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ch 7 current asset management

current asset management
companies that manage their current assets well establish a competitive advantage
– helps increase their market share
-creates an increase in shareholder value through a rising stock price
-requires a careful allocation of resources amoung the current assets of the firm
– cash
-marketable securities
-accounts receivable
– Inventory
current asset management (con’t)
– in managing cash and marketable securities
– primary concern should be for safety and liquidity
– secondary attention should be placed on maximizing profitability
cash management
financial managers actively attempt to keep cash (non-earning asset) to a minimum
– it is critical to have sufficient cash to assuage emergencies
– to improve overall profitability of a firm
– minimize cash balances
– have accurate knowledge of when cash moves in and out of the firm
reasons for holding cash balances
transaction motives (payments towards planned expenses)
Precautionary needs (emergency purposes)
cash flow cycle
inflow and outflow need to be synchronized
cash flow relies on:
– payment pattern of customers
– speed at which suppliers and creditors process checks
– efficiency of the banking system
cash flow (con’t)
financial managers must pay close attention to the percentage of sales generated by:
– cash
– outside credit cards
– company’s own credit cards
improving collections and extending disbursements
– improving collection
– extending disbursements
improving collections
setting up multiple collection centers at different locations
adopt lockbox system for expeditious check clearence at lower costs
extending disbursements
general trend
– speedup processing of incoming checks
– slowdown payment procedures
extended disbursement float-allows companies to hold onto their cash balances for as long as possible
automated clearinghouses
(ACH) transfers information between financial institutions and between accounts using computer tape
marketable securities
funds held for other than immediate transaction purposes should be invested in the interest-earning securities
describe characteristics for marketable securities
maturities of less than 1 year liquid: safe, short term, big $ transactions
examples of marketable securities
– treasury bills (borrowing of fed gov)
– federal agency securities
– CD’s (interests bearing time deposits)
– commercial paper (short-term unsecured borrowings of large corporations) (100k or more)
money market funds
people pool their money together to where they can get better bonds with better rates
accounts receivable as an investment
should be based on whether the level of return earned on such investment equals or excedes the potential gain from other investments
credit policy administration
credit standards
terms of trade
collection policy
credit standard
determine the nature of credit risk based
prior records of payment and financial stability, current net worth, and other related factors
terms of trade
– stated term of credit extension
– has a strong impact on eventual size of accounts receivable balance
– creates needs for firms to consider the use of cash discounts
collection policy
number of quantitative measures are applied to assess credit policy
avg collection period
increase would indicate poor credit admin
Avg collection period=
avg daily credit sales
ratio of bad debts for credit sales
increasing ratio may indicate too many accounts
inventory management
– raw materials
– work in progress
– finished goods
amount of inv is affected by
– sales
– production
– and economic conditions
inv is the ___ liquid of current assets
carrying costs
interest of funds tied up in inventory
– cos of wharehouse space, insurance premium expenses

– implicit cost associated with risk of obsolescence and perishiability

ordering costs
– cost of ordering
– cost of processing
rapid price movements would
would have a major impact on the profitability of the firm
nature of of receivables and inv management
prior records of payment and financial stability
– current net worth
– and other factors

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