡 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐷𝑖𝑠𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡 𝐹𝑙𝑜𝑎𝑡 − 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝐹𝑙𝑜𝑎𝑡
If Positive = “Net Positive Float”
If Negative = “Net Negative Float”
PROBLEMS
1. The following data pertains to Asakura Corp.’s:
Asakura Corp.’s payment to suppliers Asakura Corp.’s collection from customers
(in number of days) (in number of days)
Mail time 4 Mail time 3
Processing Delay 3 Processing Delay 2
Clearing Delay 1 Clearing Delay 1
Asakura Corp.’s average daily payment is P1,000 meanwhile daily collection average P1,500.
a. How much is the average daily disbursement float? 8,000
b. How much is the average daily collection float? 9,000
c. How much is the net float? (1,000)
2. Smart Enterprise supplies components to auto repair stations. These stations send their checks via remittance
firms. On average, Smart receives the checks 2 days after the date they were sent. Smart processes the checks
after 2 days, after which they are subsequently deposited to the bank. The bank cleats the check within 24
hours. Average daily collection is P40,000.
a. How much is the average daily collection float? 200,000
b. If the cash can be readily invested in instrument earning 5%, how much is the daily cost of the float?
27.78
c. If Smart Enterprise can process checks within a day and deposit the same immediately, how much can it
save in a year? 2,000 savings
3. Joy Inc. pays its purchases from remote disbursement centers. This strategy delays the clearing of checks.
Disbursement time increases by 2 days due to this practice. Cash freed from this scheme are placed in
instruments yielding 10%. Average daily disbursement is P50,000.
a. How much will be saved each year in implementing this strategy? 10,000
Other topics under Cash Management
Cash concentration
• The process used by the firm to bring lockbox and other deposits together into one bank, often called the
concentration bank.
• three main advantages
a. it creates a large pool of funds for use in making short-term cash investments. Because there is a fixed-
cost component in the transaction cost associated with such investments, investing a single pool of funds
reduces the firm’s transaction costs.
b. concentrating the firm’s cash in one account improves the tracking and internal control of the firm’s cash.
c. having one concentration bank enables the firm to implement payment strategies that reduce idle cash
balances
Wire transfer
• An electronic communication that, via bookkeeping entries, removes funds from the payer’s bank and deposits
them in the payee’s bank.
Zero-balance account (ZBA)
• A disbursement account that always has an end-of-day balance of zero because the firm deposits money to
cover checks drawn on the account only as they are presented for payment each day.