Chapter 14

Working Capital
and Current
Assets
Management

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Learning Goals

1. Understand short-term financial management, net

working capital, and the related trade-off between
profitability and risk.
2. Describe the cash conversion cycle, its funding
requirements, and the key strategies for managing it.
3. Discuss inventory management: differing views,
common techniques, and international concerns.

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Learning Goals (cont.)

4. Explain the credit selection process and the quantitative

procedure for evaluating changes in credit standards.
5. Review the procedures for quantitatively considering cash
discount changes, other aspects of credit terms, and credit
monitoring.
6. Understand the management of receipts and
disbursements, including float, speeding up collections,
slowing down payments, cash concentration, zero balance
accounts, and investing in marketable securities.

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Net working capital fundamentals

• A firm’s balance sheet provides info about the

structure of the firm’s investments on one hand,
and the structure of its financing sources on the
other side.
• The structures chosen should consistently lead
to maximisation of the value of the owners’
investment in the firm.

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Long & Short Term Assets & Liabilities

Current Assets: Current Liabilities:

Cash Accounts Payable
Marketable Securities Accruals
Prepayments Short-Term Debt
Accounts Receivable Taxes Payable
Inventory

Fixed Assets: Long-Term Financing:

Investments Debt
Plant & Machinery Equity
Land and Buildings

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Short term financial management

• This is the management of current assets

and current liabilities.
• The goal of short-term financial
management is to manage each of the firms’
current assets and liabilities to achieve a
balance between profitability and risk that
contributes positively to overall firm value.

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Short term fin mgt…

• We will use net working capital to consider the

basic relationship between current assets and
current liabilities.
• The cash conversion cycle will then be used to
consider the key aspects of current asset
management.
• Chapter 15 later will cover current liability
management.

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Net Working Capital

• Current assets, commonly called Working Capital,

consist of cash and marketable securities in addition to
accounts receivable and inventories.
• Current liabilities represent the firm’s short term
financing and include accounts payable (trade credit),
notes payable (bank loans), and accrued liabilities.
• Net Working Capital can thus be defined as total
current assets less total current liabilities.

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Net working capital…

• When current assets exceed current liabilities,

NWC is positive.

• Whe current assets are less than current

liabilities, NWC is negative.

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Tradeoff between Profitability and Risk

• A tradeoff exists between a firm’s profitability

and its risk.
• Profitability, in this context, is the relationship
between revenues and costs generated by using
the firm’s fixed assets – in productive activities.
• A firm can increase its profits by:
– Increasing revenues, or
– Decreasing costs

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Tradeoff…

• Risk, in the context of short term fin mgt, is the

probablity that a firm will be unable to pay its
bills as they fall due
• A firm that cannot settle its bills as they becoem
due is said to be “technically insolvent”.
• Generally, the greater a firm’s NWC, the lower
its risk.

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Tradeoff…changes in current assets
(assume unchanged total assets)

• Changes in the current assets and curent liabilities

affect a firm’s profitability-risk tradeoff.
• CA: when the ratio ↑s, ie when current assets ↑,
profitability ↓s.
• Why?
– Because CA are less profitable than fixed assets
– Fixed assets add more value to the product than CAs
– Without fixed assets, the firm cannot produce that product.

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Tradeoff…

• On the other hand, the risk effect ↓s as the ratio of current assets
to total assets ↑s.

• An ↑ in current assets ↑s net working capital thereby ↓ing the

chance of technical insolvency.

• Also, as you go down the asset side of the balance sheet, risk
associated with investment increases…investment in cash and
marketable securities is less risky than investment in accounts
receivables, inventories and fixed assets.

• Basically, the nearer an asset is to cash, the less risky it is.

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Tradeoff…changes in current liabilities

• When the ratio between CL and total assets ↑s,

profitability ↑s because the firm uses more of the less
expensive current liabilities and less long-term
financing.
• However, when the ratio of CL to total assets ↑s, the
risk of technical insolvency also ↑s because an ↑ in the
CL in turn ↓s net working capital.

