Current Assets corporate finance

1. Current Assets
SHAHBAKHT ZAHRA
20011554-001

2. Current Assets
• Definition (working capital )
Portion of investment which easily converted into cash in daily course of life.
• Short term Financing Management
To Fulfil need of Current asset money came from current liabilities
These C liabilities are paid by the amount generated by sale of products made with
current Assets.

3. • LIQUID ASSETS
Can converted into cash easily It includes
Account Receivables , Marketable securities , Cash
Floating Assets
Convertable in cash but it takes times
Inventory

4. Current liabilities
Current liabilities
Have to pay with in a year it includes Accruals , Notes payable, Account Payable ,
bills payable.
• Net Working capital
A portion of current asset which is financed by long term Source of financing .
CURRENT ASSETS – CURRENT LIABILITIES
NET WORKING CAPITAL IS POSITIVE WHEN CA> CL
NET WORKING CAPITAL IS NEGATIVE WHEN CA< CL

5. • Profitability
Relationship between revenue and cost generated by using both CA and fix asset in
order to produce Goods
Risk
Position that tells that company can pay its C liabilities from current assets .
Current Assets Risk
Technical insolvent
When company has more Floating Assets and unable to pay C Liabilities

6. Trade off bw profitability and Risk
• Change in current asset Ratio
CATA
CA increase + FA decrease = TA profit decrease and risk decrease
CA decrease + FA increase = TA profit increase and risk increase
• CHANGE IN C LIABILITIES RATIO
CL TA
CL increase RISK increase and profitability increase
CL decrease Risk decrease and profitability decrease

7. • Cash Conversion cycle
Amount of time fund resources are tied up .
AAL+ ACP-APP
CALCULATION OF CASH CONVERSION CYCLE
OPERATING CYCLE
The time req in the completion of production process and collection of payment by
selling finished goods.
AAI+ACP

8. • Inventory turn over
Cost of goods soldinventory
AAI = 365/inventory turnover
ACP= A/R /Avg sale per day
Avg sale per day = annual sale / 365
Cash conversion cycle = o. cycle – APP
APP= ac payable/ avg purchase per day
Avg purchase = annual purchase / 365

9. Objectives of cash conversion cycle
• Minimize th time of AAI without disturbing Quantity of production
• Minimize ACP through discount offering
• Delay APP without losing credit standard
FUNDIND REQUIREMENT FOR CCC
Permanent funding requirement
Constant investment in operating assets generated because of constant sale over
period of time
Seasonal funding requirement
An investment in operating assets generated because of cyclical sale over period of
time

10. • Long term borrowing
Lock the cost of funds
Low risk and high in cost
• Short term borrowing
Low cost and high risk
TYPES
Aggressive
Fulfil permanent need from long term and seasonal from short term source(high
risk low cost)
Conservative
Fulfil permanent and seasonal need from long term source (high cost low risk)

11. • Different point of views regarding inventory
• Finance = low inventory because storing also requires some costs ( dep cost ,
insurance cost)
• Marketing = concerned with finished goods ( maintain more inventory)
• Manufacturing = converts Raw material into finished good so requires raw
material and finished goods because of marketing
• Purchase Department
Concern with availability of raw material

12. Techniques for managing inventory
• ABC
A= high level of investment = perpetual inventory method
B = Medium level of investment = periodic method
C = lowest level of inventory = 2 bin method
FLAWS
Reorder time and quantity req to order
• Economic order Quantity
Inventory management tech which determine item optimal size by reducing TC of
order

13. • Just in time
• Minimize inventory cost
• Placing orders at exact time
• Inventory method is WIP.
AVERAGE COLLECTION PERIOD
Time from the sale on credit until customer mail the payment
2 assumptions
Only credit sales
Payment made through cheque

14. Credit standing and selection
Minimum criteria for selection of credit customer
Criteria
5 C’s
Based on criteria we make standard( max and min) then do scoring .
Scores are compared to standard.
• CREDIT TERMS
Terms of scale for the customer who have been extended credit by a firm.
Credit term is based on nature of business
Perishable = few days , short term
Regular
Seasonal= should be closer to industry avg credit period.

15. • Cash discount
If firm is going to make changes in its credit terms while offering or introducing cash
discount.
Sale will increase
Invest in A/R decrease
Chances of bad debts decrease
Per unit profit decrease
CREDIT MOINITERING
Cash is recovering in how much time if not whats the remaining %
Techniques
Ratio
Ageing of Account receivables

16. TECHNIQUES FOR COLLECTION
• Letters
• Telephone calls
• Personal visits
• Collection agencies
• Legal action
Avg payment period parts
From purchase to mail payment
Cheque discounting process

17. • FLOAT
Reference to funds that have been sent by payer but are not yet usable funds to
the payee
Component of float
Mail float
Processing float
Clearance float
Lock block facility

18. Slow down payment
• Controlled disturbing
Strategic use of mail points and bank accounts to lengthen mail float
and clearing float .
It is done through mail float and clearing float
Consideration
It is a way to centralize funds from multiple business accounts into a
single funding account to streamline your cash position.