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CHAPTER 6: CASH AND MARKETABLE SECURITIES MANAGEMENT - Coggle Diagram
CHAPTER 6:
CASH AND MARKETABLE SECURITIES MANAGEMENT
cash management
definition and reasons for holding cash
a form of currency
most liquid asset
non-earning asset (does not earn anything by holding cash. the cash itself earns no interest)
objective of cash management:
to minimize idle cash balance (hold too much cash: lose profitability)
to maintain adequate cash for business transactions
the cash management goal is to minimize the level of cash reserve while maintaining adequate level of liquidity which involves:
determine the appropriate degree of liquidity
determine the appropriate mix of cash reserve
(balance between cash and marketable securities)
reasons for holding cash:
transaction
- support day-to-day operations (i.e. pay bills, purchase material)
precautionary
- emergency purposes (i.e. cash outflow exceed cash inflow)
speculative
- make return from profit-making situation
strategies for efficient cash management:
take advantage of credit terms (pay as late as possible without damaging the firm's credit rating)
give cash discount to get prompt payment (collect the debt asap without losing future sales)
turn out
inventories as quick as possible
, but avoid stock-out
steps of efficient management of cash
operating cycle (OC)
- (i.e. days) the lag time between the
purchase of raw material and cash receipt
from sales or receivable
cash cycle (CC)
- (i.e. days) the lag time between the
cash payment of purchases and cash receipt
from sales or receivable
cash turnover (CT)
- is the number of times the cash is being turned over in a year
minimum operating cash (MOC)
- is the amount of cash that needed to be held (i.e. to avoid any shortage in making payments)
strategies in cash cycles
increasing average payment period
reducing average inventory of age
reducing average collection period
the changes will have several impacts:
shorter CC and thus higher CT
-lower MOC requirements, hence lower investment in cash to support firm's operations
lower cost of financing and higher profits
marketable securities management
definition and reasons for holding liquid assets
definition
are s/term, interest earning, money market instruments that can easily be converted into cash
reasons
as substitute for cash
as a temporary investment
when the firm sold their l/term liabilities, the proceeds will be used to buy the marketable securities
factors to influence choice of marketable securities
inflation risk
- inflation will reduce the purchasing power
marketability risk
- security cannot be sold at fair market price
interest rate risk - fluctuation in interest rate
return on the security (yield)
- higher risk leads to higher return
default risk
- borrower unable to repay interest or loan's principal when due
types of marketable securities
commercial paper
negotiable certificate of deposits
cagamas bond
repurchase agreement (REPOs)
Malaysian Government Securities (MGS)
banker's acceptance (BA)
treasury bills