Case Study:

I hate cash on hand, says Fred Salerno, Bell Atlantics CFO. According to a recent survey, Salerno has backed up his talk with actions. When rated on the number of days of operating expenses held in cash (DOEHIC), Bell Atlantic leads its industry with a DOEHIC of 6 days versus an industry average of 27. Put another way, Bell Atlantic has cash holdings equal to only 0.90 percent of sales as compared with an industry median cash/sales ratio of 5.20 percent.

A great relationship with its banks is a key to keeping low cash levels. Jim Hopwood, treasurer of Wickes, says, We have a credit revolver if we ever need it. The same is true at Haverty Furniture, where CFO Dennis Fink says, You dont have to worry about predicting short-term fluctuations in cash flow, if you have solid bank commitments.

Treasurer Wayne Smith of Avery Dennison says that their low cash holdings have reduced their net operating working capital to such an extent that their return on invested capital (ROIC) is 3 percentage points higher than it would be if their cash holdings were at the industry average. He goes on to say that this adds a lot of economic value to their company.

Despite these and other comments about the advantages of low cash holdings, many companies still hold extremely large amounts of cash and marketable securities, including Procter & Gamble ($2.6 billion, 32 days DOEHIC, 7.1 percent cash/sales) and Ford Motor Company ($24 billion, 76 DOEHIC). When asked about the appropriate level of cash holdings, Ford CFO Henry Wallace refused to be pinned down, saying, There is no answer for a company this size. However, it is interesting to note that Ford recently completed a huge stock repurchase, reducing its cash by about $10 billion.

Requirements:

1. Being a financial analyst, you need to suggest Salerono (CFO) for the better cash management to use the motives for holding cash approach for the company. As he hate cash on hand, how you can convince the Salerno to allocate the cash for these motives to manage the cash more efficiently.
2. In case you are the CFO, how you would introduce the cash management system.

3. What is net float? How might a company play the float in its disbursements?