cash & marketable securities mgmt doc

8/8/2019 Cash & Marketable Securities Mgmt Doc

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MUKESH PATEL SCHOOL OF TECHNOLOGY MANAGEMENT & ENGINEERING

Cash & Marketable

Securities Management FAA Assignment 2

Abbas Sheik Dawood (101), MBA Tech (IT) - Shirpur

Bhavuk Chandak (103), MBA Tech (IT) - Shirpur

Dharmendra Choudhary (104), MBA Tech (IT) – Shirpur

Shruti Bihani (201), MBA Tech (Chemical) – Mumbai

Vaibhav Chaudhary (301), MBA Tech (Manufacturing) - MumbaiSiddharth Devnani (302), MBA Tech (Manufacturing) – Mumbai



Cash & Marketable Securities Management

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Table of Contents

Motives for Holding Cash .......................................................................................................... 2

Speeding Up Cash Receipts ....................................................................................................... 3

Collections ............................................................................................................................. 3

Collection Float ...................................................................................................................... 3

Earlier Billing .......................................................................................................................... 4

Concentration Banking .......................................................................................................... 4

Slowing Down Cash Payouts ...................................................................................................... 5

Float ....................................................................................................................................... 6

Electronic Commerce ................................................................................................................ 7

Electronic Data Interchange (EDI) ......................................................................................... 7

1. Electronic Funds Transfer (EFT) ................................................................................. 7

2. Financial EDI (FEDI) .................................................................................................... 7

Cost & Benefits of EDI ........................................................................................................... 7

Indian Systems of EFT ............................................................................................................ 8

National Electronic Funds Transfer (NEFT) ........................................................................ 8

Real Time Gross Settlement (RTGS) .................................................................................. 8

Electronic Clearance Service (ECS) .................................................................................... 8

Cheque Truncation System (Check 21) .............................................................................. 8

Outsourcing ............................................................................................................................... 9

Benefits of outsourcing ......................................................................................................... 9

Disadvantages of Outsourcing ............................................................................................. 10

Business process outsourcing (BPO) ................................................................................... 11

Maintaining Cash Balances ...................................................................................................... 12

Compensating Balances and Fees ....................................................................................... 12

Recent Trends ...................................................................................................................... 12

Investment in marketable securities ....................................................................................... 13

Marketable Securities .......................................................................................................... 13

Criteria for Selecting Marketable Securities:....................................................................... 13

Marketable Securities Portfolio........................................................................................... 14

Common Marketable Securities .......................................................................................... 15

List of Illustrations ................................................................................................................... 18

Bibliography ............................................................................................................................. 18




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Speeding Up Cash Receipts

It includes two methods that are the speeding up of collections or by concentration banking.

First we shall discuss acceleration of collections that includes steps taken by a firm from the

time a product or service is sold until the customers’ checks are collected and become

usable funds for the firm.

Collections

A number of methods are designed to speed up the collection process these are as follows:

Expedite preparing and mailing of invoice

Accelerate the mailing of payments from customers to the firm

Reduce the time during which payments received by the firm remain uncollected

funds

Collection Float

The second and third items in the above list collectively represent the collection float, the

total time between the mailing of a check by a customer and the availability of cash to the

receiving firm. The second item refers to the mail float or the time for which the check is in

the mail. The third item is the deposit float which has two aspects processing float and

availability float. Processing float is the time taken by a firm to process checks internally.

Availability float involves the time consumed in clearing the check through the banking

system.

Figure 1 Collection Float Timeline




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Earlier Billing

Another way to speed up the collection of receivables is to get the invoices or bills to the

customers earlier. Customers have different payment habits. Some pay the bills on the final

due date or may be even after that and others pay as soon as they receive the bill or invoice.

In both the cases faster preparing and mailing of invoices helps in faster payment because

earlier receipt of invoices result in earlier discount and due dates. Billing can be done on the

computer for achieving faster preparation of invoices. Some companies even enclose the bill

with the material. Billing can be completely eliminated by the use of preauthorized debit.

Preauthorized debit means the transfer of funds from a payer’s bank account on a specified

date to the payee’s bank account. The transfer is initiated by the payee with the payer’s

advance authorization. The customer signs an agreement with a firm allowing the firm to

debit the customer’s account automatically on a specified date and transfer funds from the

customer’s account to the firm’s account.

