Chapter 15 Working Capital Management 487effective cash infusion of $4 million. This is a one-time bene! t, but the! rm will
be earning a continuing return on the $4 million.^10- Use credit cards, debit cards, wire transfers, and direct deposits. If a! rm switches
from selling on credit to accepting credit or debit cards, it will receive next-day
cash and thus the same cash " ow bene! ts as described earlier. Similarly, requir-
ing customers to pay via wire deposits speeds up collections, increases free
cash " ows, and reduces required cash holdings. - Synchronize cash " ows. If a! rm can synchronize its cash in" ows and out" ows,
the! rm will reduce its need for cash balances. For example, utilities, oil com-
panies, and department stores generally use “billing cycles” under which dif-
ferent customers are billed on different days, causing cash to " ow in evenly
during the month. These! rms can then set up their own payment schedules
to match their in" ows. This reduces average cash balances, just as your per-
sonal average monthly balance can be reduced when your income comes in at
the same time as your required payments.
Banks have experts who help! rms optimize their cash management proce-
dures. The banks charge a fee for this service, but the bene! ts of a good cash man-
agement system are well worth the cost.
15-6c Marketable Securities
Marketable securities held for operations are managed in conjunction with demand
deposits—the management of one requires coordination with the other. Firms also
purchase marketable securities as cash builds up from operations and then sell
those securities when they need cash. Microsoft is a good example. It had accumu-
lated more than $60 billion of cash (mostly marketable securities) by the end of
- It needed to hold some of those securities for liquidity purposes, but mainly
the funds built up because Microsoft generated more cash from operations than it
needed. Investors urged management to use this “cash” in a more productive
manner or to pay it out as dividends so stockholders could invest it. Partly because
of this pressure, in the fall of 2004, Microsoft announced a one-time dividend of
$30 billion; it also stepped up its stock repurchase program. By the end of 2007,
Microsoft’s holdings of cash and equivalents had been reduced to a more “reason-
able” $6.6 billion.
Given the size and importance of marketable securities holdings, how they are
managed can have a signi! cant effect on pro! ts. A trade-off between risk and
return is involved—the! rm wants to earn high returns; but since most marketable
securities are held to provide liquidity, treasurers want to hold securities that can
be sold very quickly at a known price. That means high-quality, short-term instru-
ments. Long-term Treasury bonds are safe, but they are not well suited for the
marketable securities portfolio because their prices decline when interest rates
rise. Similarly, short-term securities issued by risky companies are not suitable
because their prices decline when the issuers’ problems grow worse. Treasury
bills, most commercial paper (discussed in Section 15-11), bank certi! cates of
deposit, and money market funds are suitable holdings.
It’s worth noting that so-called safe securities don’t always turn out to be safe.
In 2007, billions of dollars of Aaa-rated commercial paper was actually backed by
(^10) We should mention the term! oat, as it often comes up in connection with cash management. If you write a check
and it takes 5 days for the recipient to receive and deposit the check and for it to be deducted from your account,
you have 5 days of $ oat, or the use of the money for 5 days before you have to deposit funds in your account. That’s
payment! oat. On the other hand, if someone sends you a check and it takes 6 days for you to receive and deposit it
and for the bank to clear the funds, that’s 6 days of collection! oat. Your “net $ oat” would be –1 day. Positive net $ oat
is good, but negative net $ oat is bad from the standpoint of minimizing required cash holdings.