Chapter 7 Current Asset  Management
Chapter 7 - Outline <ul><li>What is Current Asset Management? </li></ul><ul><li>Cash Management </li></ul><ul><li>Ways to ...
What is Current Asset Management? <ul><li>Current Asset Management is essentially an extension of working capital manageme...
Cash Management <ul><li>Financial manager wants to keep cash balances to a minimum </li></ul><ul><li>There are 2 reasons f...
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 <ul><li>There are 3 things to consider in deciding whether to extend credit: </li></u...
PPT 7-6 TABLE 7-4 Dun & Bradstreet report
Ways to Improve Collections <ul><li>Collection Center </li></ul><ul><ul><li>–   speeds up collection of A/R and reduces ma...
PPT 7-3 FIGURE 7-3 Cash management network
Marketable Securities <ul><li>Treasury Bills (T-Bills) and Notes </li></ul><ul><li>Certificates of Deposit (CDs) </li></ul...
TABLE 7-3  Types of short-term investments
PPT 7-4 FIGURE 7-6 An examination of yield and maturity characteristics
Inventory Management <ul><li>Inventory is divided into 3 categories: </li></ul><ul><ul><li>–   Raw Materials </li></ul></u...
PPT 7-7 FIGURE 7-9 Determining the optimum inventory level
Level vs. Seasonal Production <ul><li>Level Production: </li></ul><ul><ul><li>–  producing the same (equal) amount each mo...
Economic Ordering Quantity <ul><li>Economic Ordering Quantity (EOQ): </li></ul><ul><ul><li>–  the optimal (best) amount fo...
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Chapter 7

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Chapter 7

  1. 1. Chapter 7 Current Asset Management
  2. 2. Chapter 7 - Outline <ul><li>What is Current Asset Management? </li></ul><ul><li>Cash Management </li></ul><ul><li>Ways to Improve Collections </li></ul><ul><li>Marketable Securities </li></ul><ul><li>3 Primary Variables of Credit Policy </li></ul><ul><li>Inventory Management </li></ul><ul><li>Level vs. Seasonal Production </li></ul><ul><li>Economic Ordering Quantity </li></ul>
  3. 3. What is Current Asset Management? <ul><li>Current Asset Management is essentially an extension of working capital management </li></ul><ul><li>It is concerned with the current assets of a firm (cash, A/R, marketable securities, and inventory) </li></ul><ul><li>A financial manager needs to remember that the less liquid an asset is, the higher the required return </li></ul>
  4. 4. Cash Management <ul><li>Financial manager wants to keep cash balances to a minimum </li></ul><ul><li>There are 2 reasons for holding cash: </li></ul><ul><ul><li>– for everyday transactions (main reason) </li></ul></ul><ul><ul><li>– for precautionary needs (emergencies) </li></ul></ul><ul><li>Goals are to speed up the inflow of cash (or improve collections) and slow down the outflow of cash (or extend disbursements) </li></ul><ul><li>Also will attempt to “play the float” </li></ul>
  5. 5. PPT 7-1 FIGURE 7-2 Expanded cash flow cycle
  6. 6. TABLE 7-1 The use of float to provide funds
  7. 7. PPT 7-2 TABLE 7-2 Playing the float
  8. 8. 3 Primary Variables of Credit Policy <ul><li>There are 3 things to consider in deciding whether to extend credit: </li></ul><ul><ul><li>– Credit Standards </li></ul></ul><ul><ul><li>– Terms of Trade </li></ul></ul><ul><ul><li>– Collection Policy </li></ul></ul><ul><ul><ul><li>Average Collection Period </li></ul></ul></ul><ul><ul><ul><li>Ratio of Bad Debts to Credit Sales </li></ul></ul></ul><ul><ul><ul><li>Aging of Accounts Receivable </li></ul></ul></ul>
  9. 9. PPT 7-6 TABLE 7-4 Dun & Bradstreet report
  10. 10. Ways to Improve Collections <ul><li>Collection Center </li></ul><ul><ul><li>– speeds up collection of A/R and reduces mailing time </li></ul></ul><ul><li>Electronic Funds Transfer (or Wire Transfer of Funds) </li></ul><ul><ul><li>– a system where payments are automatically deducted from a bank account </li></ul></ul><ul><li>Lockbox System </li></ul><ul><ul><li>– when customers mail payment to a local post office box instead of to the firm </li></ul></ul>
  11. 11. PPT 7-3 FIGURE 7-3 Cash management network
  12. 12. Marketable Securities <ul><li>Treasury Bills (T-Bills) and Notes </li></ul><ul><li>Certificates of Deposit (CDs) </li></ul><ul><li>Banker’s Acceptances </li></ul><ul><li>Eurodollar Certificates of Deposit </li></ul><ul><li>Passbook Savings Accounts </li></ul><ul><li>Money Market Funds </li></ul>
  13. 13. TABLE 7-3 Types of short-term investments
  14. 14. PPT 7-4 FIGURE 7-6 An examination of yield and maturity characteristics
  15. 15. Inventory Management <ul><li>Inventory is divided into 3 categories: </li></ul><ul><ul><li>– Raw Materials </li></ul></ul><ul><ul><li>– Work in Progress (WIP) or Unfinished Goods </li></ul></ul><ul><ul><li>– Finished Goods </li></ul></ul><ul><li>There are 2 basic costs associated with inventory: </li></ul><ul><ul><li>– Carrying Costs </li></ul></ul><ul><ul><li>– Ordering Costs </li></ul></ul>
  16. 16. PPT 7-7 FIGURE 7-9 Determining the optimum inventory level
  17. 17. Level vs. Seasonal Production <ul><li>Level Production: </li></ul><ul><ul><li>– producing the same (equal) amount each month </li></ul></ul><ul><ul><li>– inventory costs are higher </li></ul></ul><ul><ul><li>– operating costs are lower </li></ul></ul><ul><li>Seasonal Production: </li></ul><ul><ul><li>– producing a different amount each month (based on the season) </li></ul></ul><ul><ul><li>– inventory costs are lower </li></ul></ul><ul><ul><li>– operating costs are higher </li></ul></ul>
  18. 18. Economic Ordering Quantity <ul><li>Economic Ordering Quantity (EOQ): </li></ul><ul><ul><li>– the optimal (best) amount for the firm to order each time </li></ul></ul><ul><ul><li>– occurs at the low point on the total cost curve </li></ul></ul><ul><ul><li>– the order size where total carrying costs equal total ordering costs (assuming no safety stock) </li></ul></ul><ul><li>Safety Stock: </li></ul><ul><ul><li>– “extra” inventory the firm keeps in stock in case of unforeseen problems </li></ul></ul>
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