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Cash Management

Cash management is not as complex a topic as other disciplines in corporate finance such as valuation and capital budgeting. However, cash management is a critical activities of a corporate financial manager because it ensures the continuation of the firm's operations. 

When the firm has cash on hand, we say that the firm is investing in cash, since cash is an asset. However, cash in a bank account earns little to no interest. That means that holding cash incurrs an opportunity cost equal to the amount of return that could be earned by its next best use. As a result, firm's try to limit their amount of investment in cash while still having enough cash on hand in order to meet their short-term operating needs. 

Cash management typically involves two main activities: (1) collecting and disbursing cash efficiently, and (2) investing excess cash in marketable securities. 

Float management: There often exists a difference between the amount of cash shown on a firm's accounting books and the amount of cash in the bank. This difference is known as the float, and result from the collection float (cheques that are received from the firm but take several days to be processed) and the disbursements float (the delay it takes to process cheque payments). The firm is helped by the disbursement float (it increases bank cash) and hurt by the collections float (it increases book cash but not bank cash). 

     Mail float: the time during which cheques are trapped in the mail. 
     In-house processing float: the time it takes for the receiver to process the cheque and deposit it in the bank. 
     Availability float: the time it takes the bank to clear the cheque. 

Accelerating collections: Accelerating collections here means implementing cash and cheque handling policies that allow the firm to process cheques or payments as quickly as possible. (It is differentiated from credit management, which involves negotiating credit terms with customers.) Lockboxes and cash concentration are two important tools for accelerating collections.

     Lockboxes: Lockboxes are special post office boxes set up at a bank branch. Accounts receivable payments are mailed to lockboxes and
     processed directly by the bank branch. Details of the deposits made are recorded by the bank and sent to the firm. 

     Cash concentration: For large businesses, concentration accounts consolidate the surplus deposits from the corporation's subsidiaries or
     units by crediting one central account. These funds are available same-day. Pooling or consolidating funds allows a company to use a
     positive balance in one account to offset negative balances in others, avoiding overdraft costs and bounced payments. Excess pooled
     funds can also be used by central financial managers to pay down debt or invest in marketable securities. Cash concentration systems are
     used to optimize the cash management of all the different units of the business

Controlling disbursements: Slowing down disbursements is a method of cash management that is also a sensitive area and can affect supplier relations. In practice, these methods are slowly dissappearing because of the ethical and legal ramifications of deliberately delaying payments. 

     Zero-balance accounts: Banks will transfer needed funds to cover disbursements over the course of the day from a mass account to zero-
     balance accounts. In the typical case, a firm maintains a master account, a zero-balance account for payroll and a zero-balance account for
     other payments. The firm doesn't need to keep a safety stock of cash in the zero-balance accounts, because cash can be transferred from
     the master account when needed. 

     Sweep accounts: At the end of the day, excess cash in a firm's sweep account is automatically transferred to an interest-bearing account or
     money market fund. 

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