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Chapter 7

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    Chapter 7 Chapter 7 Presentation Transcript

    • Chapter 7 Current Asset Management
    • 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
    • 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
    • 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”
    • PPT 7-1 FIGURE 7-2 Expanded cash flow cycle
    • TABLE 7-1 The use of float to provide funds
    • PPT 7-2 TABLE 7-2 Playing the float
    • 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
    • PPT 7-6 TABLE 7-4 Dun & Bradstreet report
    • 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
    • PPT 7-3 FIGURE 7-3 Cash management network
    • 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
    • TABLE 7-3 Types of short-term investments
    • PPT 7-4 FIGURE 7-6 An examination of yield and maturity characteristics
    • 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
    • PPT 7-7 FIGURE 7-9 Determining the optimum inventory level
    • 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
    • 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