Concentration Banking

It basically means the movement of cash from field banks into the firm’s central cash pool

residing in a concentration bank. The firms move part or all of the deposits to one central

location, which is known as a concentration bank. The process of cash concentration has

several effects:

It improves control over inflows and outflows of corporate cash

It reduces idle balances that is it keeps only the necessary amount of deposit

balances in the regional banks to meet transaction needs

It allows for more effective investments. Pooling excess balances provides the larger

cash amounts needed for higher yielding, short term investment opportunities that

require a larger minimum purchase.

The concentration banking is dependent on the timely transfer of funds between banks or

financial institutions. There are three principle methods employed to move funds between

financial institutions which are as follows:

Depository Transfer Check (DTC): This arrangement moves funds through the use of

a pre-printed check drawn on a local bank and payable to a single company account

at a concentration bank. Funds are not immediately available on receipt of the DTC

because the check must still be collected through the usual channels.

Automated Clearinghouse (ACH) electronic transfer: This is essentially an electronic

version of the depository transfer check, which can be used between banks that are

members of the automated clearing house system. Transferred funds become

available one business day later.

Wire Transfer: This is the fastest way to transfer funds between banks. It is a generic

term used for electronic funds transfer using a two-way communications system,

such as Fedwire (Federal Reserve Wire System). It is simply a telephone-like

communication which via book keeping entries, removes funds from a payer bankaccount and deposits them in an account of a payee bank.




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Slowing Down Cash Payouts

The second way in which one can hold cash is by slowing down the payments. The motives

for slowing down payouts are the same as the motives of speeding up receipts. The firm

always would want to make most use of money it already has, before it has been spent.

To minimize the time cash deposits are idle and to slow down expenditures, the firm needs

to effectively manage its CONTROL OF DISBURSEMENTS.

A firm should build a system in which it should be able to transfer funds between multiple

accounts/banks in such a way that the account from which disbursements are made should

have an adequate but should not allow building up of excess balance and these excess funds

should be transferred to invest in marketable securities.

A convenient way to do this is by centralising disbursements into a single dedicated

account or several dedicated accounts. In this case, funds are transferred to this

account at the precise time disbursements are made. The idea is to have just enough

cash in the account through which there is an outflow predicted and use the rest of

the cash. The firm should aim to make disbursement only at that precise time, after

which it would hamper the firm's credit standing, or an additional expense would be

incurred due to late payment.

Cash discount: There is a possibility that cash discount is offered. In this case the

firm should send the payment at the end of the discount period.

Dividends and Payroll: For payroll and dividend separate accounts can bemaintained as described in "dedicated accounts". Balance in this account can be

maintained depending on prediction of when the cheques will be deposited by the

employees. Balance can be maintained to a minimum by this. For example if payday

is on 10th of every month, initially it should be observed what the trend is regarding

debiting of the payroll dedicated account over the next few days. Eventually using

this prediction the firm does not need to deposit all the required funds for payroll at

once, and can deposit into this account part by part according to the trend

observed.




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This system is also followed by firms for dividend payments. In the case of dividend

payments it is observed that there is a greater delay of depositing of cheques. Hence firms

can take advantage of it.

Intentional delay: Float can be intentionally be increased by firms to cause a

deliberate delay in payments. But in this we must realise that one firms gain is

another firms loss. The payees will receive payment much later than they would

want to. This can lead to supplier relations being hurt and this can affect the

goodwill of the company.

Remote disbursement: This is done by strategically selecting geographically remote

banks. This enables the cheques to remain outstanding for the maximum amount of

time.

Controlled Disbursement: In this system the firm directs cheques to be drawn at a

branch that gives them notification in the morning of total amount of money which

will be cleared that day towards cheques deposited

Float

Funds in the bank are generally greater than the balance shown on the company's books.

The difference between bank balance and books balance of cash is called net float. It is the

consequence of delays between when the cheques are made till when they are cleared by

the payee's bank.

"Playing the float": The amount of the net float can be estimated accurately. If this is done

then bank balances can be reduced to put funds to more profitable uses.




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Electronic Commerce

Electronic commerce (EC) is the exchange of business information in an electronic format or

more generally, it encompasses all the business conducted through the means of computer

networks and it offers an alternative to the paper based systems. The electronic commerce

spectrum ranges from unstructured systems of email and facsimile to the highly structured

messaging system called Electronic Data Interchange (EDI). The recent advances in

telecommunications and computer technologies have made computer networks an integral

part of the economic infrastructure. E-commerce in India is still in nascent stage, but even

the most-pessimistic projections indicate a boom.

