FINC-220 Lecture Notes - Lecture 12: Money Market, Opportunity Cost, Credit Risk
Chapter 19
Cash and liquidity management
Chapter outline
• Reasons for holding cash
• Cash collection and concentration
• Managing cash disbursements
• Investing idle cash
Reasons for holding cash
Speculative motive – hold cash to take advantage of unexpected opportunities
Precautionary motive – hold cash in case of emergencies
Transaction motive – hold cash to pay the day-to-day bills
Trade-off between opportunity cost of holding cash relative to the transaction cost of
converting marketable securities to cash for transactions
Cash collection
One of the goals of management is to try to reduce the collection delay. There are several
techniques that can reduce various parts of the delay
Lockbox system
1. A lockbox system is a service whereby checks are mailed to a local PO Box address.
2. The checks are picked up daily (or even multiple times per day) by the servicing firm.
3. The checks are deposited into the local branch bank.
4. The balances are electronically transferred to the firm’s branch of the bank, available for
use immediately.
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Document Summary
Chapter outline: reasons for holding cash, cash collection and concentration, managing cash disbursements. Speculative motive hold cash to take advantage of unexpected opportunities. Precautionary motive hold cash in case of emergencies. Transaction motive hold cash to pay the day-to-day bills. Trade-off between opportunity cost of holding cash relative to the transaction cost of converting marketable securities to cash for transactions. One of the goals of management is to try to reduce the collection delay. There are several techniques that can reduce various parts of the delay. Slowing down payments but it may not be ethical or optimal to do this. Maintain several sub-accounts at regional banks and one master account. Funds are transferred from the master account when checks are presented for payment at one of the regional accounts. Firm is notified on a daily basis how much cash is required to meet that day"s disbursements and the firm wires the necessary funds.
