Chapter 5. Cash Chapter 5. Cash Cash management involves examining - - PDF document

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Chapter 5. Cash Chapter 5. Cash Cash management involves examining - - PDF document

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Chapter Focus Chapter Focus Chapter 5. Cash Chapter 5. Cash Cash management involves examining Cash management involves examining liquidity needs and evaluating savings deposits liquidity needs and evaluating savings deposits

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SLIDE 1

Chapter 5. Cash Chapter 5. Cash Management: Funds for Management: Funds for Immediate Needs Immediate Needs

Chapter Focus Chapter Focus

  • Cash management involves examining

Cash management involves examining liquidity needs and evaluating savings deposits liquidity needs and evaluating savings deposits

  • ptions for meeting these needs. A sound cash
  • ptions for meeting these needs. A sound cash

management strategy must determine the management strategy must determine the appropriate amount of cash to hold, in what appropriate amount of cash to hold, in what form, and in which financial institution. More form, and in which financial institution. More

  • ver, it requires establishing an adequate level
  • ver, it requires establishing an adequate level
  • f liquidity while minimizing cash balances.
  • f liquidity while minimizing cash balances.

Major Topics Major Topics

  • Meeting Cash Needs

Meeting Cash Needs

  • Deposit Options

Deposit Options

  • Using Your Checking Account

Using Your Checking Account

  • Understanding How Your Account Earns

Understanding How Your Account Earns Interest Interest

  • Cash Management Strategy

Cash Management Strategy

A Cash Management Strategy A Cash Management Strategy Considers the Following Factors Considers the Following Factors

  • How Much Cash Should You Hold?

How Much Cash Should You Hold?

  • In What Form?

In What Form?

  • In What Kind of Financial Institutions?

In What Kind of Financial Institutions?

How Much Cash? How Much Cash? – – Depending Depending

  • n Needs
  • n Needs
  • Undertake transactions

Undertake transactions

  • Pocket money for small transactions

Pocket money for small transactions

  • Checking account for large transactions

Checking account for large transactions

  • If you often use cash, then you need to have more.

If you often use cash, then you need to have more.

  • Emergency reserves

Emergency reserves

  • Planners recommend 3

Planners recommend 3-

  • 6 months

6 months’ ’ of after

  • f after-
  • tax income

tax income

  • Store of Value

Store of Value

  • Saving for a major purchase

Saving for a major purchase

  • Waiting for investment environment to improve

Waiting for investment environment to improve

  • How much in this category will depend on the investment environm

How much in this category will depend on the investment environment. ent.

  • Bottom line: Emergency reserve is the most important one. So

Bottom line: Emergency reserve is the most important one. So 3 3-

  • 6 months

6 months’ ’ after tax income as cash is a good idea. after tax income as cash is a good idea.

In What Form? In What Form? -

  • Deposit

Deposit Options Options

  • Checking Accounts

Checking Accounts

  • Regular: no interest

Regular: no interest

  • NOW Account (negotiated order of withdrawal):

NOW Account (negotiated order of withdrawal): interest earning, low rate though interest earning, low rate though

  • Federal deposit insurance

Federal deposit insurance

  • Savings Accounts

Savings Accounts

  • No check writing privileges

No check writing privileges

  • Low interest rate (passbook rate)

Low interest rate (passbook rate)

  • Federal deposit insurance

Federal deposit insurance

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SLIDE 2
  • Money Market Deposit Accounts

Money Market Deposit Accounts

  • Savings accounts with interest rate tied to money

Savings accounts with interest rate tied to money market rate of interest, usually slightly higher than market rate of interest, usually slightly higher than regular savings account. regular savings account.

  • Limited access to account (e.g. 6 transfers a month)

Limited access to account (e.g. 6 transfers a month)

  • Federal deposit insurance

Federal deposit insurance

  • Minimum balance requirement

Minimum balance requirement

  • Rates are often lower than rates available on CDs or

Rates are often lower than rates available on CDs or Money Market Mutual Funds Money Market Mutual Funds--

  • -SHOP AROUND!

SHOP AROUND!

  • Money Market Mutual Funds

Money Market Mutual Funds

  • Offered by banks and mutual funds

Offered by banks and mutual funds

  • Minimum balance requirement

Minimum balance requirement

  • Differ in terms of investments each makes

Differ in terms of investments each makes--

  • -read

read the Prospectus the Prospectus

  • Check writing privileges (not suitable for small

Check writing privileges (not suitable for small amount checks) amount checks)

  • NOT FEDERALLY INSURED! But their safety

NOT FEDERALLY INSURED! But their safety record has been excellent record has been excellent

  • Certificates of Deposit (CDs)

Certificates of Deposit (CDs)

  • Available in many maturities

Available in many maturities

  • Usually offer the highest rates for cash deposits

Usually offer the highest rates for cash deposits

  • But, they have early withdrawal penalties

But, they have early withdrawal penalties

  • Offered by most financial institutions, including

Offered by most financial institutions, including credit unions credit unions

  • Series EE Savings Bonds

Series EE Savings Bonds

  • Issued by the U.S. treasury

Issued by the U.S. treasury

  • Rates change with market conditions

Rates change with market conditions

  • Issued in discount form

Issued in discount form— — e.g. You pay $50 for e.g. You pay $50 for a $100 bond a $100 bond

