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Foundations of Financial Management Page 1

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 anextension of working capital management

It is concerned with the current assets of a firm

(cash, A/R, marketable securities, and inventory)

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I. Cash Management

Financial manager wants to keep cashbalances to a minimum

There are 3 reasons for holding cash:

for everyday transactions (main reason)

for compensating balances

for precautionary needs (emergencies)

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Foundations of Financial Management Page 2

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FIGURE 7-2

Expanded

cash flowcycle slide #6

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II. Cash Management

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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TABLE 7-1

The use of float to

provide funds

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TABLE 7-2

Playing the float

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Foundations of Financial Management Page 3

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II. Ways to Improve Collections

Collection Center

speeds up collection of A/R and reduces mailing time

Electronic Funds Transfer (or Wire Transfer of Funds)

funds-excess cash balances are transferred from collection

points to a centralized location for use.

Lockbox System

when customers mail payment to a local post office box

instead of to the firm

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FIGURE 7-3

Cashmanagement

network

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III. Marketable Securities

Treasury Bills (T-Bills) and NotesCertificates of Deposit (CDs)

Bankers Acceptances

Eurodollar Certificates of Deposit

Passbook Savings Accounts

Money Market Funds

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FIGURE 7-6

An examination of

yield and maturity

characteristics

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Foundations of Financial Management Page 4

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IV. 3 Primary Variables of

Credit Policy

There are 3 things to consider in deciding whether

to extend credit:

Credit Standards

Terms of Trade

Collection PolicyAverage Collection Period

Ratio of Bad Debts to Credit Sales

Aging of Accounts Receivable

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V. 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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V. 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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V. 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

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Foundations of Financial Management Page 5

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FIGURE 7-9

Determining theoptimum

inventory level