Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 CHAPTER THIRTY-ONE 880 CASH MANAGEMENT Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 CHAPTER 30 PROVIDED an overall idea of what is involved in short-term financial management. Now it is time to get down to detail. We begin in this chapter by looking at how companies manage their holdings of cash and marketable securities. Then in the next chapter we look at the terms on which firms sell their goods and how they ensure that their customers pay promptly. Out first task is to explain how cash is collected and paid out. In the United States small routine payments are commonly made by check. You want to ensure that when customers pay by check, you can convert these payments into usable cash in the bank quickly and cheaply. The use of checks is on the decline and large payments are almost always made electronically. You therefore need to under- stand how electronic payment systems work. Our second task is to consider how much cash the firm should hold. Companies have a choice be- tween holding cash in the bank and investing it in short-term securities. There is a trade-off here. Cash gives you a store of liquidity, which can be used to pay employees and suppliers. However, cash has the disadvantage that it does not pay interest. As we explain in the second section of this chapter, the trick is to strike a sensible balance. In the last chapter we explained how companies raise short-term loans to tide them over a tem- porary cash shortage. If you are in the opposite position and have surplus cash, you need to know where you can park it to earn interest. So in the final section of this chapter we look at the menu of short-term investments that are available to the financial manager. 881 31.1 CASH COLLECTION AND DISBURSEMENT The majority of small face-to-face purchases are made with coins or dollar bills. The most popular alternative in the United States for retail purchases is to pay by check. Each year individuals and firms write about 70 billion checks. Notice that the United States is unusual in this heavy use of checks. For exam- ple, Figure 31.1 compares retail payment methods in the United States and Hol- land. You can see that checks are almost unknown in Holland: Most payments there are made by debit cards, direct debit, or credit transfer. 1 How Checks Create Float How does the firm’s cash balance change when it writes or deposits a check? Suppose that the United Carbon Company has $1 million on demand deposit with its bank. It now pays one of its suppliers by writing and mailing a check for $200,000. The com- pany’s ledgers are immediately adjusted to show a cash balance of $800,000. But the company’s bank won’t learn anything about this check until it has been received by the supplier, deposited at the supplier’s bank, and finally presented to United Car- bon’s bank for payment. 2 During this time United Carbon’s bank continues to show 1 Debit cards allow the cardholder to transfer money directly to the receiver’s bank account. With a credit transfer the payer initiates the transaction, for example by giving her bank a standing order to make a regular payment. With a direct debit the transaction is initiated by the payee and is usually processed electronically. 2 Checks deposited with a bank are cleared through the Federal Reserve clearing system, through a cor- respondent bank, or through a clearinghouse of local banks. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 in its ledger that the company has a balance of $1 million. The company obtains the benefit of an extra $200,000 in the bank while the check is clearing. This sum is often called payment, or disbursement float. 882 PART IX Financial Planning and Short-Term Management Check Direct debit Debit card Credit card Credit transfer 2% 19% 4% 1% 74% 52% 0% 18% 27% 3% Check Direct debit Debit card Credit card Credit transfer USA Holland FIGURE 31.1 Shares of noncash retail payments in the USA and Holland in 1997. Notice the heavy use of checks in the USA. Source: “Retail Payments in Selected Countries: A Comparative Study,” Bank for International Settlements, Basel, 1999. Company's ledger balance $800,000 + Bank's ledger balance $1,000,000 equals Payment float $200,000 Float sounds like a marvelous invention, but unfortunately it can also work in reverse. Suppose that in addition to paying its supplier, United Carbon receives a check for $100,000 from a customer. It deposits the check, and both the company and the bank increase the ledger balance by $100,000: Company's ledger balance $900,000 + Bank's ledger balance $1,100,000 equals Payment float $200,000 But this money isn’t available to the company immediately. The bank doesn’t ac- tually have the money in hand until it has sent the check to, and received pay- ment from, the customer’s bank. Since the bank has to wait, it makes United Car- bon wait too—usually one or two business days. In the meantime, the bank will show that United Carbon has an available balance of $1 million and an availability float of $100,000: Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 Notice that the company gains as a result of the payment float and loses as a re- sult of the availability float. The difference is often termed the net float. In our ex- ample, the net float is $100,000. The company’s available balance is therefore $100,000 greater than the balance shown in its ledger. As financial manager you are concerned with the available balance, not with the company’s ledger balance. If you know that it is going to be a week or two before some of your checks are presented for payment, you may be able to get by on a smaller cash balance. This game is often called playing the float. You can increase your available cash balance by increasing your net float. This means that you want to ensure that checks paid in by customers are cleared rap- idly and those paid to suppliers are cleared slowly. Perhaps this may sound like rather small beer, but think what it can mean to a company like Ford. Ford’s daily sales average about $450 million. Therefore if it can speed up the collection process by one day, it frees $450 million, which is available for investment or payment to Ford’s stockholders. Some financial managers have become overenthusiastic in managing the float. In 1985, the brokerage firm E. F. Hutton pleaded guilty to 2,000 separate counts of mail and wire fraud. Hutton admitted that it had created nearly $1 billion of float by shuffling funds between its branches, and through various accounts at different banks. These activities cost the company a $2 million fine and its agreement to re- pay the banks any losses they may have incurred. Managing Float Float is the child of delay. Actually there are several kinds of delay, and so people in the cash management business refer to several kinds of float. Figure 31.2 summarizes. Of course the delays that help the payer hurt the recipient. Recipients try to speed up collections. Payers try to slow down disbursements. Speeding Up Collections Many companies use concentration banking to speed up collections. In this case customers in a particular area make payment to a local branch office rather than to company headquarters. The local branch office then deposits the checks into a CHAPTER 31 Cash Management 883 Company's ledger balance $900,000 + Bank's ledger balance $1,100,000 equals Payment float $200,000 Available balance $1,000,000 + Availability float $100,000 equals Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 local bank account. Surplus funds are transferred to a concentration account at one of the company’s principal banks. Concentration banking reduces float in two ways. First, because the branch office is nearer to the customer, mailing time is reduced. Second, since the customer’s check is likely to be drawn on a local bank, the time taken to clear the check is also reduced. Concentration banking brings many small balances together in one large, central bal- ance, which can then be invested in interest-paying assets through a single transaction. For example, when Amoco streamlined its U.S. bank accounts in 1995, it was able to reduce its daily bank balances in non-interest-bearing accounts by almost 80 percent. 3 Often concentration banking is combined with a lock-box system. In a lock-box system, you pay the local bank to take on the administrative chores. The system works as follows. The company rents a locked post office box in each principal re- gion. All customers within a region are instructed to send their payments to the post office box. The local bank, as agent for the company, empties the box at regu- lar intervals and deposits the checks in the company’s local account. Surplus funds are transferred periodically to one of the company’s principal banks. 884 PART IX Financial Planning and Short-Term Management Payer sees same delays as payment float Recipient sees delays as collection float Check received Check deposited Check charged to payer's account Cash available to recipient Check mailed Processing float Presentation float Availability float Mail float FIGURE 31.2 Delays create float. Each heavy arrow represents a source of delay. Recipients try to reduce delay to get available cash sooner. Payers prefer delay because they can use their cash longer. Note: The delays causing avail- ability float and presentation float are equal on average but can differ from case to case. 3 “Amoco Streamlines Treasury Operations,” The Citibank Globe, November/December 1998. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 How many collection points do you need if you use a lock-box system or con- centration banking? The answer depends on where your customers are and on the speed of the U.S. mail. For example, suppose that you are thinking of opening a lock box. The local bank shows you a map of mail delivery times. From that and knowledge of your customers’ locations, you come up with the following data: • Average number of daily payments to lock box: 150 • Average size of payment: $1,200 • Rate of interest per day: .02 percent • Saving in mailing time: 1.2 days • Saving in processing time: .8 day On this basis, the lock box would increase your collected balance by 150 items per day ϫ $1,200 per item ϫ (1.2 ϩ .8) days saved ϭ $360,000 Invested at .02 percent per day, $360,000 gives a daily return of .0002 ϫ $360,000 ϭ $72 The bank’s charge for operating the lock-box system depends on the number of checks processed. Suppose that the bank charges $.26 per check. That works out to 150 ϫ .26 ϭ $39 per day. You are ahead by $72 Ϫ 39 ϭ $33 per day, plus whatever your firm saves from not having to process the checks itself. Our example assumes that the company has only two choices. It can do nothing, or it can operate the lock box. But maybe there is some other lock-box location, or some mixture of locations, that would be still more effective. Of course, you can al- ways find this out by working through all possible combinations, but it may be simpler to solve the problem by linear programming. Many banks offer linear pro- gramming models to solve the problem of locating lock boxes. 4 Controlling Disbursements Speeding up collections is not the only way to increase the net float. You can also do so by slowing down disbursements. One tempting strategy is to increase mail time. For example, United Carbon could pay its New York suppliers with checks mailed from Nome, Alaska, and its Los Angeles suppliers with checks mailed from Vienna, Maine. But on second thought you will realize that such post office tricks are unlikely to give more than a short-run payoff. Suppose you have promised to pay a New York supplier on February 29. Does it matter whether you mail the check from Alaska on the 26th or from New York on the 28th? Of course, you could use a re- mote mailing address as an excuse for paying late, but that’s a trick easily seen through. If you have to pay late, you may as well mail late. 5 There are effective ways of increasing presentation float, however. For example, suppose that United Carbon pays its suppliers with checks written on a New York City bank. From the time that the check has been deposited by the supplier, there CHAPTER 31 Cash Management 885 4 See, for example, A. Kraus, C. Janssen, and A. McAdams, “The Lock-Box Location Problem,” Journal of Bank Research 1 (Autumn 1970), pp. 50–58. 5 Since the tax authorities look at the date of the postmark rather than the date of receipt, companies have been tempted to use a remote mailing address to pay their tax bills. But the tax authorities have reacted by demanding that large tax bills be paid by electronic transfer. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 will be an average lapse of little more than a day before it is presented to United Carbon’s bank for payment. The alternative is that United Carbon pays its suppli- ers with checks mailed to arrive on time but written on a bank in Helena, Montana; Midland, Texas; or Wilmington, Delaware. In these cases, it may take three or four days before each check is presented for payment. United Carbon, therefore, gains several days of additional float. 6 Some firms even maintain disbursement accounts in different parts of the coun- try. The computer looks up each supplier’s zip code and automatically produces a check on the most distant bank. The suppliers won’t object to these machinations because the Federal Reserve guarantees a maximum clearing time of two days on all checks cleared through its system. The Federal Reserve, however, does object and has been trying to prevent remote disbursement. A New York City bank receives several check deliveries each day from the Fed- eral Reserve system as well as checks that come directly from other banks or through the local clearinghouse. Thus, if United Carbon uses a New York City bank for paying its suppliers, it will not know at the beginning of the day how many checks will be presented for payment. It must either keep a large cash balance to cover contingencies or be prepared to borrow. However, instead of having a disbursement account with a bank in New York, United Carbon could open a zero- balance account with a regional bank that receives almost all check deliveries in the form of a single, early-morning delivery from the Federal Reserve. Therefore, it can let the cash manager at United Carbon know early in the day exactly how much money will be paid out that day. The cash manager then arranges for this sum to be transferred from the company’s concentration account to the disbursement ac- count. Thus by the end of the day (and at the start of the next day), United Carbon has a zero balance in the disbursement account. United Carbon’s regional bank account has two advantages. First, by choosing a remote location, the company has gained several days of float. Second, because the bank can forecast early in the day how much money will be paid out, United Carbon does not need to keep extra cash in the account to cover contingencies. The Finance in the News box describes how one Canadian company was able to reduce its cash needs by concentrating its cash holdings and using zero- balance accounts. Electronic Funds Transfer Throughout the world the use of checks is on the decline. For consumers they are being replaced by credit or debit cards. In the case of companies, payments are in- creasingly made electronically. 