  • Tax deferred until bonds are sold

Tax deferred until bonds are sold

  • Sold by financial institutions

Sold by financial institutions

  • Free of state and local income taxes

Free of state and local income taxes

  • Free of federal income tax if used for child

Free of federal income tax if used for child’ ’s s education (income limitation) education (income limitation)

Summary of Deposit Options Summary of Deposit Options

B+ B+ B B A+ A+ A A Series EE bonds & I bonds Series EE bonds & I bonds A A C C A+ A+ A A Certificate of deposit (CDs) Certificate of deposit (CDs) B B-

  • A+ to B

A+ to B A to C A to C B+ B+ Money market mutual fund Money market mutual fund B B-

  • B+

B+ A+ A+ C C Money market deposit Money market deposit B B-

  • A+

A+ A+ A+ A A NOW NOW D D B+ B+ A+ A+ A+ A+ Savings Savings F F A+ A+ A+ A+ A+ A+ Regular checking Regular checking Yield Yield Liquidity Liquidity Safety Safety Availability Availability Deposit Deposit

Using Your Checking Account Using Your Checking Account

  • Selecting a bank

Selecting a bank

  • Geographic convenience

Geographic convenience

  • Services and charges

Services and charges

  • Interest rates

Interest rates

  • Check out a

Check out a bank Website bank Website for services, charges, and for services, charges, and interest rates interest rates

  • Check out a

Check out a credit union Website credit union Website for services, charges, for services, charges, and interest rates and interest rates

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SLIDE 3
  • Check insurance status

Check insurance status

  • Federal deposit insurance is offered by many

Federal deposit insurance is offered by many financial institutions financial institutions

  • Commercial Banks (FDIC)

Commercial Banks (FDIC)

  • Savings Associations (SAIF)

Savings Associations (SAIF)

  • Credit Unions (NCUA)

Credit Unions (NCUA)

  • Insurance at any one institution is $100,000 per

Insurance at any one institution is $100,000 per depositor, not per deposit depositor, not per deposit

Checking Account Procedures Checking Account Procedures

  • Opening an account

Opening an account

  • Click to see an online application

Click to see an online application

  • If married, consider Joint Account with Right of

If married, consider Joint Account with Right of Survivorship (WROS) Survivorship (WROS)

  • Making additional deposits and endorsing checks

Making additional deposits and endorsing checks

  • Blank endorsement

Blank endorsement

  • Maria J. Garcia

Maria J. Garcia

  • Restrictive endorsement

Restrictive endorsement

  • For deposit only, Maria J. Garcia

For deposit only, Maria J. Garcia

  • Special endorsement

Special endorsement

  • Pay to the order of Sharon Steele, Maria J. Garcia

Pay to the order of Sharon Steele, Maria J. Garcia

  • Writing checks

Writing checks

  • Use duplicated checks

Use duplicated checks

  • Bouncing a check (overdraft)

Bouncing a check (overdraft)

  • Check bouncing fee can be expensive

Check bouncing fee can be expensive

  • Consider overdraft protection

Consider overdraft protection

  • Stop check order

Stop check order

  • Fee involved

Fee involved

End End-

  • of
  • f-
  • Month Activities

Month Activities

  • Bank reconciliation

Bank reconciliation

  • Sort checks numerically, look for checks that have

Sort checks numerically, look for checks that have not cleared not cleared

  • Note any deposits not yet recorded by the bank

Note any deposits not yet recorded by the bank

  • Deduct service charges from your account balance;

Deduct service charges from your account balance; Add any interest if your account earns interest Add any interest if your account earns interest

  • Prepare end

Prepare end-

  • of
  • f-
  • month reconciliation

month reconciliation

  • Filing and storage

Filing and storage

Checks That Guarantee Payment Checks That Guarantee Payment

  • Certified check

Certified check

  • Bank verifies that your account has sufficient

Bank verifies that your account has sufficient funds to cover the check funds to cover the check

  • Cashiers check

Cashiers check

  • Sold by financial institutions

Sold by financial institutions

  • Convenient for people without checking accounts

Convenient for people without checking accounts

  • Traveler

Traveler’ ’s check s check

  • Purchased from a bank usually when a payer is

Purchased from a bank usually when a payer is traveling away from home traveling away from home

Electronic Banking Electronic Banking

  • Automated teller machines (ATMs)

Automated teller machines (ATMs)

  • Electronic funds transfer systems (EFTS)

Electronic funds transfer systems (EFTS)

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SLIDE 4

Understanding How Your Understanding How Your Account Earns Interest Account Earns Interest

  • Compounding issue

Compounding issue

  • Most banks use either daily compounding or continuous

Most banks use either daily compounding or continuous compounding (similar to daily compounding) compounding (similar to daily compounding)