Electronic Data Interchange (EDI)

This involves the transfer of business information in a computer readable format. This

information includes invoices, purchase orders etc. EDI not only involves direct, computer-

to-computer data movement via communication links but also the physical delivery among

businesses of electronic data storage items such as computer tapes, disks and CD-ROMs.

There are two major subsets of EDI, and they are listed below:

1. Electronic Funds Transfer (EFT)

This form of EDI involves a transfer of value (money) between two depository

institutions

International examples include Automated Clearing House (ACH) and wire transfers.

Internationally, EFT may involve instructions and transfers by the way of Society for

Worldwide Interbank Financial Telecommunication (SWIFT) and the Clearing House

Interbank Payment System (CHIPS).

2. Financial EDI (FEDI)

FEDI involves a no value transfer, a transfer of business information between a firm

and a bank or between banks. Examples include Lockbox remittance information

and bank balance information.

Cost & Benefits of EDI

A horde of benefits have been attributed to the application of EDI for financial and other

services, they include the following:

1. Faster movement of information and payments with greater reliability

2. Improved cash forecasting and cash management

3. Customers benefit from such a faster and reliable service

4. Reduce mail, paper, document and storage costs

5. Speed of transactions eliminates float

But all these benefits come at a price. The movement of data requires computer hardware

and software. The training of the personnel to use the system adds a cost to the company.

Additionally time, money and effort must be spent to convince the suppliers and customers

to do business electronically with the firm. The elimination of float period means the loss of favourable float in disbursements, which is a very high price to pay.




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Indian Systems of EFT

National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) is a nation-wide system that facilitates individuals

to electronically transfer funds from any bank branch to any other bank branch in the

country. NEFT uses the Public Key Infrastructure (PKI) technology to ensure end-to-end

security and rides on the INdian FInancial NETwork (INFINET) to connect the bank branches

for electronic transfer of funds. This system operates on the principle of deferred net

settlement (DNS) which settles payments in batches. There is no limit on the amount to be

transferred in this system. Presently, NEFT operates in batches from 9 am to 5 p.m. There

are six settlements at 9 am, 11 am, 12 noon, 1 pm, 3 pm and 5 pm on week days and three

settlements at 9 am, 11 am and 12 noon on Saturdays.

Real Time Gross Settlement (RTGS)

The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer

mechanism where transfer of money takes place from one bank to another on a 'real time'

and on 'gross' basis. This is the fastest possible money transfer system through the banking

channel. Settlement in 'real time' means payment transaction is not subjected to any waiting

period. The transactions are settled as soon as they are processed. 'Gross settlement' means

the transaction is settled on one to one basis without bunching with any other transaction.

Considering that money transfer takes place in the books of the Reserve Bank of India, the

payment is taken as final and irrevocable. Contrary to DNS, in RTGS, transactions are

processed continuously throughout the RTGS business hours. RTGS is primarily for very large

transactions and the minimum amount to be transferred is `100000.The RTGS service

window for customer's transactions is available from 9.00 hours to 16.30 hours on week

days and from 9.00 hours to 12.30 noon on Saturdays for settlement at the RBI end.

However, the timings that the banks follow may vary depending on the customer timings of

the bank branches.

Electronic Clearance Service (ECS)

ECS is a mode of electronic funds transfer for transactions that are repetitive and periodic in

nature. ECS is used by institutions for making bulk payment of amounts towards distribution

of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards

telephone / electricity / water dues, cess / tax collections, loan instalment repayments,

periodic investments in mutual funds, etc. Essentially, ECS facilitates bulk transfer of monies

from one bank account to many bank accounts or vice versa using the services of an ECS

Centre at an ECS location.

Cheque Truncation System (Check 21)

Cheque Truncation System (CTS) is being introduces an image-based processing of cheques

& will lead down certain features in the printing of cheque.




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Outsourcing

Outsourcing is defined as Subcontracting a certain business operation to an outside firm-

whether abroad or at home - instead of doing it “in-house” . All other essential but non core

areas of business are candidates for outsourcing. Outsourcing is often viewed as involving

the contracting out of a business function - commonly one previously performed in-house -

to an external provider. In this sense, two organizations may enter a contractual agreement

involving an exchange of services and payments.

Use of lockbox service (oldest corporate cash management service) is an example of

outsourcing of a critical but noncore financial process.

The growing interest shown by firms in e-commerce makes area of disbursements well

suited for outsourcing. Most likely a bank would manage this outsourced operation. For

example- a firm might deliver a single file of all payment instructions to a bank in EDI format.