• The opposite effects on profit and risk result from a

decrease in the ratio of CL:TA

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The Tradeoff Between
Profitability & Risk

• Positive Net Working Capital (low return and low risk)

Current Current
low
Assets Liabilities cost
low
return
Net Working
Capital > 0
high
Long-Term cost
Debt
high
return
highest
Fixed cost
Assets Equity
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The Tradeoff Between
Profitability & Risk

• Negative Net Working Capital (high return and high risk)

Current Current
low Assets Liabilities
return low
Net Working
cost
Capital < 0

high Long-Term high

return Debt cost

Fixed highest
Assets Equity cost
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The Tradeoff Between
Profitability & Risk

Table 14.1 Effects of Changing Ratios

on Profits and Risk

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The Cash Conversion Cycle

• Central to short-term financial

management is an understanding of the
basic relationship between CA and CL and
then to use the cash conversion cycle to
address key aspects of current asset
management.

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Calculating the CCC…

• A firm’s operating cycle (OC) is the time from the beginning of

the production process to collection of cash from the sale of the
finished product.

• The OC encompasses 2 major short term asset categories:

– Inventory, and
– Accounts receivable.

• The OC is measured in time elapsed by summing the average

age of inventory (AAI) and the average collection period (ACP)

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Calculating CCC…

• However, the process of producing and selling a product also

includes the purchase of production inputs (raw materials) on
account, resulting in accounts payable.
• Accounts payable reduce the number of days a firm’s resources
are tied up in the operating cycle.
• The amount of time it takes to pay the accounts payable,
measured in days is called the average payment period (APP).
• The operating cycle less the avg payment period is referred to as
the cash conversion cycle…representing the amount of time the
firm’s resources are tied up.

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Calculating the Cash
Conversion Cycle (cont.)

• Both the OC and CCC may be computed as

shown below.

Where: OC=operating cycle; CCC=cash conversion cycle

AAI=avg age of inventory; APP=avg payment period;
ACP=avg collection period
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Calculating the Cash
Conversion Cycle (Example)

MAX Company, a producer of paper dinnerware, has

annual sales of $10 million, cost of goods sold of 75% of
sales, and purchases that are 65% of cost of goods sold.
MAX has an average age of inventory (AAI) of 60 days,
an average collection period (ACP) of 40 days, and an
average payment period (APP) of 35 days.

Using the values for these variables, the cash conversion

cycle for MAX is 65 days (60 + 40 - 35) and is shown on
a time line in Figure 14.1.
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Calculating the Cash
Conversion Cycle (cont.)

Figure 14.1 Time Line for MAX Company’s Cash

Conversion Cycle

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Calculating the Cash
Conversion Cycle (cont.)

The resources MAX has invested in the cash conversion

cycle assuming a 365-day year are:

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CCC…

• Obviously, reducing AAI or ACP or lengthening

APP will reduce the cash conversion cycle, thus
reducing the amount of resources the firm must
commit to support operations.

• For example, if MAX had a 5 day reduction in

ACP, resources invested in the CCC would
reduce by $10m x 5/365 = $136,986.

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Funding Requirements of the CCC

• Permanent vs. Seasonal Funding Needs

– If a firm’s sales are constant, then its investment in operating
assets should also be constant, and the firm will have only a
permanent funding requirement.
– If sales are cyclical, then investment in operating assets will
vary over time, leading to the need for seasonal funding
requirements in addition to the permanent funding
requirements for its minimum investment in operating assets.

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Funding Requirements
of the CCC (cont.)

