Chapter

Most often, when news breaks about a firm's cash position, it's because the company is running low. That wasn't the case for oil companies in 2001. The Royal Dutch/Shell Group, for example, was pumping out $1.5 million in profit per hour and had about $12 billion in the bank. ExxonMobil was sitting on $11 billion, and the industry as a whole had a $40 billion (and growing fast) stockpile according to analysts. These companies certainly had ample cash reserves; in fact, the word enormous might be more appropriate. Why would these firms hold such large quantities of cash? We examine cash management in this chapter to find out.

This chapter is about how firms manage cash. The basic objective in cash management is to keep the investment in cash as low as possible while still keeping the firm operating efficiently and effectively. This goal usually reduces to the dictum "Collect early and pay late." Accordingly, we discuss ways of accelerating collections and managing disbursements.

In addition, firms must invest temporarily idle cash in short-term marketable securities. As we discuss in various places, these securities can be bought and sold in the financial markets. As a group, they have very little default risk, and most are highly marketable. There are different types of these so-called money market securities, and we discuss a few of the most important ones.

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