Investing Cash Money market -financial instruments with an original maturity of one year or less Temporary Cash Surpluses Seasonal or cyclical activities-buy marketable securities with seasonal surpluses;convert securities back to cash when deficits occur Planned or possible expenditures-accumulate marketable securities in anticipation of upcoming expenses 5
5 Investing Cash n Money market – financial instruments with an original maturity of one year or less n Temporary Cash Surpluses q Seasonal or cyclical activities – buy marketable securities with seasonal surpluses; convert securities back to cash when deficits occur q Planned or possible expenditures – accumulate marketable securities in anticipation of upcoming expenses
Figure 17.4 Dollars Total financing Bank needs loans Short-term Marketable financing securities Long-term financing Time(quarters) 0 1 2 3 Time 1:A surplus cash position exists.Seasonal demand for current assets is low.The surplus is invested in short-term marketable securities. Time 2:A deficit cash position exists.Seasonal demand for current assets is high.The financial deficit is financed by selling marketable securities and by bank borrowing. 6
6 Figure 17.4
Characteristics of Short-Term Securities Maturity -firms often limit the maturity of short-term investments to 90 days to avoid loss of principal due to changing interest rates Default risk-avoid investing in marketable securities with significant default risk Marketability -ease of converting to cash Taxability -consider different tax characteristics when making a decision
7 Characteristics of Short-Term Securities n Maturity – firms often limit the maturity of short-term investments to 90 days to avoid loss of principal due to changing interest rates n Default risk – avoid investing in marketable securities with significant default risk n Marketability – ease of converting to cash n Taxability – consider different tax characteristics when making a decision
Credit Management:Key Issues Granting credit increases sales Costs of granting credit Chance that customers won't pay Financing receivables Credit management examines the trade-off between increased sales and the costs of granting credit 8
8 Credit Management: Key Issues n Granting credit increases sales n Costs of granting credit q Chance that customers won’t pay q Financing receivables n Credit management examines the trade-off between increased sales and the costs of granting credit