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Disadvantages of having cash on hand?
It's not doing anything for you. It can't work for you, it just sits there.
What are the three reasons for holding cash?
- 1. Speculative motive-- hold cash to take advantage of unexpected opportunities
- 2. Precautionary motive – hold cash in case of emergencies
- 3. Transaction motive – hold cash to pay the day-to-day bills
Are trading costs increased or decreased when the firm must sell securities to establish a cash balance?
What happens to opportunity costs when there is a cash balance?
They increase because there is no return on cash.
What is float?
difference between cash balance recorded in the cash account and the cash balance recorded at the bank
Who likes float and why? The payee or the payer?
If you are a payee and you recieve money, float is a bad guy. Longer float is the longer it takes to get your money. Opposite for the payer.
- Generated when a firm writes checks
- Available balance at bank – book balance > 0
- Checks received increase book balance before the bank credits the account
- Available balance at bank – book balance < 0
You have $3,000 in your checking account. You just deposited $2,000 and wrote a check for $2,500.
1. What is the disbursement float?
2. What is the collection float?
3. What is the net float?
4. What is your book balance?
5. What is your available balance?
- 1. 2,500
- 2. 2000
- 3. 2,500 - 2000= 500
- 4. 3000 + 2000 - 2500= 2,500
- 5. 3000
Cash collection: COLLECTION. Is float the good or bad guy?
Float is the bad guy.
Ways to reduce float
3 different types of float
1. mail float. 2. processing float. 3 availability float.
What is a lockbox and why do companies use them?
a post office bond under the control of your bank. Customers send their checks into your lockboxes. The banks open it 1, 2, 3, times a day. It’s a means to expedite cash coming in. Optimizing the float as a receiver of funds.
Why do companies use concentration accounts?
Because it gives them buying power for investments. Also has the ability to monitor debt.
What ways can you have controlled disbursements?
- Zero-balance account
- Controlled disbursement account
- Direct deposit- deposit directly into the account, no paper checks. Reduces funds availability for payout but do not incur admin charge to make a check (13/check)