7 Electronic payments are relatively few in number but they account for the majority of transactions by value. Electronic payment sys- tems may be of two kinds—a gross settlement system or a net settlement system. With gross settlement each payment is settled individually; with net settlement all payment instructions are accumulated and then at the end of the day any imbal- ances are settled. 886 PART IX Financial Planning and Short-Term Management 6 Remote disbursement accounts are described in I. Ross, “The Race Is to the Slow Payer,” Fortune, April 18, 1983, pp. 75–80. 7 Consumers also may receive and pay bills electronically via their personal computer. Currently Elec- tronic Bill Presentment and Payment (EBPP) accounts for only a small proportion of payments but it is forecasted to grow rapidly. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 In the United States there are two systems for making large-value electronic payments—Fedwire (a gross system) and CHIPS (a net system). Fedwire is op- erated by the Federal Reserve system and connects over 10,000 financial institu- tions in the United States to the Fed and thereby to each other. Suppose Bank A instructs the Fed to transfer $1 million from its account with the Fed to the ac- count of Bank B. Bank A’s account is debited immediately and Bank B’s account is credited at the same time. Fedwire is therefore an example of a real-time gross settlement (RTGS) system. Most developed countries now operate RTGS systems for large-value payments. Real-time gross settlement suffers from a potential problem. If Bank A needs to pay Bank B, B needs to pay C, and C needs to pay A, there is a risk that the system could gridlock unless each bank kept a large reserve with the Fed. (A might not be able to pay B until it has been paid by C, C can’t pay A until paid by B, and B in turn is awaiting payment by A.) To oil the wheels, therefore, the Fed takes on the credit risk by paying the receiving bank even if there are insufficient funds in the account of the payer. Since each payment is final and guaranteed by the Fed, each receiving bank can be sure that it has the money and can give its customer imme- diate access to the funds. Cross-border high-value payments in dollars are handled by CHIPS, which is a privately owned system connecting 115 large domestic and foreign banks. CHIPS accumulates payment instructions throughout the day, and at the end of the day each bank settles up the net payment using Fedwire. This means that, if the bank receiving payments makes the funds available to its customers during the day, it would be at risk if the paying bank goes belly up during the day. Banks control this risk by imposing intraday credit limits on their exposure to each other. 887 FINANCE IN THE NEWS HOW LAIDLAW RESTRUCTURED ITS CASH MANAGEMENT The Canadian company, Laidlaw Inc., has more than 4,000 facilities throughout America, operating school bus services, ambulance services, and Grey- hound coaches. During the 1990s the company ex- panded rapidly through acquisition, and its number of banking relationships multiplied until it had 1,000 separate bank accounts with more than 200 different banks. The head office had no way of knowing how much cash was stashed away in these accounts until the end of each quarter, when it was able to construct a consolidated balance sheet. To economize on the use of cash, Laidlaw’s fi- nancial manager sought to cut the company’s aver- age float from five days to two. At the same time management decided to consolidate cash manage- ment at five key banks. This enabled cash to be zero-balanced to a single account for each division and swept daily to Laidlaw’s disbursement bank. Because the head office could obtain daily reports of the company’s cash position, cash forecasting was improved and the company could reduce its cash needs still further. Source: Cash management at Laidlaw is described in G. Mann and S. Hutchison, “Driving Down Working Capital: Laidlaw’s Story,” Canadian Treasurer Magazine, August/September 1999. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 Fedwire and CHIPS provide same-day settlement and are used to make high- value payments. Bulk payments such as wages, dividends, and payments to sup- pliers generally travel through the Automated Clearinghouse (ACH) system and take two to three days. In this case the company simply needs to provide a computer file of instructions to its bank, which then debits the corporation’s account and for- wards the payments to the ACH system. The ACH system is the largest payment system in the United States and in 1999 handled 6.2 billion payments with a value of $19 trillion. For companies that are “wired” to their banks, customers, and suppliers, these electronic payment systems have at least three advantages: • Record keeping and routine transactions are easy to automate when money moves electronically. Campbell Soup’s Treasury Management Department discovered that it could handle cash management, short-term borrowing and lending, and bank relationships with a total staff of seven. The company’s domestic cash flow was about $5 billion. 