• Permanent vs. Seasonal Funding Needs

Nicholson Company holds, on average, $50,000 in cash and
marketable securities, $1,250,000 in inventory, and $750,000
in accounts receivable. Nicholson’s business is very stable
over time, so its operating assets can be viewed as
permanent. In addition, Nicholson’s accounts payable of
$425,000 are stable over time. Nicholson has a permanent
investment in operating assets of $1,625,000 ($50,000 +
$1,250,000 + $750,000 - $425,000). This amount would also
equal the company’s permanent funding requirement.
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Funding Requirements
of the CCC (cont.)

• Permanent vs. Seasonal Funding Needs

In contrast, Semper Pump Company, which produces bicycle pumps,
has seasonal funding needs. Semper has seasonal sales, with its peak
sales driven by purchases of bicycle pumps. Semper holds, at minimum,
$25,000 in cash and marketable securities, $100,000 in inventory, and
$60,000 in accounts receivable. At peak times, Semper’s inventory
increases to $750,000 and its accounts receivable increase to $400,000.
To capture production efficiencies, Semper produces pumps at a
constant rate throughout the year. Thus, accounts payable remain at

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Funding Requirements
of the CCC (cont.)

• Permanent vs. Seasonal Funding Needs

$50,000 throughout the year. Accordingly, Semper has a permanent
funding requirement for its minimum level of operating assets of
$135,000 ($25,000 + $100,000 + $60,000 - $50,000) and peak
seasonal funding requirements of $990,000 [($25,000 + $750,000 +
$400,000 - $50,000) - $135,000]. Semper’s total funding
requirements for operating assets vary from a minimum of $135,000
(permanent) to a seasonal peak of $1,125,000 ($135,000 + $990,000)
as shown in Figure 14.2.

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Funding Requirements
of the CCC (cont.)

• Permanent vs. Seasonal Funding Needs

Figure 14.2
Semper Pump
Company’s
Total Funding
Requirements

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Funding requirements of the CCC…

• Aggressive vs Conservative Funding Strategies

– An aggressive funding strategy is one under which
the firm funds its seasonal requirements with short
term debt and its permanent requirements with long
term debt
– A conservative strategy is one under which the firm
funds both its seasonal and permanent requirements
with long term debt

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Funding requirements of the CCC…

• Short term funds are often less expensive than

long term funds
• But, long term funds allow the firm to lock in its
cost of funds over a period of time, thereby
avoiding the risk of ↑s in short term interest
rates
• Long term funding also ensures that the required
funds are available to the firm when needed

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Funding Requirements
of the CCC (Example)

• Aggressive vs. Conservative Funding Strategies

Semper Pump has a permanent funding requirement of $135,000 and
seasonal requirements that vary between $0 and $990,000 and
average $101,250. If Semper can borrow short-term funds at 6.25%
and long term funds at 8%, and can earn 5% on any invested surplus,
then the annual cost of the aggressive strategy would be:

*4. because the amount of financing exactly equals estimated funding

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required, no surplus exists. 14-33
Funding Requirements
of the CCC (cont.)
• Aggressive vs. Conservative Funding Strategies
Alternatively, Semper can choose a conservative strategy under which
surplus cash balances are fully invested. In Figure 13.2, this surplus would
be the difference between the peak need of $1,125,000 and the total need,
which varies between $135,000 and $1,125,000 during the year.

*5: the avg surplus balance would be calculated by subtracting the sum of the permanent
need and the avg seasonal need from the seasonal peak need: $1,125,000-$135,000-
$101,250 to get $888,750. This represents the surplus amount of financing that on avg
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could be invested in short-term vehicles that earn 5%p.a. 14-34
Funding Requirements
of the CCC (cont.)

• Aggressive vs. Conservative Funding Strategies

Clearly, the aggressive strategy’s heavy reliance on short-term
financing makes it riskier than the conservative strategy because of
interest rate swings and possible difficulties in obtaining needed
funds quickly when the seasonal peaks occur.

