178) This process is known as float. Some companies actually operate with a negative cash balance on the corporate books, knowing float will carry them through at the bank. (Block & Hirt, 2004, pg. 179) Float is based on the ability of the company to improve their collection of accounts receivables and extending the time of their disbursements. The preference is to have collections to be as short as possible and for disbursements to extend as long as possible.
Maintaining a sound understanding the organizations cash flow process can be an expensive process. These expenses must be compared to the benefits that may accrue through the use of cost-benefit analysis. (Block & Hirt, 2004, pg. 180) Cost-benefits analysis can determine the amount of funds that a company has to invest in other manners based on the average daily remittance and the number of time saving days (collections or disbursements).
Methods of Short-term Financing
The firm may hold excess funds in anticipation of a cash outlay. When funds are being held for other than immediate transaction purposes, they should be converted from cash into interest-earning marketable securities. (Block & Hirt, 2004, pg. 184) Factors that must be taken into consideration by the financial manager when selecting the type of short-term financing are the companys financial goals and the yield, maturity, minimum investment required, safety, and marketability.
Options available as short-term financing are federal government securities, federal agency securities, non-government securities. One of the primary differences between the types is the return on investment and the risk associated with the security type.
Of the securities to be discussed the Treasury Bills (or T-Bill) provide the most stability and least amount of risk. Treasury bills are short-term obligations of the federal government and are a popular place to park funds because of a large and active market. Although these securities View More »