Cash and Liquidity Management
Cash versus liquidity
Cash management ensures the right cash is in the right account at the right time; liquidity management ensures the firm can meet obligations without forced borrowing or asset sales. Key tools include daily cash positioning, forecasting, concentration structures, and a short-term investment portfolio.
Concepts
- Float: disbursement float (outstanding checks) adds to the book balance; deposit float (uncollected funds) is not available. Depending on convention, available balance = ledger balance − deposit float + disbursement float.
- Positioning and concentration: daily consolidation of balances; sweeps move excess cash into concentration or investment accounts; zero balance accounts (ZBAs) fund disbursements exactly.
- Pooling: notional pooling offsets balances without moving cash; physical pooling transfers funds.
- Liquidity measures: current and quick ratios, cash flow coverage, and committed credit facilities.
- Short-term instruments: T-bills, commercial paper, CDs, repos, and money market funds; evaluate credit, maturity, liquidity, and yield.
- Yield conventions: discount yield versus bond-equivalent yield; money market yields often use actual/360.
Traps
Confusing ledger and available balances; ignoring bank availability schedules; treating notional pooling as a legal transfer; comparing yields without annualizing on the same basis; assuming all money market funds carry equal credit risk.
Worked example
A firm has a ledger balance of $5,000,000, deposit float of $400,000, and disbursement float of $150,000. Available cash ≈ 5,000,000 − 400,000 + 150,000 = $4,750,000. Invest only the available amount; investing ledger cash can create a daylight overdraft.