This document provides an overview of current asset management. It discusses key aspects like working capital management, current asset investment policies, cash management, marketable securities, accounts receivable management, and inventory management. The goal of current asset management is to optimize investment in current assets to balance risk and return while maintaining sufficient liquidity to meet short-term obligations.

1. Current Asset Management
 Working Capital Management
 Current Asset Investment Policy
 Temporary and Permanent Current Assets
 Zero Working Capital
 Cash Management
 Marketable Securities
 Accounts Receivable Management
 Inventory Management

2. Working Capital Management
 Gross Working Capital -(Current Assets)
 New Working Capital - (Current Assets - Current
Liabilities)
 Working Capital Management
 Involves investing in current assets and financing
of current assets:
Current
Liabilities
Long-Term
Financing
Current Asset
Investment

3. Current Asset Investment Policy
 Everything else remaining the same, higher levels of current
assets mean lower risk and lower expected return
 Lower Risk
 Greater ability to meet short-run obligations.
 Lower Return
 Cash and marketable securities typically yield low returns.
Furthermore, when current assets are increased,
additional financing costs will be incurred thereby lowering
returns.
 Lower levels of current assets result in opposite effects.

4. Alternative Current Asset Investment
Policies
0
2
4
6
8
10
12
14
0 10 20 30 40
Current Asset (millions of $)
Sales (millions of dollars)
Conservative - low risk
Aggressive - high risk
Moderate

5. Temporary vs. Permanent Investment
in Current Assets
 Temporary Investment - Commonly, firms experience short-run
fluctuations in current assets. For example, retail department
stores will have high levels of inventory around Thanksgiving. In
January, the inventory should be low.
 Permanent Investment - Firms always have some minimum
level of investment in current assets (i.e., a permanent
investment). As a firm grows over time, the level of permanent
current assets also grows (e.g., a supermarket chain with 70
stores will have more permanent inventory than a chain with 4
stores).

6. Temporary and Permanent Current Assets
0
2
4
6
8
10
12
14
0 3 6 9 12 15 18 21
Millions of dollars
Time Period
Temporary Fluctuations in
Current Assets
Permanent Current Assets

7. Cash Management: An Overview
 Beginning Cash Balance
+ Cash Inflows - - - Speed Up
- Cash Outflows - - - Slow Down
= Ending Cash Balance
- Desired Cash Balance
= Surplus or Shortage
 If Surplus: Pay off short-term debt or buy marketable
securities
 If Shortage: Short-term borrowing or sell marketable
securities

8. Desired Cash Balance:
 Precautionary Demand - Satisfy possible, but as yet indefinite
cash needs.
 Speculative Demand - Build up current cash balances in
anticipation of future business costs being lower.
 Risk Preferences
 Compensating Balances
 Transactions Demand - Cash needs arising in the ordinary
course of doing business.

9. Float
 Much of cash management is oriented towards managing the
float.
 Mail Float
 Time lapse from the moment a customer mails a remittance
check until the firm begins to process it.
 Processing Float
 Time required for the firm to process remittance checks
before they can be deposited in the bank.

10. Float (Continued)
 Transit Float
 Time necessary for a deposited check to clear through the
commercial banking system and become usable funds to the
company.
 Disbursing Float
 Funds available in the firm’s bank account until its payment
check has cleared through the system.

11. Electronic Funds Transfer
 Substantially reduces float
 Some Examples:
 Automated teller machines
 Direct deposit of payroll checks
 Paying the supermarket and others with bank cards.

12. Lock-Box System
 Customers mail remittance checks to P.O. Box.
 Local bank processes and deposits checks directly into the
company’s account.
 Reduces mail and processing float.
 Also reduces transit float if lock-box is located near Federal
Reserve Bank or branches.

13. Marketable Securities
 The marketable securities portfolio is typically used for
temporary investments of excess cash, or as a substitute for
cash (i.e., near cash). Therefore, securities in the portfolio are
generally safe, short-term, and highly liquid.
 Treasury Bills
 Short-term obligations of the federal government with
maturities of 91 days to a year. They are traded on a
discount basis in bearer form. Not taxable at state and local
levels, but taxable at the federal level.
 Commercial Paper
 Unsecured promissory notes issued by large corporations in
amounts of $25,000 or more (No active secondary market).

14. Marketable Securities Continued
 Negotiable Certificates of Deposit (CDs)
 Offered by financial institutions (e.g., banks, S&Ls). Those
big business is interested in have $100,000 minimums.
 Banker’s Acceptance: Generally arise out of foreign trade.
 Importer (buyer) issues a promise to pay a certain amount to
the exporter (seller).
 A bank accepts the promise, and commits itself to pay the
amount when due.
 Exporter (seller) can now sell this acceptance in the
marketplace at a discount (a price that is less than the
promised amount).

15. Accounts Receivable Management
 Major Decisions
 Credit Standards
 Credit Terms
 Collection Policy
 Credit Standards: Will they pay as agreed?
 Credit Scoring
 Credit Reports
 Past Experience
 Financial Analysis
 Debt Ratios, Liquidity Ratios, Profit Ratios

16. Accounts Receivable Management
(Continued)
 Credit Terms
 Example: 2/10, net 30
 Collection Policy
 Standard Operating Procedures
 Be professional, firm, and do not bluff.
 Vary procedures with slow payers.
 Evaluating Collection Efforts
 Average Collection Period, Bad Debt to Sales
Ratio, Aging Accounts Receivable, Receivables
to Assets Ratio, Credit Sales to Receivables
Ratio.

17. Inventory Management
(Covered in Production Management)
 Basic Costs Associated With Inventory
 Carrying Costs
 storage, insurance, cost of capital used
 Ordering Costs
 placing orders, shipping and handling
 Costs of Running Short
 lost sales, reduced customer goodwill
 Objective
 Minimize total costs associated with managing inventory.