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CHAPTER 17 WORKING CAPITAL MANAGEMENT



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CHAPTER 17 WORKING CAPITAL MANAGEMENT CHAPTER 17 QUIZ CHAPTER ORGANIZATION The basic objective in cash management is to keep the investment in cash as low as possible while still operating the firm s activities efficiently and effectively This goal usually reduces to the dictum Collect early and pay late Accordingly we discuss ways of accelerating collections and managing disbursements In addition firms must invest temporarily idle cash in short term marketable securities These securities can be bought and sold in the financial markets As a group they have very little default risk and most are highly liquid 17 1 Float and Cash Management Reasons for Holding Cash Speculative motive The need to hold cash in order to be able to take advantage of for example bargain purchase opportunities that might arise attractive interest rates and in the case of international firms favorable exchange rate fluctuations Precautionary motive The need to hold cash as a safety margin to act as a financial reserve is the need for a safety supply to act as a financial reserve Transaction motive The need to have cash on hand to pay bills Transaction related needs come from the normal disbursement and collection activities of the firm The opportunity cost of holding cash is the return that could be earned by investing the cash in other assets However there is also a cost to convert between cash and other assets The optimal cash balance will balance these costs to minimize the overall cost of holding cash Understanding Float The difference between the available balance and the ledger balance is called the float and it represents the net effect of checks in the process of clearing moving through the banking system Book balance the amount of cash recorded in the accounting records of the firm Available balance the amount of cash the bank says is available to be withdrawn from the account may not be the same as the amount of checks deposited minus amount of checks paid because deposits are not



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