The conservative strategy avoids these risks through the locked-in

interest rate and long-term financing, but is more costly. Thus the
final decision is left to management. This depends on mgrs’
disposition towards risk and the strength of their banking
relationships.
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Strategies for Managing the CCC

• The goal of a firm is to minimize the length of the cash conversion

cycle, which minimizes negotiated liabilities.
• As such, this goal can be realized using one of these strategies:
1.Turn over inventory as quickly as possible without stock outs that result
in lost sales.
2.Collect accounts receivable as quickly as possible without losing sales
from high-pressure collection techniques.
3.Manage mail, processing, and clearing time to reduce them when
collecting from customers and to increase them when paying suppliers.
4.Pay accounts payable as slowly as possible without damaging the firm’s
credit rating.

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Inventory Management:
Inventory Fundamentals

• Classification of inventories:
– Raw materials: items purchased for use in the
manufacture of a finished product
– Work-in-progress: all items that are currently in
production
– Finished goods: items that have been produced but
not yet sold

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Inventory Management:
Differing Views About Inventory

• The different departments within a firm (finance, production,

marketing, etc.) often have differing views about what is an
“appropriate” level of inventory.
• Financial managers would like to keep inventory levels low to ensure
that funds are wisely invested.
• Marketing managers would like to keep inventory levels high to
ensure orders could be quickly filled.
• Manufacturing managers would like to keep raw material levels high
to avoid production delays and to make larger, more economical
production runs.
• Purchasing managers are solely concerned with the raw materials
inventories…having the correct quantities at the desired times at a
favourable price

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Techniques for Managing Inventory

• The ABC System

– The ABC system of inventory management divides inventory
into three groups of descending order of importance based on
the dollar amount invested in each.
– A typical system would contain, group A would consist of
20% of the items worth 80% of the total dollar value; group B
would consist of the next largest investment, and so on.
– Control of the A items would intensive because of the high
dollar investment involved.

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Economic Order Quantity (EOQ)

• EOQ is a technique for determining an item’s optimal

order size, which is the size that minimizes the total of
its order and carrying costs
• Order costs are the fixed clerical costs of placing and
receiving an inventory order
• Carrying costs are the variable costs per unit of holding
an item in inventory for a specific period of time (eg
storage, insurance, deterioration, etc)
• Order costs ↓ as the size of the order ↑s
• Carrying costs however ↑ with ↑s in the order size

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Techniques for Managing
Inventory (EOQ)
The EOQ model analyses the tradeoff between order and
carrying costs to determine the order quantity that minimizes
the total inventory cost

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Techniques for Managing
Inventory (EOQ)

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Techniques for Managing
Inventory (EOQ)

• The Economic Order Quantity (EOQ) Model

Assume that RLB, Inc., a manufacturer of electronic test equipment,
uses 1,600 units of an item annually. Its order cost is $50 per order,
and the carrying cost is $1 per unit per year. Substituting into the
above equation we get:

EOQ = 2(1,600)($50) = 400

$1
The EOQ can be used to evaluate the total cost of inventory as
shown on the following slides.
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Techniques for Managing
Inventory (EOQ)

• The Economic Order Quantity (EOQ) Model

Ordering Costs = Cost/Order x # of Orders/Year

Ordering Costs = $50 x 4 = $200
Carrying Costs = Carrying Costs/Year x Order Size
2

Carrying Costs = ($1 x 400)/2 = $200

Total Costs = Ordering Costs + Carrying Costs

Total Costs = $200 + $200 = $400
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Techniques for Managing
Inventory (EOQ)

• The Reorder Point

– Once a company has calculated its EOQ, it must determine
when it should place its orders.
– More specifically, the reorder point must consider the lead
time needed to place and receive orders.
– If we assume that inventory is used at a constant rate
throughout the year (no seasonality), the reorder point can be
determined by using the following equation:

Reorder point = lead time in days x daily usage

Daily usage = Annual usage/360
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Techniques for Managing
Inventory (EOQ)

