Management of Cash and Marketable Securities

Sophistication is increasing  in cash management by corporations. The trend has been toward reducing cash—the firm’s most liquid asset—to a minimum.  and the funds are invested in interest earning securities or in earning assets. This trend can be attributed to rising interest rates on securities, which make the opportunity cost of holding cash more expensive, to innovations in cash management, and to economies of scale in cash management as corporations grow larger.

A number of methods have come into existence in recent years to speed up this collection process and maximize available cash. These methods helps cash management in the following ways:
(1) speed the mailing time of payments from customers to the firm;
(2 ) reduce the time during which payments received by the firm remain uncollected funds; and
(3) speed the movement of funds to disbursement banks.


Multiple Collection Centers

 Instead of a single collection center located at the company headquarters, multiple collec-
tion centers are established. The purpose is to shorten the period between the time a customer mails in his payment and the time when the company has the use of the funds. Customers in a particular geographic area are instructed to remit their payments to a collection center in that area.  When
payments are received, they are deposited in the collection center’s local bank. Surplus funds are then transferred from these local bank accounts to a concentration bank or banks. A bank of concentration is one with which the company has a major account—usually a disbursement account.


Bank Collection of Checks from Post Offices


Another means of accelerating the flow of funds is a lock-box arrangement. The purpose
of a lock-box arrangement is to eliminate the time between the receipt of remittances by the company and their deposit in the bank. The company rents a local post office box and authorizes its bank in
each of these cities to pick up remittances in the box. Customers are billed with instructions to mail their remittance to the lock box. The bank picks up the mail several times a day and deposits the checks in the company’s account. This procedure frees the company from handling and depositing the checks. The main advantage of a lock-box system is that checks are deposited at banks sooner and become collected balances sooner than if they were processed by the company prior to deposit. No doubt, the bank will take an extra fee for the service. But the service is utilized only when it is profitable for the company to employ it.


Frequently, firms give special attention to the handling of large remittances so that they may be deposited in a bank as quickly as possible. This special handling may involve personal pickup of these checks or the use of airmail or special delivery.. The firm should exercise tight control over interbank transfers of cash and transfers between various units of the company, such as divisions or subsidiaries. Excessive funds may be tied up in various divisions of the firm.

Some companies maintain too many bank accounts, thereby creating unnecessary pockets of idle funds. With less number of accounts also similar service can be provided at a lesser cost to the company.


MBA Core Management Knowledge - One Year Revision Schedule