Chapter 7

Current Asset Management

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Chapter 7 - Outline

What is Current Asset Management? Cash Management Ways to Improve Collections Marketable Securities 3 Primary Variables of Credit Policy Inventory Management Level vs. Seasonal Production Economic Ordering Quantity

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What is Current Asset Management?

Current Asset Management is essentially an extension of working capital management

It is concerned with the current assets of a firm (cash, A/R, marketable securities, and inventory)

A financial manager needs to remember that the less liquid an asset is, the higher the required return

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Cash Management

Financial manager wants to keep cash balances to a minimum

There are 2 reasons for holding cash:– for everyday transactions (main reason)– for precautionary needs (emergencies)

Goals are to speed up the inflow of cash (or improve collections) and slow down the outflow of cash (or extend disbursements)

Also will attempt to “play the float”

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PPT 7-1FIGURE 7-2Expandedcash flowcycle

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TABLE 7-1 The use of float to provide funds

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PPT 7-2TABLE 7-2 Playing the float

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3 Primary Variables of Credit Policy

There are 3 things to consider in deciding whether to extend credit:– Credit Standards– Terms of Trade– Collection Policy

Average Collection Period Ratio of Bad Debts to Credit Sales Aging of Accounts Receivable

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PPT 7-6TABLE 7-4Dun & Bradstreet report

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Ways to Improve Collections

Collection Center– speeds up collection of A/R and reduces mailing

time

Electronic Funds Transfer (or Wire Transfer of Funds)– a system where payments are automatically

deducted from a bank account

Lockbox System– when customers mail payment to a local post

office box instead of to the firm

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PPT 7-3

FIGURE 7-3Cashmanagementnetwork

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Marketable Securities

Treasury Bills (T-Bills) and Notes Certificates of Deposit (CDs) Banker’s Acceptances Eurodollar Certificates of Deposit Passbook Savings Accounts Money Market Funds

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TABLE 7-3 Types of short-term investments

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PPT 7-4FIGURE 7-6An examination ofyield and maturitycharacteristics

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Inventory Management

Inventory is divided into 3 categories:– Raw Materials– Work in Progress (WIP) or Unfinished Goods– Finished Goods

There are 2 basic costs associated with inventory:– Carrying Costs– Ordering Costs

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PPT 7-7FIGURE 7-9Determining theoptimuminventory level

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Level vs. Seasonal Production

Level Production:– producing the same (equal) amount each month– inventory costs are higher– operating costs are lower

Seasonal Production:– producing a different amount each month

(based on the season)– inventory costs are lower– operating costs are higher

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Economic Ordering Quantity

Economic Ordering Quantity (EOQ):– the optimal (best) amount for the firm to order

each time– occurs at the low point on the total cost curve– the order size where total carrying costs equal

total ordering costs (assuming no safety stock)

Safety Stock:–“extra” inventory the firm keeps in stock in case

of unforeseen problems