What are the principal reasons for holding cash?Can a firm estimate its target cash balance by summing the cash held to satisfy each of the reasons?Why or why not?

The two principal reasons for holding cash are for transactions and compensating balances. Transactions represent the normal routine day to day operations like payment of cash to suppliers, meeting of other business operating expenses by cash, receipt of collections from customers etc. These receipts are deposited in the cash account. The cash outflows and inflows cannot be predicted accurately and hence the firm must maintain a safety level of cash to meet the operations and emergencies. If the firms cash flows are less predictable, then the level of safety cash would be more and vice versa.

Banks require that its customers keep a minimum amount of its deposit as compensating balance to offset the cost of providing service. Also, the more the number of deposits with the bank, higher is the banks profit and hence they stipulate on this compensating balance. Therefore, firms hold cash for this purpose. A firm cannot estimate its target cash balance by summing the cash held to satisfy each of the two reasons. The same cash can frequently satisfy both the objectives partially. Apart from transactions and compensating balances, the other reason to hold cash includes the availability of trade discounts.

Why is a cash budget important even when there is plenty of cash in the bank?

A cash budget is extremely important because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems.

The cash budget is managements approximation of cash on hand at the beginning of a budget period and the estimated cash inflows and outflows. The cash inflows may include those that result from cash sales, the sale of assets, the collection of accounts receivable, borrowing cash or stock issuance. The cash outflows may include disbursements for material purchases, debt repayment, asset acquisition, taxes, manufacturing costs and dividends. The cash budget highlights a companys probable income or deficit for a period, the latter of which the company must address by increasing sales or decreasing expenditures. The importance of the cash budget lies in its ability to identify a companys future financing needs, highlight the need for corrective actions and evaluate a companys performance.

Discuss why it is important for a financial manager to understand the concept of float if he or she is to effectively manage the firms cash.

The financial manager is responsible for the effectiveness of the cash management program.Effective cash management encompasses proper management of both the cash inflows and outflows of a firm, which entails consideration of the cash synchronization and check clearing and use of float.

The reason is because float creates drift in the time from when a check is written to when it is deducted from the bank account, this float should be maximized.Collections float time from when a company receives payment from a customer to when the bank designates it is available funds.This type of float should be minimized (disbursement collections = net).

Firms and financial managers want to speed up collection float and delay disbursement float to give them a longer net float.

Why would a lockbox plan make more sense for a firm that makes sales all over the United States than for a firm with the same volume of business that is concentrated where the corporate headquarters are located?

A lockbox arrangement requires customers to send their payments to a P.O. box located in the area near where they live rather than directly to the firm.The firm arrangements for a local bank to collect the checks from the P.O. Box, possibly several times a day, and to immediately deposit them in the companys checking account.

A lockbox plan is a technique used to reduce float by having payments sent to post office boxes located near the customers, one method of speeding up the check-clearing process for customer payments and decreasing the firms net float position.The mail delay is less than if the payment had to travel further and the checks are cleared faster because the banks the checks are written on are in the same federal reserve district.

What are the elements of a firms credit policy?To what extend can firms set their own credit policies as opposed to having to accept policies that are dictated by the competition?

Elements of Credit Policy:

1. Credit Standards: Tighter standards tend to reduce sales, but reduce bad debt expense. Fewer bad debts reduces DSO.

2. Terms of Credit: The conditions of the credit sale.

3. Collection Policy: the procedures the company follows to collect credit accounts, when to invoice, how to handle past-due accounts and when to turn over to a collection agency.A tougher policy will reduce DSO but may damage customer relationships.

Cash discounts:lower price, attract new customers, and reduces DSO.

Firms prefer cash of course but offer credit sales because competitors offer credit.The credit policy is one of the variables that affect demand for a product.

Credit Period: How long to pay? Shorter period reduces DSO and average A/R, but it may discourage sales.

What are aging schedules, and how can they be used to help the credit manager more effectively manage accounts receivable?

If your company offerscredit to your customers, you need a collections policy. One part of that collections policy is to monitor your receivables by developing an aging schedule.

An aging schedule is a way of finding out if customers are paying their bills within the credit period prescribed in the company's credit terms. Every day that a customer is late making payment on their account costs your company money from a cash flow point of view, so preparing an aging schedule to drive your collections policy is an important financial management step for a business firm.

If you find that a high percentage of your customers are slow in paying their bills, you should re-evaluate your credit and care the answers to these questions correct?

