Lecture 3 - Accounting for Cash

Accounting for Cash

Management issues related to cash management: Management needs to keep track of cash balances for each period, possibly daily or weekly. For each period, plan and track the beginning balance, inflow, outflow and the ending balance. Every firm of any size has this in some form.

A firm may have several cash accounts. For instance, each store may have a separate account. Payroll may be a separate account. All accounts are rolled up together for the Balance Sheet.

Compensating Balance is the minimum balance that a bank requires the company to maintain on deposit. Compensating balances must be disclosed on the balance sheet - in a footnote.

Cash balances may be significantly positive during some times of the year. Companies invest in short-term commercial paper with their excess cash. Commercial paper are notes from other firms. This bypasses the banks and is called disintermediation. Notes with maturing periods of less than 270 days do not need to be registered with the SEC. Commercial paper is unsecured debt, but is preferred over common stock. Get rates for commercial paper here. Commercial paper rarely defaults and is considered very liquid.

How is commercial paper classified on the balance sheet? Since it's so liquid, it's lumped in with cash if it has a maturity of less than 90 days. If it's more than 90 days, it's an investment. Frequently, the balance sheet says "cash or cash equivalents". The equivalents may include commercial paper.

The real market for commercial paper is short-term money market mutual funds. Recently, many money market funds faltered and the government had to step in to rescue them. The problem with money market funds faltering is that they supply funds to the borrowing companies. If the borrowing companies wouldn't be able to secure funds, it would have a major effect on those companies.