Introduction to Corporate Finance

ONLINE CHAPTERS

8 What is the primary purpose of the accounts payable function? Describe the procedures used to

manage accounts payable. What are the key differences between centralised and decentralised

payables and payment systems?

9 When is it advantageous for a company to pay early and take an offered cash discount? Under what

circumstance would the company be advised to always take any offered cash discounts?

10 What is the difference between a ZBA and a controlled disbursement account? Are they direct

substitutes?

11 What are some of the recent developments in the accounts payable and disbursements area? What

role does new technology play in preventing disbursement fraud?

CONCEPT REVIEW QUESTIONS 19-3

19-4 SHORT-TERM INVESTING AND

BORROWING

After determining the company’s cash position, the cash manager will generally have either surplus funds

to invest or a deficit of funds to replenish via short-term borrowing. Clearly, the goal is to earn relatively

safe returns on short-term surpluses and to borrow at reasonable cost to meet short-term deficits. The

company’s motive for holding cash will have a significant impact on both its short-term investing and its

borrowing decisions. This section reviews the key motives for holding cash and short-term investment

balances, and some of the options available to the financial manager for investing short-term surpluses.

In addition, it describes some key aspects of borrowing to meet short-term deficits.

19- 4a MOTIVES FOR HOLDING CASH AND SHORT-TERM

INVESTMENTS

There are three basic motives for holding cash and short-term investments (also called marketable

securities). In a more general sense, these are the motives for maintaining liquidity. Each motive can be

addressed in two ways: (1) the appropriate degree of liquidity; and (2) the appropriate mix of cash and

short-term investments.

Transactions Motive

A company maintains cash and short-term investments to satisfy the transactions motive, which is to make

planned payments for items such as materials and wages. Generally, because these balances are held

to make planned near-term payments, companies fulfil this motive primarily by holding cash balances.

If the company’s cash inflows and cash outflows are closely matched, its transactions balances can be

minimised. Although companies must fulfil this cash need, typically they hold liquid balances to meet

the following two motives as well.

LO19.6

transactions motive
A motive for holding cash
and short-term investments
in order to make planned
payments for items such as
materials and wages