Cash Management Cash Cycle Factors that influence the desired level of cash Optimal cash inventories Short-term investment strategies The Manager Resource Decisions Information Decisions Financing Decisions Investment Decisions Human Resources Decisions Managing an entity’s Resources Cash Management Inventory Management Working Capital Management Investment in Human Capital Long-term Assets Accounts Receivable Economics of Information Database Management Data Modeling IS Planning & Development Debt vs. Tax Financing Cost of Capital Discount Rate Value Creation Financial Markets Cash Inflows Operating Decisions Recruitment, Selection Training, Productivity Performance Appraisal Compensation Unions & Labor Relations Life cycle effects, Business cycle, public events, etc. Overview     !"# $#%$&'( )'* (! ' Managing WC involves determing: • +)"#, - CA vs. FA - Nature of activities/programs • In each CA? - Cash, A/R, Inventory - Cash Mgt - A/R is Credit Mgt - Inv = POM & Cash balance models Our objectives • -)""' • .!/) ! • -) ! • 0!! ))' 1 Objectives of Public Money Managers 2')  #) ) !!) Key areas of Public Cash Management 3  ")!!) 4!'' &!5!) 3! ") 2 Treasury Management of Cash Balances 3)! )  2! 6!!) How much cash should a organization keep on hand? • 7)' 8 – (Daily or Weekly Cash Budget helpful) • #'! )59)8)'  The size of the minimum cash balance depends on: • +9)''   8 • +)' 9)8 – (Cash Budget helpful) • +))' !8 [...]... about the Cash Cycle • Understand the factors that influence the desired level of cash • Learn two models that calculate the optimal level of cash • Gain an overview of what factors/ areas are inputs to a cash budget and how they affect the cash balance Stop Here Payments netting in Public Cash Management (contd.) Payments Netting in Public Cash Management (contd.) Cash Planning and Budgeting Cash Planning... hold too little that earns to meet cash needsorder to transfer funds from the state pool, costs 01% per day In costs to meet cash needs Grantsville must pay a transaction cost of $20 How much cash should it transfer when it runs out (Grantsville can complete the cash transfer electronically sohold lots until the= forgo investing zero) hold lotsof cash =cash balance is in M/S it waits of cash forgo investing... Consider Cash an ‘Inventory’ the trade-offs: hold little cash = invest An inventory approach invest the trade-offs: hold little cash = to Cash remainder in M/S to earn interest remainder in M/S to decisions: Balance earn interest Grantsville has a daily demand for cash of $10,000 Grantsville’s too little cash = incur transactions state investment pool invests excess cash in the if hold treasurercash... Dollars in the Cash Account The Miller - Orr Model Upper Limit Buy Securities H Z Lower Limit Sell Securities Days of the Month L The Miller-Orr Model - Target Cash Balance (Z) 3 Z= 3 x TC x V +L 4xr where: TC = transaction cost of buying or selling securities V = variance of daily cash flows r = daily return on short-term investments L = minimum cash requirement The Miller-Orr Model - Target Cash Balance... ‘safety stock’ of cash The Miller - Orr Model • The Miller-Orr Model provides a formula for determining the optimum cash balance (Z), the point at which to sell securities to raise cash (lower limit L) and when to invest excess cash by buying securities and lowering cash holdings (upper limit H) • Depends on: – transaction costs of buying or selling securities – variability of daily cash (incorporates... equation: H = 3Z - 2L where: Z = Target cash balance L = Lower limit • In the previous example: H = 3 ($4,000) - 2($1,000) = $10,000 Dollars in the Cash Account The Miller - Orr Model Upper Limit Buy Securities $10,000 $4000 Lower Limit Sell Securities Days of the Month $100 0 Cash Pooling Centralized cash management involves transfer of an agency’s cash in excess of minimal operating requirements into... Suppose that short-term securities yield 5% per year and it costs the organization $50 each time it buys or sells securities (TC) The daily variance of cash flows is $1000 (V) and your bank requires $1,000 minimum checking account balance (L).* Z= 3 3 x 50 x 1000 4 x 05/360 + $1,000 = $3,000 + $1,000 = $4,000 The Miller-Orr Model - Upper Limit • The upper limit for the cash account (H) is determined by the. .. Certification of vouchers Collection of funds Need for accelerating collections How to accelerate collection of receivables Disbursement of funds Importance of disbursement of funds Review of disbursements Payment instruments being used (checks, drafts, wire transfers, etc.) Bank charges and internal costs Techniques being used Time involved for processing of instruments Payments Netting in Public Cash Management... known as a cash pool Procedure and Benefits Investment of excess funds The Collection & Disbursement of Public Funds Managing Cash Balances • Safety • Liquidity • Maximize pool of funds available for investment – Concentration Accounts – Zero-balance accounts • Highest yield Controlling Cash Collection & Disbursement • Dual responsibility • Receipts maintained in a location separate from cash & checks.. .The organization’s maximum cash balance depends on: • Available (short-term) investment opportunities – e.g money market funds, CDs, commercial paper • Expected return on investment opportunities – e.g If expected returns are high, organizations should be quick to invest excess cash • Transaction cost of withdrawing cash and making an investment • Demand for Cash for daily transactions – (Cash . Cash Management Cash Cycle Factors that influence the desired level of cash Optimal cash inventories Short-term investment strategies The Manager Resource Decisions Information. zero). An inventory approach to Cash Balance decisions: the trade-offs: - hold little cash = invest remainder in M/S to earn interest the trade-offs: - hold little cash = invest remainder in M/S. must pay a transaction cost of $20. How much cash should it transfer when it runs out. (Grantsville can complete the cash transfer electronically so it waits until the cash balance is zero). An