The attached worksheet is offered as extra credit. There are six discussion topics offered. Appropriate discussion of each topic will earn one point per item. One or two sentence responses will not earn points. Fully formed thoughts and informational responses written in grammatically correct form must be provided for credit consideration. There is much discussed about each topic in your textbook, therefore your responses should be comprehensive. What are the principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the reasons? Why or why not? The two principal reasons for holding cash are for transactions and compensating balances. Transactions represent the normal routine day to day operations like payment of cash to suppliers, meeting of other business operating expenses by cash, receipt of collections from customers etc. These receipts are deposited in the cash account. The cash outflows and inflows cannot be predicted accurately and hence the firm must maintain a safety level of cash to meet the operations and emergencies. If the firm's cash flows are less predictable, then the level of safety cash would be more and vice versa. Banks require that its customers keep a minimum amount of its deposit as compensating balance to offset the cost of providing service. Also, the more the number of deposits with the bank, higher is the bank's profit and hence they stipulate on this compensating balance. Therefore, firms hold cash for this purpose. A firm cannot estimate its target cash balance by summing the cash held to satisfy each of the two reasons. The same cash can frequently satisfy both the objectives partially. Apart from transactions and compensating balances, the other reason to hold cash includes the availability of trade discounts. Why is a cash budget important even when there is plenty of cash in the bank? A cash budget is extremely important because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. The cash budget is management's approximation of cash on hand at the beginning of a budget period and the estimated cash inflows and outflows. The cash inflows may include those that result from cash sales, the sale of assets, the collection of accounts receivable, borrowing cash or stock issuance. The cash outflows may include disbursements for material purchases, debt repayment, asset acquisition, taxes, manufacturing costs and dividends. The cash budget highlights a company's probable income or deficit for a period, the latter of which the company must address by increasing sales or decreasing expenditures. The importance of the cash budget lies in its ability to identify a company's future financing needs, highlight the need for corrective actions and evaluate a company's performance. Discuss why it is important for a financial manager to understand the concept of float if he or she is to effectively manage the firm's cash. The financial manager is responsible for the effectiveness of the cash management program. Effective cash management encompasses proper management of both the cash inflows and outflows of a firm, which entails consideration of the cash synchronization and check clearing and use of float. The reason is because float creates drift in the time from when a check is written to when it is deducted from the bank account, this float should be maximized. Collections float time from when a company receives payment from a customer to when the bank designates it is available funds. This type of float should be minimized (disbursement - collections = net). Firms and financial managers want to speed up collection float and delay disbursement float to give them a longer net float. Why would a lockbox plan make more sense for a firm that makes sales all over the United States than for a firm with the same volume of business that is concentrated where the corporate headquarters are located? A lockbox arrangement requires customers to send their payments to a P.O. box located in the area near where they live rather than directly to the firm. The firm arrangements for a local bank to collect the checks from the P.O. Box, possibly several times a day, and to immediately deposit them in the company's checking account. A lockbox plan is a technique used to reduce float by having payments sent to post office boxes located near the customers, one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position. The mail delay is less than if the payment had to travel further and the checks are cleared faster because the banks the checks are written on are in the same federal reserve district. What are the elements of a firm's credit policy? To what extend can firms set their own credit policies as opposed to having to accept policies that are dictated by the competition? Elements of Credit Policy: 1. Credit Standards: Tighter standards tend to reduce sales, but reduce bad debt expense. Fewer bad debts reduces DSO. 2. Terms of Credit: The conditions of the credit sale. 3. Collection Policy: the procedures the company follows to collect credit accounts, when to invoice, how to handle past-due accounts and when to turn over to a collection agency. A tougher policy will reduce DSO but may damage customer relationships. Cash discounts: lower price, attract new customers, and reduces DSO. Firms prefer cash of course but offer credit sales because competitors offer credit. The credit policy is one of the variables that affect demand for a product. Credit Period: How long to pay? Shorter period reduces DSO and average A/R, but it may discourage sales. What are aging schedules, and how can they be used to help the credit manager more effectively manage accounts receivable? If your company offers credit to your customers, you need a collections policy. One part of that collections policy is to monitor your receivables by developing an aging schedule. An aging schedule is a way of finding out if customers are paying their bills within the credit period prescribed in the company's credit terms. Every day that a customer is late making payment on their account costs your company money from a cash flow point of view, so preparing an aging schedule to drive your collections policy is an important financial management step for a business firm. If you find that a high percentage of your customers are slow in paying their bills, you should reevaluate your credit and collections policies and make some changes