Chapter 15 Working Capital Management 485Note that if cash in" ows and out" ows do not occur uniformly during each
month, the actual funds needed might be quite different from the indicated
amounts. The data in Table 15-1 show the situation on the last day of each month,
and we see that the maximum projected loan is $115 million. However, if all pay-
ments had to be made on the 1st of the month but most collections came on the
30th, Allied would have to make $265 million of payments in July before it received
the $254 million from collections. In that case, the! rm would need to borrow about
$275 million, not the $21 million shown in Table 15-1. A daily cash budget would
reveal that situation.
Table 15-1 was prepared using Excel, which makes it easy to change the as-
sumptions. Therefore, we could examine the cash " ow effects of changes in sales,
the target cash balance, customers’ payments, and so forth. Also, the effects of
changes in credit policy and inventory management could be examined through
the cash budget.
SEL
F^ TEST How could the cash budget be used when the terms of a bank loan are
negotiated?
Suppose a " rm’s cash # ows do not occur uniformly throughout the month.
What e! ect would this have on the accuracy of the forecasted borrowing
requirements based on a monthly cash budget? How could the " rm deal
with this problem?15-6 CASH AND MARKETABLE SECURITIES
When most of us use the term cash, we mean currency (paper money and coins) in
addition to bank demand deposits. However, when corporate treasurers use the
term, they often mean currency and demand deposits in addition to very safe, highly
liquid marketable securities that can be sold quickly at a predictable price and thus be con-
verted to bank deposits.^8 Therefore, “cash” as reported on balance sheets generally
includes short-term securities, which are also called “cash equivalents.”
Note that a! rm’s marketable security holdings can be divided into two cate-
gories: (1) Operating short-term securities, which are held primarily to provide
liquidity and are bought and sold as needed to provide funds for operations, and
(2) other short-term securities, which are holdings in excess of the amount needed to
support normal operations. Highly pro! table! rms such as Microsoft often hold
far more securities than are needed for liquidity purposes. Those securities will
eventually be liquidated; and the cash will be used for such things as paying a
large one-time dividend, repurchasing stock, retiring debt, acquiring other! rms,
or! nancing major expansions. This breakdown is not reported on the balance
sheet, but! nancial managers know how much of their securities will be needed
for operating versus other purposes. In our discussion of net working capital, the
focus is on securities held to provide operating liquidity.
(^8) The reason corporate treasurers think of cash as they do is that from their perspective, there is little di# erence
between demand deposits and liquid marketable securities. They can call a dealer, sell securities, and have the
proceeds deposited in the! rm’s bank account in an hour or so. Also, many types of short-term securities are
available. Treasury bills are an obvious example; but as we discussed in Chapter 2, there are many other safe,
liquid, short-term, marketable securities.