• The Reorder Point

Using the RLB example above, if they know that it requires 10 days
to place and receive an order, and the annual usage is 1,600 units
per year, the reorder point can be determined as follows:

Daily usage = 1,600/360 = 4.44 units/day

Reorder point = 10 x 4.44 = 44.44 or 45 units

Thus, when RLB’s inventory level reaches 45 units, it should place

an order for 400 units. However, if RLB wishes to maintain safety
stock to protect against stock outs, they would order before inventory
reached 45 units.
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Techniques for Managing
Inventory (JIT)

• Just-In-Time (JIT) System

– The JIT inventory management system minimizes the
inventory investment by having material inputs arrive exactly
at the time they are needed for production.
– For a JIT system to work, extensive coordination must exist
between the firm, its suppliers, and shipping companies to
ensure that material inputs arrive on time.
– In addition, the inputs must be of near perfect quality and
consistency given the absence of safety stock.

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Techniques for Managing
Inventory (cont.)

• Computerized Systems for Resource Control

– Manufacturing Resource Planning (MRP) systems are
used to determine what to order, when to order, and what
priorities to assign to ordering materials.
– MRP uses EOQ concepts to determine how much to order
using computer software.
– It simulates each product’s bill of materials structure all of
the product’s parts), inventory status, and manufacturing
process.

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Techniques for Managing
Inventory (cont.)

• Computerized Systems for Resource Control

– Like the simple EOQ, the objective of MRP systems is to
minimize a company’s overall investment in inventory
without impairing production.
– Manufacturing resource planning II (MRP II) is an
extension of MRP that integrates data from numerous areas
such as finance, accounting, marketing, engineering, and
manufacturing suing a sophisticated computer system.
– This system generates production plans as well as numerous
financial and management reports.

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Techniques for Managing
Inventory (cont.)

• Computerized Systems for Resource Control

– Unlike MRP and MRP II, which tend to focus on internal
operations, enterprise resource planning (ERP) systems can
expand the focus externally to include information about
suppliers and customers.
– ERP electronically integrates all of a firm’s departments so
that, for example, production can call up sales information
and immediately know how much must be produced to fill
certain customer orders.

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Inventory Management:
International Inventory Management

• International inventory management is typically

much more complicated for exporters and MNCs.
• The production and manufacturing economies of scale
that might be expected from selling globally may prove
elusive if products must be tailored for local markets.
• Transporting products over long distances often results
in delays, confusion, damage, theft, and other
difficulties.

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Accounts Receivable Management

• The second component of the cash conversion cycle is

the average collection period – the average length of
time from a sale on credit until the payment becomes
usable funds to the firm.
• The collection period consists of two parts:
– the time period from the sale until the customer mails
payment, and
– the time from when the payment is mailed until the firm
collects funds in its bank account.

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Accounts receivable management…

• Objective:
– To collect accounts receivable as quickly as possible
without losing sales from high-pressure collection
techniques
• How?
– Credit selection and standards
– Credit terms
– Credit monitoring

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Credit selection and standards

• This involves the application of techniques to

determine which customers should receive credit
• Process requires evaluation of the customer’s
creditworthiness and comparing it to the firm’s
credit standards
• Credit standards are the firm’s minimum
requirements for extending credit to a customer

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Credit Selection and Standards:
The Five Cs of Credit

• Character: The applicant’s record of meeting past obligations

• Capacity: The applicant’s ability to repay the requested credit

• Capital: The applicant’s debt relative to equity

• Collateral: The amount of assets the applicant has available for

use in securing the credit.
• Conditions: Current general and industry-specific economic
conditions.
• NB: these do not yield a specific accept/ reject decision

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Accounts Receivable Management:
Credit Scoring

• Credit scoring is a procedure resulting in a score that measures

an applicant’s overall credit strength, derived as a weighted-
average of scores of various credit characteristics.
• The score is then is used to make the accept/reject decision for
granting the applicant credit.
• The purpose of credit scoring is to make a relatively informed
credit decision quickly and inexpensively.
• Commonly applied for credit cards, departmental store a/cs,
banks, etc

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Accounts Receivable Management:
Changing Credit Standards

• The firm sometimes will contemplate changing its

credit standards to improve its returns and generate
greater value for its owners.