The bank would then separate payments by type and the make then payments. This service

is helpful to a firm needing to make international payments. So, major money –center banks

would have the technical expertise necessary to handle many currencies and clearing the

systems involved.

Benefits of outsourcing

Reducing and controlling operating costs: This involves reducing the scope, defining

quality levels, re-pricing, re-negotiation, cost re-structuring. Outsourcer can use

economies of scale and their specialized expertise to perform an outsourced business

operation. Hence, a firm gets the service at both a lower cost and higher quality than it

could have provided itself.

Focus on Core Business: Outsourcing may free up time thereby eliminating distractions

& personnel so that the company can focus more on its core businesses. Resources (for

example investment, people, and infrastructure) are focused on developing the core

business.

Cost restructuring: Operating leverage is a measure that compares fixed costs to

variable costs. Outsourcing changes the balance of this ratio by offering a move from

fixed to variable cost and also by making variable costs more predictable.

Continuity & Risk management: Outsourcing provides a level of continuity to the

company while reducing the risk that a substandard level of operation would bring to

the company. So Outsourcing may permit multiple companies to share risk. An

approach to risk management for some types of risks is to partner with an outsourcer

who is better able to provide the mitigation.

Improve quality: Achieve a steep change in quality through contracting out the service

with a new service level agreement.

Knowledge: Access to intellectual property and wider experience and knowledge




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Business process outsourcing (BPO)

• It is a subset or a specialized form of outsourcing in which an entire business process is

handed over to a third party service provider. .It involves multi-year contracts that can

run into hundreds of millions of dollars. BPO is typically categorized into (a) back office

outsourcing - which includes internal business functions such as human resources or

finance and accounting, & (b) front office outsourcing - which includes customer-

related services such as contact center services.

• BPO that is contracted outside a company's country is called offshore outsourcing.

BPO that is contracted to a company's neighboring (or nearby) country is called near

shore outsourcing.BPO has been growing steadily in recent years and could be a $500

billion market globally by next year. It is a market for both smaller & larger

multinationals .BPO is an evolution from major (IT) outsourcing contracts that started

in 1990s.Its’s less of a cost play-using cheaper overseas labor to do the same work-

than an effort to led a third party undertake best practices functions that aren’t core

to the corporation’s profit making abilities.

• India remains the foremost location for BPO , followed by countries like China , Mexico

,Brazil & Eastern European nations like Hungary.Leading BPO companies in India

includes GENPACT, WNS SERVICES , IBM DAKSH ,WIPRO ,TCS etc.

• Business process outsourcing enhances the flexibility of an organization in different

ways.

• Most services provided by BPO vendors are offered on a fee-for-service basis .This

helps a company to become more flexible by transforming fixed into variable cost. Avariable cost structure helps a company in responding to changes in required capacity

and does not require a company to invest in assets, thereby making the company

more flexible. Outsourcing may provide a firm with increased flexibility in its resource

management and may reduce response times to major environmental changes

• Secondly a BPO helps an organization to focus on its core competencies, without being

burdened by the demands of bureaucratic restraints.

• Thirdly a BPO increases the speed of business processes using techniques such as

linear programming which can reduce cycle time and inventory levels thereby

increasing efficiency. BPO helped to transform Nortel from a bureaucratic organization

into a very agile competitor. A company can maintain growth goals while avoiding

standard business bottlenecks. BPO therefore allows firms to retain their

entrepreneurial speed and agility, which they would otherwise sacrifice in order to

become efficient as they expanded.




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Maintaining Cash Balances

Most business firms establish a target level of cash balances to maintain. They do not want

to maintain excess cash balances because interest can be earned when these funds are

invested in marketable securities. The greater the interest rate available on marketable

securities, the greater the opportunity cost to maintaining idle cash balances.

The optimum level of cash should be the larger of

1. The transactions balances required when cash management is efficient

2. The compensating balance requirements of commercial banks with which the firm

has deposit accounts.

Transactions balances are determined in keeping with considerations. Also, the higher the

interest rate, the greater the opportunity cost of holding cash, and the greater thecorresponding desire to reduce the firm’s cash holdings, all other things the same. A number

of cash management models have been developed for determining an optimal split between

cash and marketable securities.

Compensating Balances and Fees

Establishing a minimum level of cash balances depends, in part, on the compensating

balance requirements of banks. The requirements for the firm to maintain a certain amount

of demand deposits to compensate a bank for services provided are based on the

profitability of the account.

