Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition
VII. Short−Term Financial
Planning and Management
- Cash and Liquidity
Management
© The McGraw−Hill^715
Companies, 2002
The general idea in such systems is to have no more than the minimum amount neces-
sary to pay bills on deposit in the bank. We discuss some approaches to accomplishing
this goal next.
Zero-Balance Accounts With a zero-balance accountsystem, the firm, in cooper-
ation with its bank, maintains a master account and a set of subaccounts. When a check
written on one of the subaccounts must be paid, the necessary funds are transferred in
from the master account. Figure 20.5 illustrates how such a system might work. In this
case, the firm maintains two disbursement accounts, one for suppliers and one for pay-
roll. As shown, if the firm does not use zero-balance accounts, then each of these ac-
counts must have a safety stock of cash to meet unanticipated demands. If the firm does
use zero-balance accounts, then it can keep one safety stock in a master account and
transfer the funds to the two subsidiary accounts as needed. The key is that the total
amount of cash held as a buffer is smaller under the zero-balance arrangement, which
frees up cash to be used elsewhere.
Controlled Disbursement Accounts With a controlled disbursement account
system, almost all payments that must be made in a given day are known in the morn-
ing. The bank informs the firm of the total, and the firm transfers (usually by wire) the
amount needed.
INVESTING IDLE CASH
If a firm has a temporary cash surplus, it can invest in short-term securities. As we have
mentioned at various times, the market for short-term financial assets is called the
CONCEPT QUESTIONS
20.4a Is maximizing disbursement float a sound business practice?
20.4bWhat is a zero-balance account? What is the advantage of such an account?
688 PART SEVEN Short-Term Financial Planning and Management
FIGURE 20.5
No zero-balance accounts
Payroll account Supplier account
Safety stocks
Two zero-balance accounts
Master account
Safety stock
Cash
transfers
Cash
transfers
Payroll account Supplier account
With no zero-balance accounts, separate safety stocks must
be maintained, which ties up cash unnecessarily. With zero-
balance accounts, the firm keeps a single safety stock of cash
in a master account. Funds are transferred into disbursement
accounts as needed.
Zero-Balance Accounts
zero-balance account
A disbursement account
in which the firm
maintains a zero
balance, transferring
funds in from a master
account only as needed
to cover checks
presented for payment.
controlled disbursement
account
A disbursement account
to which the firm
transfers an amount that
is sufficient to cover
demands for payment.