Cash Management ✅

1. Cash Budget.. is a cash details projected the receipts & disbursement
○ Based on projected sales & credit terms, collection percentage, and estimated purchases & payment terms.
○ Cash outflows is budgeted based on sales level,
○ Budgets must be for a specified period of time.. the units of time must be short enough to assure that all cash payments can be met.

2. Reasons of holding cash
    a- Medium of exchange
    b- Precautionary measure
    c- for Speculation
    d- Compensating Balance

3. Cash inflows should be expedited

4. Slowing Cash Disbursements to increase available cash.
a- Payments should be made within discount periods (if cost of not taking a discount > firm’s cost of capital)
• cost of not taking discount is: [360 ÷ (T. pay period – disc period)] x [ disc% ÷ (100% - disc%)]
Example: 2/10 net 30 (payment period 30 days & discount period 10 days & discount rate 2%)
Calc1: 2/10net30 result in (360 ÷ 20) x (2 ÷ 98) = 36.70% annualized interest (cost of not taking disc.)
Calc2: More accurate calculation (considering compounding effects):
            number of annual payments = 360 ÷ (30-10) = 18
            annual effective rate = [1.0 + (2 ÷ 98)]18  – 1.0 = 43.80%
b- Compensating Balances..
Effective interest rate requiring compensation balance = Total Interest Cost ÷ Total. Principal
d- Zero-balancing Checking Accounts..

5. Cash Amount to Keep on Hand, determined by Cost-Benefit Analysis.
a- reducing [avg cash * interest rate] is the benefit.
b- cost of insufficient cash: incremental personnel cost, lost discounts, lost goodwill
c- Economic Order Quantity (EOQ): is a model for cash management with the following assumptions:
• known demand of cash, • given carrying (interest) cost, • cost of liquidation of other assets.

6. Excess Cash should be invested with high return & little risk. Such as:
a- Treasury Bills: Short-term govt. debt securities guaranteed by US govt & exempted from state & local taxes. It is sold on discount.
b- Certificate of Deposit ‘CD’: savings deposit that cannot be withdrawn before maturity without high penalty.
c- Money-Market Accounts: as checking accounts but pay higher interest.
d- High-Grade Commercial Paper: unsecured & short-term notes issued by large companies with very good credit risk. Commercial paper is higher return than CDs cuz of higher risk.