8 • The marginal cost of transactions is very low. For example, it costs less than $10 to transfer huge sums of money using Fedwire and only a few cents to make an ACH transfer. • Float is drastically reduced. Wire transfers generate no float at all. This can result in substantial savings. For example, cash managers at Occidental Petroleum found that one plant was paying out about $8 million per month three to five days early to avoid any risk of late fees if checks were delayed in the mail. The solution was obvious: The plant’s managers switched to paying large bills electronically; that way they could ensure they arrived exactly on time. 9 International Cash Management Cash management in domestic firms is child’s play compared with that in large multinational corporations operating in dozens of countries, each with its own cur- rency, banking system, and legal structure. A single, centralized cash management system is an unattainable ideal for these companies, although they are edging toward it. For example, suppose that you are the treasurer of a large multinational company with operations throughout Eu- rope. You could allow the separate businesses to manage their own cash but that would be costly and would almost certainly result in each one accumulating little hoards of cash. The solution is to set up a regional system. In this case the company establishes a local concentration account with a bank in each country. Then any surplus cash is swept daily into central multicurrency accounts in London or an- other European banking center. This cash is then invested in marketable securities or used to finance any subsidiaries that have a cash shortage. Payments also can be made out of the regional center. For example, to pay wages in each European country, the company just needs to send its principal bank a com- puter file with details of the payments to be made. The bank then finds the least costly way to transfer the cash from the company’s central accounts and arranges for the funds to be credited on the correct day to the employees in each country. 888 PART IX Financial Planning and Short-Term Management 8 J. D. Moss, “Campbell Soup’s Cutting-Edge Cash Management,” Financial Executive 8 (September/ October 1992), pp. 39–42. 9 R. J. Pisapia, “The Cash Manager’s Expanding Role: Working Capital,” Journal of Cash Management 10 (November/December 1990), pp. 11–14. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management © The McGraw−Hill Companies, 2003 Companies that maintain separate balances in each country are liable to find that they have a cash surplus in one country and a shortage in another. In this case the company could lend the surplus and borrow the deficit. However, that is likely to be costly, since banks need to charge a higher rate to borrowers than they pay to lenders. One alternative is to convert the surplus cash pool into the currency which is in short supply, but the simpler solution is to arrange for the bank to pool all your cash surpluses and shortages. In this case no money is transferred between ac- counts. Instead, the bank just adds together the credit and debit balances and pays you interest at its lending rate on the net surplus. Most large multinationals have several banks in each country, but the more banks they use, the less control they have over their cash balances. So development of regional cash management systems favors banks that can offer a worldwide branch network. These banks also can afford to invest the several billion dollars that are needed to set up computer systems for handling cash payments and re- ceipts in many different countries. Paying for Bank Services Much of the work of cash management—processing checks, transferring funds, running lock boxes, helping keep track of the company’s accounts—is done by banks. And banks provide many other services not so directly linked to cash man- agement, such as handling payments and receipts in foreign currency or acting as custodian for securities. 10 All these services have to be paid for. Usually payment is in the form of a monthly fee, but banks may agree to waive the fee as long as the firm maintains a minimum average balance in an interest-free deposit. Banks are prepared to do this, because, after setting aside a portion of the money in a reserve account with the Fed, they can relend the money to earn interest. Demand deposits earmarked to pay for bank services are termed compensating balances. They used to be a very common way to pay for bank services, but there has been a steady trend away from using compensating balances and toward direct fees. CHAPTER 31 Cash Management 889 10 Of course, banks also lend money or give firms the option to borrow under a line of credit. See Section 30.6. 