Cash management means efficiently collecting cash from customers and managing cash outflows. To manage cash, the\u00a0cash budget<\/strong>\u2014a forward-looking document\u2014is an important planning tool. To understand cash management, you must first understand what is meant by cash holdings and the motivations (reasons) for holding cash. A cash budget example is covered in\u00a0Using Excel to Create the Short-Term Plan.<\/p>\n\n\n\n The cash holdings of a company are more than the currency and coins in the cash registers or the treasury vault. Cash includes currency and coins, but usually those amounts are insignificant compared to the cash holdings of checks to be deposited in the company\u2019s bank account and the balances in the company\u2019s checking accounts.<\/p>\n\n\n\n The initial answer to the question of why companies hold cash is pretty obvious: because cash is how we pay the bills\u2014it is the medium of exchange. The transactional motive<\/strong> of holding cash means that checks and electronic funds transfers are necessary to meet the payroll (pay the employees), pay the vendors, satisfy creditors (principal and interest payments on loans), and reward stockholders with dividend payments. Cash for transaction is one reason to hold cash, but there is another reason\u2014one that stems from uncertainty and the precautions you might take to be ready for the unexpected.<\/p>\n\n\n\n Just as you keep cash balances in your checking and savings accounts and even a few dollars in your wallet or purse for unexpected expenditures, cash balances are also necessary for a business to provide for unexpected events. Emergencies might require a company to write a check for repairs, for an unexpected breakdown of equipment, or for hiring temporary workers. This motive of holding cash is called the precautionary motive<\/strong>.<\/p>\n\n\n\n Some companies maintain a certain amount of cash instead of investing it in marketable securities or in upgrades or expansion of operations. This is called the speculative motive<\/strong>. Companies that want to quickly take advantage of unexpected opportunities want to be quick to purchase assets or to acquire a business, and a certain amount of cash or quick access to cash is necessary to jump on an opportunity.<\/p>\n\n\n\n Sometimes cash balances may be required by a bank with which a company conducts significant business. These balances are called compensating balances<\/strong> and are typically a minimum amount to be maintained in the company\u2019s checking account.<\/p>\n\n\n\n For example, Jack\u2019s Outback Restaurant Group borrowed $500,000 from First National Bank and Trust. As part of the loan agreement, First National Bank required Jack\u2019s to keep at least $50,000 in its company checking account as a way of compensating the bank for other corporate services it provides to Jack\u2019s Outback Restaurant Group.<\/p>\n\n\n\n Cash that a company has that is in excess of projected financial needs is often invested in short-term investments, also known as cash equivalents (cash alternatives). The reason for this is that cash does not earn a rate of return; therefore, too much idle cash can affect the profitability of a business.<\/p>\n\n\n\n Table 19.3\u00a0shows a list of typical investment vehicles used by corporations to earn interest on excess cash. Financial managers search for opportunities that are safe and highly liquid and that will provide a positive rate of return. Cash alternatives, because of their short-term maturities, have low interest rate risk (the risk that an investment\u2019s value will decrease because of changes in market interest rates). In that way, prudent investment of excess cash follows the risk\/return trade-off; in order to achieve safe returns, the returns will be lower than the possible returns achieved with risky investments. Cash alternative investments are not committed to the stock market.<\/p>\n\n\n\n Table<\/strong> 19.3<\/strong> Typical Cash Equivalents<\/p>\n\n\n\n Figure 19.5\u00a0shows a note within the 2021 Annual Report (Form 10-K) of\u00a0Target Corporation. The note discloses the amount of Target\u2019s cash and cash equivalent balances of $8,511,000,000 for January 30, 2021, and $2,577,000,000 for February 1, 2020.<\/p>\n\n\n\n In that note, which is a supplement to the company\u2019s balance sheet, receivables from third-party financial institutions is also considered a cash equivalent. That is because purchases by Target\u2019s customers who use their credit cards (e.g.,\u00a0VISA\u00a0or\u00a0MasterCard) create very short-term receivables\u2014amounts that Target is waiting to collect but are very close to a cash sale. So instead of being reported as accounts receivable\u2014a line item on the Target balance sheet that is separate from cash and cash equivalents\u2014these amounts receivable from third-party financial institutions are considered part of the cash and cash equivalents and are a very liquid asst. For example, the amount of $560,000,000 for January 30, 2021, is considered a cash equivalent since the settlement of these accounts will happen in a day or two with cash deposited in Target\u2019s bank accounts. When a retailer sells product and accepts a credit card such as VISA, MasterCard, or\u00a0American Express, the cash collection happens very soon after the credit card sale\u2014typically within 24 to 72 hours.<\/p>\n\n\n\n Companies also invest excess funds in marketable securities. These are debt and equity investments such as corporate and government bonds, preferred stock, and common stock of other entities that can be readily sold on a stock or bond exchange. Ford Motor Company has this definition of marketable securities in its 2019 Annual Report (Form 10-K):<\/p>\n\n\n\n \u201cInvestments in securities with a maturity date greater than three months at the date of purchase and other securities for which there is more than an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal are classified as\u00a0Marketable securities<\/em>.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" By the end of this section, you will be able to: Cash management means efficiently collecting cash from customers and managing cash outflows. To manage cash, the\u00a0cash budget\u2014a forward-looking document\u2014is an important planning tool. To understand cash management, you must first understand what is meant by cash holdings and the motivations (reasons) for holding cash. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1860],"tags":[],"class_list":["post-18194","post","type-post","status-publish","format-standard","hentry","category-the-importance-of-trade-credit-and-working-capital-in-planning"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/18194","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=18194"}],"version-history":[{"count":1,"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/18194\/revisions"}],"predecessor-version":[{"id":18195,"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/18194\/revisions\/18195"}],"wp:attachment":[{"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=18194"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=18194"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/4botany.appscodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=18194"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Cash Holdings<\/h3>\n\n\n\n
Motivations for Holding Cash<\/h4>\n\n\n\n
Cash Alternatives<\/h4>\n\n\n\n
Security<\/th> Description<\/th><\/tr><\/thead> US Treasury bills<\/td> Obligations of the US government with maturities of 3 and 6 months<\/td><\/tr> Federal agency securities<\/td> Obligations of federal government agencies such as the Federal Home Loan Bank and the Federal National Mortgage Association<\/td><\/tr> Certificates of deposit<\/td> Issued by banks, a type of savings deposit that pays interest<\/td><\/tr> Commercial paper<\/td> Short-term promissory notes issued by large corporations with maturities ranging from a few days to a maximum of 270 days<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n