Because banks differ in the method of account analysis they use, the determination of

compensating balances varies. The firm therefore may be wise to shop around and find the

bank that requires the lowest compensating balances for a given level of activity. If a firm

has a lending arrangement with a bank, the firm may well be required to maintain balances

in excess of those required to compensate the bank for the activity in its account.

Recent Trends

In recent years there has been a marked trend toward paying cash for services rendered by a

blank instead of maintaining compensating balances. The advantage to the firm is that it

may be able to earn more on funds used for compensating balances that the fee for the

services.

The higher the interest rate in the money market, the greater the opportunity cost of

compensating balances, and the greater the advantage of service charges. It is an easy

matter to determine whether the firm would be better off with service charges as opposed

to maintaining compensating balances. One simply compares the charges with the earnings

on the funds released.




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Investment in marketable securities

The earlier parts of the report explain how much of current assets should be kept in cash

and how it is maintained efficiently. However it is important to note that not all of the firms

need for cash call comes from holding cash exclusively. Some of it is also met by holding

marketable securities which can be easily traded for cash.

Firms use these marketable securities as near cash investments. The accumulation of excess

cash in the cash account could be easily earning interest if invested temporarily in

marketable securities. These marketable securities which the firm purchases to meet its cash

requirements are shown in the balance sheet as ‘cash equivalents’ if the remaining

maturities are 3 months or less than that. Other market securities whose maturity time is

less than a year are termed as ‘short term investments’.

Marketable SecuritiesMarketable securities are investments that are highly liquid, meaning that they can be

quickly sold in the secondary financial markets in large amounts for cash. A company

might invest in these types of securities as a way to preserve cash for unanticipated

events.

Criteria for Selecting Marketable Securities:

The variables that need to be considered while purchasing marketable securities include

safety, marketability, yield & maturity.

Figure 2 Marketable Securities Selection Criteria

•Likelihood of getting back the same no. of rupees intiallyinvested(Principal amount)

•High degree of safety is must if the security has to be seriouslyconsiderd

•Treasury bills have a high safety if held to maturity

Safety

•Ability to convert security into cash at a short notice withoutincurring a loss

•A Security could be safe if held to maturity but this does not implythat it will be sold without loss before maturity

Marketabilityor Liquidity

•It is the interest and/or appreciation of principal provided by the

security•Yiels id calculated by 2 ways; Bond equivalent Yield & Effective

annual Yield

•Loss can be incurred if a marketable security is sold prior tomaturity and the level of interest rate has increased later.(InterestRate Risk)

Yield

•Refers to life of the security

•Time before which principal amount becomes due.

•Treasury bills have orignal lives of 91. 182 or 364 daysMaturity




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Marketable Securities Portfolio

In selecting securities for the various portfolio segments, the portfolio manager tries to

match alternative money market instruments with the specific needs relating to each

segment, after taking into account the above variables. In short the composition of the firms

marketable securities account is determined while keeping in mind the trade-off that exists

between risk and return.

The firm’s portfolio of short term marketable securities can be divided into 3 segments

depending on its usage.

Figure 3 Marketable Securities Segmentation

1. Ready Cash Segment

They act as a reserve for the company’s cash account. Unless a firms cash inflows

are always greater than or equal to cash outflows each day, the firm would probably

need to cash in some securities from time to time. One major requirement of these

securities is instant liquidity. These securities may have to be liquidated on a short

notice. They are intended to provide the first line of defence against unforeseen

operating needs of the firm.

2. Controllable Cash Segment

They are required to meet the firm’s knowable or controllable outflows about which

the firm knows quite in advance. This includes dividends, tax payments, loans

coming due, interest payments etc.

3. Free Cash Segment

This is an amount of firm’s marketable securities that are set aside to service neither

the cash account nor the controllable outflows. It is basically extra cash that the firm

has simply invested short term as the firm has no immediate use of these funds.

Ready CashSegment

Controllable

Cash

Segment

Free Cash

Segment




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Common Marketable Securities

1. Treasury Bills

Treasury Bills are very useful instruments to deploy short term surpluses depending

upon the availability and requirement. Even funds which are kept in current

accounts can be deployed in treasury bills to maximize returns. Banks do not pay any

interest on fixed deposits of less than 15 days or balances maintained in current

accounts, whereas treasury bills can be purchased for any number of days

depending on the requirements. This helps in deployment of idle funds for very

short periods as well. Further, since every week there is a treasury bills auction, one

can purchase treasury bills of different maturities as per requirements so as to

match with the respective outflow of funds. At times when the liquidity in the

economy is tight, the returns on treasury bills are much higher as compared to bank

deposits even for longer term. Besides, better yields and availability for very short

tenors. Another important advantage of treasury bills over bank deposits are thatthe surplus cash can be invested depending upon the staggered requirements.