31.2 HOW MUCH CASH SHOULD THE FIRM HOLD? Cash pays no interest. So why do individuals and corporations hold billions of dol- lars in cash and demand deposits? Why, for example, don’t you take all your cash and invest it in interest-bearing securities? The answer of course is that cash gives you more liquidity than securities. You can use it to buy things. It is hard enough getting New York cab drivers to give you change for a $20 bill, but try asking them to split a Treasury bill. In equilibrium all assets in the same risk class are priced to give the same expected marginal benefit. The benefit from holding Treasury bills is the interest that you re- ceive; the benefit from holding cash is that it gives you a convenient store of liquid- ity. In equilibrium the marginal value of this liquidity is equal to the marginal value of the interest on Treasury bills. This is just another way of saying that Treasury bills are investments with zero net present value; they are fair value relative to cash. [...]... choice of money-market investments, with different SUMMARY Visit us at www.mhhe.com/bm7e Brealey−Meyers: Principles of Corporate Finance, Seventh Edition Brealey−Meyers: Principles of Corporate Finance, Seventh Edition 902 IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 31 Cash Management PART IX Financial Planning and Short-Term Management FIGURE 31. 4 40 Short-term... sell low-value non-negotiable CDs to individuals Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management 31 Cash Management © The McGraw−Hill Companies, 2003 CHAPTER 31 Cash Management 899 Repos sometimes run for several months, but more frequently they are just overnight (24-hour) agreements No other domestic money-market investment offers such... Miller and D Orr, “A Model of the Demand for Money by Firms,” Quarterly Journal of Economics 80 (August 1966), pp 413–435 The Miller–Orr model is described in the Principles of Corporate Finance Web page Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 31 Cash Management CHAPTER 31 Cash Management while... because of the costs and delays discussed in this chapter Large corporations get close, however Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 31 Cash Management CHAPTER 31 Cash Management Inventory costs ($) 70 60 50 Total cost Order cost Carrying cost 40 30 20 10 0 1 4 7 10 13 16 19 22 25 28 31 34 Order... Journal of Finance, 37:361–371 (May 1983) Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 31 Cash Management CHAPTER 31 Cash Management 903 Baumol was the pioneer in applying inventory models to cash management Miller and Orr extend the Baumol model to handling uncertain cash flows, and Mullins and Homonoff... choose the floating-rate preferred over either of the other two securities Why? Explain briefly Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management © The McGraw−Hill Companies, 2003 31 Cash Management CHAPTER 31 Cash Management 1 Every day, Consolidated Blancmange writes checks worth $100,000 These checks take an average of five days to clear... the morning mail and picks up the end -of- month account summary from the bank The manager notes that only the $20,000 payment of the 27th has cleared the bank What are the company’s ledger balance and payment float? What is the company’s net float? Brealey−Meyers: Principles of Corporate Finance, Seventh Edition 906 IX Financial Planning and Short−Term Management 31 Cash Management © The McGraw−Hill... pay that have been accepted by a bank Sales of government securities by dealer with simultaneous agreement to repurchase Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX Financial Planning and Short−Term Management 31 Cash Management © The McGraw−Hill Companies, 2003 CHAPTER 31 Cash Management U.S Treasury Bills The first item in Table 31. 1 is U.S Treasury bills These are usually.. .Brealey−Meyers: Principles of Corporate Finance, Seventh Edition 890 IX Financial Planning and Short−Term Management 31 Cash Management © The McGraw−Hill Companies, 2003 PART IX Financial Planning and Short-Term Management Does this mean that it does not matter how much cash you hold? Of course not The marginal value of liquidity declines as you hold increasing amounts of cash When you... operating the lock-box system described in Section 31. 1 given the new level of interest rates 13 A three-month Treasury bill and a six-month bill both sell at a discount of 10 percent Which offers the higher annual yield? 14 In Section 31. 3 we described a six-month bill that was issued on an annually compounded yield of 5.19 percent Suppose that one month has passed and the investment still offers the same . Journal of Economics 80 (August 1966), pp. 413–435. The Miller–Orr model is described in the Principles of Corpo- rate Finance Web page. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX through a cor- respondent bank, or through a clearinghouse of local banks. Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash. available balance of $1 million and an availability float of $100,000: Brealey−Meyers: Principles of Corporate Finance, Seventh Edition IX. Financial Planning and Short−Term Management 31. Cash Management ©