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Changing Credit Standards Example

Dodd Tool, a manufacturer of lathe tools, is currently selling a product

for $10/unit. Sales (all on credit) for last year were 60,000 units. The
variable cost per unit is $6. The firm’s total fixed costs are $120,000.

Dodd is currently contemplating a relaxation of credit standards that is

anticipated to increase sales by 5% to 63,000 units. It is also
anticipated that the ACP will increase from 30 to 45 days, and that bad
debt expenses will increase from 1% of sales to 2% of sales. The
opportunity cost of tying funds up in receivables is 15%.

Given this information, should Dodd relax its credit standards?

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Changing Credit
Standards Example (cont.)

• Additional Profit Contribution from Sales

Dodd Tool Company

Analysis of Rexaxing Credit Standards
Additional Profit Contribution from Sales
Old Sales Level 60,000 Price/Unit $ 10.00
New Sales Level 63,000 Variable Cost/Unit $ 6.00
Increase in Sales 3,000 Contribution Margin/Unit $ 4.00
Additional Profit Contribution from Sales (sales incr x cont margin) $ 12,000

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Accounts Receivable Management:
Changing Credit Standards

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Changing Credit
Standards Example (cont.)

Cost of marginal investment in Accounts Receivable:

Turnover of A/R:

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Changing Credit
Standards Example (cont.)

Cost of marginal investment in Accounts Receivable:

Under present plan: $360,000 = $29,508
12.2

Under proposed plan: $378,000 = $46,667

8.1

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Changing credit standards…

Interpretation
The resulting value of $2,574 is considered a
cost (opportunity cost) because it represents the
maximum amount that could be earned on the
$17,159 had it been placed in the best equal-risk
investment alternative available at the firm’s
required rate of return on investment of 15%

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Changing Credit
Standards Example (cont.)

Cost of marginal bad debts:

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Changing Credit
Standards Example (cont.)

Cost of marginal investment in A/R:

Table 14.2
Effects on Dodd
Tool of a
Relaxation of
Credit Standards

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Changing credit terms

• Credit terms are the terms of sale for customers who

have been extended credit by the firm

• A cash discount is a % deduction from the purchase

price; available to the customer that pays his account
within a specified period of time (cash discount period)

• The credit period is the number of days after the start

of the credit taken until full payment is due.

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Changing Credit Terms

• A firm’s credit terms specify the repayment terms

required of all of its credit customers.
• Credit terms are composed of three parts:
– The cash discount
– The cash discount period
– The credit period

• For example, with credit terms of 2/10 net 30, the

discount is 2%, the discount period is 10 days, and the
credit period is 30 days.

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Changing Credit Terms Example

MAX Company has an average collection period of 40

days (turnover = 365/40 = 9.1). In accordance with the
firm’s credit terms of net 30, this period is divided into 32
days until the customers place their payments in the mail
(not everyone pays within 30 days) and 8 days to receive,
process, and collect payments once they are mailed.

MAX is considering initiating a cash discount by changing

its credit terms from net 30 to 2/10 net 30. The firm
expects this change to reduce the amount of time until the
payments are placed in the mail, resulting in an average
collection period of 25 days (turnover = 365/25 = 14.6).
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Changing Credit
Terms Example (cont.)

Table 14.3
Analysis of
Initiating a Cash
Discount for MAX
Company

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Credit Monitoring

• Credit monitoring is the ongoing review of a firm’s

accounts receivable to determine whether customers are
paying according to the stated credit terms.
• Slow payments are costly to a firm because they
lengthen the average collection period and increase the
firm’s investment in accounts receivable.
• Two frequently used techniques for credit monitoring
are the average collection period and ageing of
accounts receivable.