These are discounted securities and thus are issued at a discount to face value. The

return to the investor is the difference between the maturity value and issue price.

There are different types of Treasury bills based on the maturity period and utility of

the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury

bills etc. In India, at present, the Treasury Bills are issued for the following tenor’s

91-days, 182-days and 364-days Treasury bills.

Benefits of Investment in Treasury Bills

No tax deducted at source

Zero default risk being sovereign paper

Highly liquid money market instrument

Better returns especially in the short term

Transparency

Simplified settlement

High degree of tradability and active secondary market facilitates meeting

unplanned fund requirements.




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2. Certificates of Deposits

Certificates of Deposits are virtually a risk free option. They are issued in

denominations of 0.5Mn and have a maturity ranging from 30 days to 3 years. They

are unsecured negotiable instruments and are issued in bearer form. Both

commercial banks and financial institutions can issue CDs however financial

institutions can issue ones having a maturity of at least one year. Banks issue CDs

during a period of limited liquidity at a relatively higher interest rate usually when

there is a high credit demand but a poor growth of deposit.

Unlike fixed deposits, CDs are transferrable & tradable. They can be issued to

companies, trusts, associates, individuals and others and like other time deposits,

are also a subject to SLR & CRR.

As there is more incentive to hold CDs till the time of its maturity, secondary market

for CDs has not evolved as an active market.

3. Commercial Paper

They are short term, unsecured promissory notes generally issued by finance

companies with sound financial position and a high credit rating. Initially they were

issued for 90 days but now the period has been relaxed to anything between 15 days

to 1 year. It can be issued in denomination of Rs. 5 lakhs or in multiples thereof.

Commercial papers are issued at a discount which is determined by the money

market forces. In order to broaden the secondary market base of commercial

papers, primary dealers and satellite dealers were also allowed to issue commercial

papers.

4. Inter-Corporate Deposits

It is an unsecured loan offered by one company to another. This allows the

corporate with excess funds to invest their surplus by way of lending to other

corporate. They are highly risky as they are unsecured.

5. Ready Forwards or Repos or Buyback

This is one of the most extensively used money market instrument usually deployed

to meet temporary cash requirement. Usually banks or other organizations enter

into ready forward transactions to fund their short term requirements.

Under this arrangement, the seller sells particular securities to the buyer with the

agreement to repurchase the same securities at a mutually predetermined future

date and at a prefixed future price. Likewise the buyer purchases the same securities

with the promise to resell them to the seller at a mutually agreed future price and

date. The difference in the price adds to the income of the company.

6. Bills of Exchange

They are promissory notes issued for commercial transactions involving goods and

services. These bills form a part of companies banking limits and are discounted by

the bank which in turn rediscounts the bills with each other.




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7. Bill Discounting

It is a widely used source of short term finance in the Indian corporate sector. In this

the bank buys the bill from the customer before it is due and credits the value of the

bill after a discount charge to the customer’s account. The transaction is practically

an advance against the security of the bill and the discount represents the interest

on the advance from the date of purchase of the bill until it is due for payment. It is

better than inter-corporate deposits because of its self-liquidating nature. However

they involve a credit risk unless bills are a genuine trade and backed by a letter of

credit.




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List of Illustrations

Figure 1 Collection Float Timeline ............................................................................................. 3

Figure 2 Marketable Securities Selection Criteria ................................................................... 13

Figure 3 Marketable Securities Segmentation ........................................................................ 14

Bibliography

Horne, J. C., & John M. Wachowicz, J. (2010). Fundamentals of Financial Management.

Pearson Prentice Hall.

RBI. (n.d.). Electronic Clearing Service. Retrieved from RBI:

http://www.rbi.org.in/scripts/ECSUserView.aspx?Id=20

RBI. (n.d.). NEFT - FAQ. Retrieved from RBI:

http://www.rbi.org.in/scripts/FAQView.aspx?Id=60

RBI. (n.d.). RTGS System - FAQ. Retrieved from RBI:

http://www.rbi.org.in/scripts/FAQView.aspx?Id=65

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