Cash Management and Marketable Securities^209
Controlling Disbursements
Just as speeding collections turns accounts receivable into cash and thereby reduces
the firmís financing requirements. Slowing disbursements does the same. In earlier
chapter, we discussed trade credit as a source of funds. There we conclude that the
proper policy was to pay within the terms agreed upon taking cash discounts when
offered. We conclude also that is no point in paying sooner than agreed. By waiting as
long as possible, the firm maximises the extent to which accounts payable are used as
a source of funds, a source which requires no interest payment.
Firms with expense-generating activities that over a wide area often find it advantageous
to make disbursements from a single central account. In that way, schedules can be
tightly controlled and disbursements can be made on exactly the right day. An alternate
arrangement is to disburse from decentralised locations, but to wire transfer the exact
amount needed in each local account for all disbursement scheduled that day.
Some firms find it advantageous to exploit the ìcheque book floatî, which is the time
between the writing of a cheque and its presentation for collection, represented by CD
. If this lag can be exploited, it offsets at least partially the lag in the other direction in
collecting cheques from customer (HJ). Because of lag CD, a firmís balance on the
bankís books is higher than in its own cheque book. Knowing this, a firm may be able to
reduce its working cash requirements. Banks understand cheque book float also, and
can be expected to set compensating balances and fees based on balances on their (the
banks) books. If a firm exploits cheque book float too far, it increases the likelihood of
cheques being dishonoured for insufficient funds and the accompanying displeasure of
both bank and payee.
Determining the Appropriate Working Cash Balance
Let us assume the firm now is collecting, and disbursing its cash as efficiently as possible.
Given its long-term financial structure fixed assets long-term liabilities, and equity its
total cash position at any time is determined by its operating plan. Suppose total cash is
more than the firm needs for operating purposes, if disbursements are made according
to plan.
The Neptune Company projected a total cash balance as high as Rs 4,89,000 in
November. Should all these funds be kept in Neptuneís current account? Since current
accounts earn no interest, it is to Neptuneís advantage to leave only the amount necessary
to operate, and to invest the remainder temporarily in interest-bearing liquid assets until
needed.
Our problem, then, is to determine how much cash a firm should maintain in its current
account as a working balance. We will address this question here, and in the next
section discuss the investment of amounts above the working balance.