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Credit Monitoring:
Average Collection Period

• The average collection period is the average number of

days that credit sales are outstanding and has two parts:
– The time from sale until the customer places the payment in
the mail, and
– The time to receive, process, and collect payment.

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Credit Monitoring:
Ageing of Accounts Receivable

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Credit Monitoring:
Collection Policy

• The firm’s collection policy is its procedures for

collecting a firm’s accounts receivable when they are
due.
• The effectiveness of this policy can be partly evaluated
by evaluating the level of bad expenses.
• As seen in the previous examples, this level depends
not only on collection policy but also on the firm’s
credit policy.

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Collection Policy

Table 14.4 Popular Collection Techniques

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Management of Receipts
& Disbursements: Float

• Collection float is the delay between the time when a

payer deducts a payment from its checking account
ledger and the time when the payee actually receives
the funds in spendable form.
• Disbursement float is the delay between the time when
a payer deducts a payment from its checking account
ledger and the time when the funds are actually
withdrawn from the account.
• Both the collection and disbursement float have three
separate components.

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Management of Receipts
& Disbursements: Float (cont.)

• Mail float is the delay between the time when a payer

places payment in the mail and the time when it is
received by the payee.
• Processing float is the delay between the receipt of a
check by the payee and the deposit of it in the firm’s
account.
• Clearing float is the delay between the deposit of a
check by the payee and the actual availability of the
funds which results from the time required for a check
to clear the banking system.

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Management of Receipts & Disbursements:
Speeding Up Collections

• Lockboxes
– A lockbox system is a collection procedure in which payers
send their payments to a nearby post office box that is
emptied by the firm’s bank several times a day.
– It is different from and superior to concentration banking in
that the firm’s bank actually services the lockbox which
reduces the processing float.
– A lockbox system reduces the collection float by shortening
the processing float as well as the mail and clearing float.

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Management of Receipts & Disbursements:
Slowing Down Payments

• Controlled Disbursing
– Controlled Disbursing involves the strategic use of
mailing points and bank accounts to lengthen the
mail float and clearing float respectively.
– This approach should be used carefully, however,
because longer payment periods may strain supplier
relations.

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Management of Receipts &
Disbursements: Cash Concentration

• Direct Sends and Other Techniques

– Wire transfers is a telecommunications bookkeeping device
that removes funds from the payer’s bank and deposits them
into the payees bank—thereby reducing collections float
– Automated clearinghouse (ACH) debits are
pre-authorized electronic withdrawals from the payer’s
account that are transferred to the payee’s account via a
settlement among banks by the automated clearinghouse.
– ACHs clear in one day, thereby reducing mail, processing,
and clearing float

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Management of Receipts & Disbursements:
Zero-Balance Accounts

• Zero-balance accounts (ZBAs) are

disbursement accounts that always have an end-
of-day balance of zero.
• The purpose is to eliminate non-earning cash
balances in corporate checking accounts.
• A ZBA works well as a disbursement account
under a cash concentration system.

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Investing in marketable securities

• Marketable securities are short-term, interest-earning money

market instruments that can easily be converted into cash.

• To be truly marketable, these assets should:

– Have a ready market (so as to minimise time to convert to cash)
– Safety of the principal invested

• Securities that are commonly held in a firm’s portfolio are

divided into 2 groups:
– Government securities (low risk therefore low return)
– Non-government securities

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Investing in Marketable Securities

Table 14.5 Features and Recent Yields on Popular

Marketable Securitiesa (cont.)

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Investing in Marketable
Securities (cont.)

Table 14.5 Features and Recent Yields on Popular

Marketable Securitiesa (cont.)

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Investing in Marketable
Securities (cont.)

Table 14.5 Features and Recent Yields on Popular

Marketable Securitiesa

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