Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty’s Sports Paradise (SSP). Ray decided that, at age 62, he wasn’t quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray’s educational background was in literature and not in business, he hired you, a finance expert, to help him with the store’s cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the following questions:
a. What is the goal of cash management?
b. For what reasons do firms hold cash?
c. What is meant by the terms precautionary balance and speculative balance?
d. What are some specific advantages for a firm in holding adequate cash balances?
e. How can a firm synchronize its cash flows and what good would this effort do?
f. You have been going through the store’s checkbook and bank balances. In the process, you discovered that SSP, on average, writes checks in the amount of $10,000 each day and that it takes approximately five days for these checks to clear. Also, the firm receives checks in the amount of $10,000 daily, but loses four days while they are being deposited and cleared. What is the firm’s disbursement float, collections float, and net float?
g. How can a firm speed up collections and slow down disbursements?
h. Why would a firm hold marketable securities?
i. What factors should a firm consider in building its marketable securities portfolio? What are some securities that should be held and some that should not be held?