Introduction to Corporate Finance

ONLINE CHAPTERS

4 Clearing float is the time between deposit of the cheque and presentation of the cheque back to the

bank on which it is drawn.

In addition to managing the collection, concentration and disbursement of funds, the cash manager

is also responsible for the following duties:

■ Financial relationships: managing relationships with banks and other providers of cash management

services

■ Cash flow forecasting: determining future cash flows to predict surpluses or deficits (see Chapter 16)

■ Investing and borrowing: managing the investing of short-term surpluses or borrowing for short-term

deficits

■ Information management: developing and maintaining information systems to gather and analyse cash

management data.

Cash management typically resides in the company’s treasury area, along with such functions as external

financing and risk management. In smaller companies, accounting or clerical staffs may perform the cash

management function. The staff ’s specific cash management tasks related to collection, concentration

and disbursement of funds are described in the following sections.

19 -1b CASH POSITION MANAGEMENT

On a daily basis, the primary cash management tasks related to the collection, concentration and

disbursement of funds for the company are generally referred to as cash position management. That is,

each day the cash manager must determine the amount of funds to be collected, move balances to the

appropriate accounts and fund the projected disbursements. The cash position can be managed with

some degree of accuracy many weeks into the future, given proper forecasting of cash flows. Most of the

cash management products and services offered by banks and other financial institutions are associated

with some part of this process.

At the end of the day, the cash manager must determine: (1) whether the company will have a surplus

or a deficit of funds in each cheque account; and (2) how to manage the difference. If the company has

a surplus of funds, then the money may be placed in some type of short-term investment, such as an

interest-bearing account at its bank or a portfolio of marketable securities. However, if the company has

a deficit, then the cash manager must arrange either to transfer funds from investment accounts or to

draw on a short-term credit agreement with the company’s bank. The management of these short-term

investing and borrowing arrangements is typically the responsibility of the cash manager.

Many companies, especially smaller ones, do not actively engage in cash position management, but

rather set a target cash balance for their cheque accounts. The primary approach to determining these

target cash balances is based on transactions requirements or a minimum balance set by the bank.

The transactions requirement is determined simply by how much cash a company needs to fund its

day-to-day operations. Companies with a high volume of daily inflows and outflows will find that some

balances remain in non-interest-bearing cheque accounts, regardless of forecasting ability. Many banks

also require a specified minimum balance in customer cheque accounts. For smaller companies and

banks, this minimum balance is designed to provide adequate compensation to the bank for the services

it provides. For larger companies, most banks perform account analysis, which compares the value of the

balances a company leaves on deposit to the value of the services it receives from the bank.

What are the cash manager’s

goals with regard to float

when managing a company’s

cash receipts and cash

disbursements?

thinking cap
question

cash position

management

The primary cash management

tasks that are performed

daily and involve the

collection, concentration and

disbursement of company

funds

target cash balance

A cash total that is set for

cheque accounts to avoid

engaging in cash position

management

clearing float

The time between deposit of

the cheque and presentation

of the cheque back to the bank

on which it is drawn