  • Determine the balance that earns interest

Determine the balance that earns interest

  • Day of Deposit to Day of Withdrawal (generally, the most

Day of Deposit to Day of Withdrawal (generally, the most favorable to savers) favorable to savers)

  • Minimum Balance

Minimum Balance

  • Fist In, First Out (FIFO)

Fist In, First Out (FIFO)

  • Last In, First Out (LIFO)

Last In, First Out (LIFO)

Day of Deposit to Day of Day of Deposit to Day of Withdrawal Method Withdrawal Method

  • Account Activity:

Account Activity:

  • Beginning Bal. $1,000

Beginning Bal. $1,000

  • Day 30 Deposit 1,000

Day 30 Deposit 1,000

  • Day 60 Withdrl

Day 60 Withdrl -

  • 900

900

  • Day 90 Ending

Day 90 Ending

  • Balance 1,100

Balance 1,100

  • Interest Calculation:

Interest Calculation:

  • $1,000 x 30/360 x 0.06 =

$1,000 x 30/360 x 0.06 = $5.00 plus $5.00 plus

  • $2,000 x 30/360 x 0.06 =

$2,000 x 30/360 x 0.06 = $10.00 plus $10.00 plus

  • $1,100 x 30/360 x 0.06 =

$1,100 x 30/360 x 0.06 = $5.50 $5.50

  • Total = $20.50

Total = $20.50

Minimum Balance Method Minimum Balance Method

  • Account Activity:

Account Activity:

  • Beginning Bal. $1,000

Beginning Bal. $1,000

  • Day 30 Deposit 1,000

Day 30 Deposit 1,000

  • Day 60 Withdrl

Day 60 Withdrl -

  • 900

900

  • Day 90 Ending

Day 90 Ending

  • Balance 1,100

Balance 1,100

  • Interest Calculation:

Interest Calculation:

  • $1,000 x 90/360 x 0.06 =

$1,000 x 90/360 x 0.06 = $15.00 $15.00

  • Total = $15.00

Total = $15.00

FIFO METHOD FIFO METHOD

  • Account Activity:

Account Activity:

  • Beginning Bal. $1,000

Beginning Bal. $1,000

  • Day 30 Deposit 1,000

Day 30 Deposit 1,000

  • Day 60 Withdrl

Day 60 Withdrl -

  • 900

900

  • Day 90 Ending

Day 90 Ending

  • Balance 1,100

Balance 1,100

  • Interest Calculation

Interest Calculation

  • $100 x 90/360 x 0.06 =

$100 x 90/360 x 0.06 = $1.50 plus $1.50 plus

  • $1,000 x 60/360 x 0.06

$1,000 x 60/360 x 0.06 = $10.00 = $10.00

  • Total = $11.50

Total = $11.50

LIFO Method LIFO Method

  • Account Activity:

Account Activity:

  • Beginning Bal. $1,000

Beginning Bal. $1,000

  • Day 30 Deposit 1,000

Day 30 Deposit 1,000

  • Day 60 Withdrl

Day 60 Withdrl -

  • 900

900

  • Day 90 Ending

Day 90 Ending

  • Balance 1,100

Balance 1,100

  • Interest Calculation

Interest Calculation

  • $1,000 x 90/360 x 0.06

$1,000 x 90/360 x 0.06 = $15.00 plus = $15.00 plus

  • $100 x 60/360 x 0.06 =

$100 x 60/360 x 0.06 = $1.00 $1.00

  • Total = $16.00

Total = $16.00

Cash Management Strategy Cash Management Strategy

  • Resolve the question: Will interest rates

Resolve the question: Will interest rates increase, decrease, or stay the same over the increase, decrease, or stay the same over the upcoming planning period? upcoming planning period?

  • Obtain yield information on deposit accounts

Obtain yield information on deposit accounts that appeal to you that appeal to you

  • Allocate your liquid funds among the accounts

Allocate your liquid funds among the accounts to satisfy your preferences for yield, safety, to satisfy your preferences for yield, safety, and liquidity and liquidity

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SLIDE 5

Please Check Out These Websites Please Check Out These Websites

  • For up

For up-

  • to

to-

  • date interest rate information see

date interest rate information see Bankrate.com Bankrate.com

  • Check out information on U.S. Saving bonds at

Check out information on U.S. Saving bonds at

http://www.treasurydirect.gov/indiv/products/p http://www.treasurydirect.gov/indiv/products/p roducts.htm roducts.htm

  • For information on U.S. banks, check out

For information on U.S. banks, check out American American Bankers Association website. Bankers Association website.

Assignment for Chapter 5 Assignment for Chapter 5

  • Examine your cash reserve. Does the reserve meet the

Examine your cash reserve. Does the reserve meet the expert recommendation of 3 expert recommendation of 3-

  • 6 months of after

6 months of after-

  • tax

tax income? income?

  • In what form is your cash reserve?

In what form is your cash reserve?

  • Find out the interest rate and interest calculation

Find out the interest rate and interest calculation methods of all the cash deposit accounts you have. methods of all the cash deposit accounts you have.

  • Study the fee structure of your bank or credit Union.

Study the fee structure of your bank or credit Union.