Financial Analysis, Planning and Forecasting Theory and Application

1. Financial Analysis, Planning and ForecastingTheory and Application Chapter 20 Cash, Marketable Securities, and Inventory Management By Alice C. Lee San Francisco State University John C. Lee J.P. Morgan Chase Cheng F. Lee Rutgers University

2. Outline • 20.1 Introduction • 20.2 The Baumol and Miller-Orr model • 20.3 Cash management systems • 20.4 Credit lines and bank relations • 20.5 Marketable securities management • 20.6 Inventory Management • 20.7 Summary • Appendix 20A. Derivation of equation 20-1

3. 20.1 Introduction

4. 20.2 The Baumol and Miller-Orr model • Baumol’s EOQ model • Miller-Orr model

5. 20.2 The Baumol and Miller-Orr model （20-1） Figure 20-1

6. 20.2 The Baumol and Miller-Orr model Figure 20-2

7. 20.2 The Baumol and Miller-Orr model

8. 20.2 The Baumol and Miller-Orr model Figure 20-3

9. 20.2 The Baumol and Miller-Orr model （20-2） （20-3） （20-4） （20-5）

10. 20.2 The Baumol and Miller-Orr model upper limit = lower limit + spread = ＄20,000＋＄22,293 = ＄42,293

11. 20.3 Cash management systems • Float • Cash collection and transference systems • Cash transference mechanism and scheduling

12. 20.3 Cash management systems Figure 20-4

13. 20.3 Cash management systems Figure 20-5 Source: Stone and Hill, 1980.

14. 20.3 Cash management systems Figure 20-6 Source: Stone and Hill, 1980.

15. 20.4 Credit lines and bank relations • Credit lines • Bank relations

16. 20.4 Credit lines and bank relations

17. 20.5 Marketable securities management • Investment criteria for surplus cash balances • Types of marketable securities • Hedging considerations

18. 20.5 Marketable securities management

19. 20.5 Marketable securities management (20-6)

20. 20.6 Inventory Management • Inventory Loans • Economic order quantity

21. 20.6 Inventory Management （20-7）

22. 20.7 Summary Chapter 20 has examined various aspects of cash and marketable security management. Two techniques were discussed that can assist in the estimation of an optimal level or range for the cash balance; these were Baumol’s model and the Miller-Orr model. To make the cash collection system more efficient, the firm can choose from various methods for collecting or transferring cash and deciding when to transfer it. Such cost minimization is ideal for linear programming applications.

23. 20.7 Summary The credit line offers the firm a means of handling cash variations caused by seasonal effects or unanticipated events. Establishing good bank relations is an important feature for any cash management system. However, bank services do take on a cost, typically in the form of compensating balances. While credit lines can be a good investment for a bank, they can have detrimental effects on the bank’s liquidity that could intensify any maturity gap problems. Efficient cash management ensures that surplus balances are invested in marketable securities that meet minimum standards for certainty of principal, maturity, liquidity, and yield. In Chapter 20, we considered the hedge decision from the cash manager’s perspective and gave various examples of hedging applications. Optimal inventory management was also briefly discussed.

24. Appendix 20A. Derivation of equation 20-1 （20A-1） （20A-2）