The document discusses current asset management, including cash management, marketable securities, accounts receivable, and inventory management. It covers topics such as cash flow cycles, float, credit policies, inventory levels, and inventory decision models. The goal of current asset management is to balance liquidity needs with maximizing returns through techniques like minimizing cash balances and actively managing receivables, marketable securities, and inventory levels.

1. Chapter 07
• Current Asset Management
By
Md. Shahedur Rahaman
Chowdhury
7-1

2. Chapter Outline
• What is current asset management
• Cash management and its importance
• Management of marketable securities
• Accounts receivable and inventory
management
• Inventory management and policy decisions
required
• Liquidity vis-à-vis returns
7-2

3. Cash Management
• Financial managers actively attempt to keep
cash (non-earning asset) to a minimum
– It is critical to have sufficient cash to assuage
emergencies
– Steps to improve overall profitability of a firm:
• Minimize cash balances
• Have accurate knowledge of when cash moves in and
out of the firm
7-3

4. Reasons for Holding Cash Balances
• Transactions balances
– Payments towards planned expenses
• Compensative balances for banks
– Compensate a bank for services provided rather
than paying directly for them
• Precautionary needs
– Emergency purposes
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5. Cash Flow Cycle
• Ensure that cash inflows and outflows are
synchronized for transaction purposes
– Cash budgets is a tool used to track cash flows
and ensuing balances
• Cash flow relies on:
– Payment pattern of customers
– Speed at which suppliers and creditors process
checks
– Efficiency of the banking system
7-5

6. Cash Flow Cycle (cont’d)
• Cash inflows are driven by sales and influenced
by:
– Type of customers
– Customers’ geographical location
– Product being sold
– Industry
• When the cash balance increases, the extra cash
can be
– Used for various payments to lenders, stockholders, government,
etc
– Used to invest in marketable securities
• When there is a need for cash a firm can:
– Sell the marketable securities
– Borrow funds from short-term lenders
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7. Expanded Cash Flow Cycle
7-7

8. E-commerce and Sales
• Benefits: faster cash flow
– Credit card companies advance cash to the
retailer within 7–10 days against retailer’s with a
30 day payment terms
• Financial managers must pay close attention
to the percentage of sales generated:
– By cash
– By outside credit cards
– By the company’s own credit cards
7-8

9. Float
• Difference between firm’s recorded amount and
amount credited to the firm by a bank
• Two types of float:
– Mail float: Arises duet to the time it takes to deliver a check.
– Clearing float: Arises due to the time it takes to clear a check once
the payment is made
• Both these floats do not exist anymore due to:
– Electronic payments
– Check Clearing for the 21st Century Act
• Check Clearing for the 21st Century Act (Check 21)
– Allows banks and others to electronically process a check
7-9

10. Improving Collections and
Extending Disbursements
• Improving collection:
– Setting up multiple collection centers at different
locations
– Adopt lockbox system for expeditious check clearance at
lower costs
• Extending disbursement:
– General trend:
• Speedup processing of incoming checks
• Slow down payment procedures
– Extended disbursement float – allows companies to hold onto their
cash balances for as long as possible
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11. Cost-Benefit Analysis
• Allows companies to analyze the benefits,
received by investing on an efficiently
maintained cash management program
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12. Cash Management Network
7-12

13. Electronic Funds Transfer
• Funds are moved between computer terminals
without the use of a ‘check’
– Automated clearinghouses (ACH): Transfers information between
financial institutions and between accounts using computer tape
• International fund transfer is carried out through
SWIFT (Society for Worldwide Interbank Financial
Telecommunications)
– Uses a proprietary secure messaging system
– Each message is encrypted
– Every money transaction is authenticated by a code, using smart
card technology
– Assumes financial liability for the accuracy, completeness, and
confidentiality of transaction
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14. International Cash Management
• Factors differentiating international cash
management from domestic based systems:
– Differing payment methods and/or higher popularity
of electronic funds transfer
– Subject to international boundaries, time zone
differences, currency fluctuations, and interest rate
changes
– Differing banking systems and check clearing
processes
– Differing account balance management and
information reporting systems
– Cultural, tax, and accounting differences
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15. International Cash Management
(cont’d)
• Financial managers try to keep as much
cash as possible in a country with a strong
currency and vice versa
• Sweep account:
– Allows companies to maintain zero balances
– Excess cash is swept into an interest-earning
account
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16. An Examination of Yield and
Maturity Characteristics
• Marketable
securities
7-16

17. Marketable Securities
• When a firm has excess funds, it should be
converted from cash into interest-earning securities
• Types of securities:
– Treasury bills: Short-term obligations of the government
– Treasury notes: Government obligations with a maturity of 1-10
years
– Federal agency securities: Offerings of government organizations
– Certificate of deposit: Offered by commercial banks, savings, and
other financial institutions
– Commercial paper: Represents unsecured promissory notes
issued by large business organizations
– Banker’s acceptances: Short-term securities that arise from
foreign trade
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18. Management of Accounts
Receivable
• Accounts receivable as an investment
– Should be based on the level of return earned
equals or exceeds the potential gain from other
investments
• Credit policy administration
– Credit standards
– Terms of trade
– Collection policy
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19. Types of Short-Term Investments
7-19

20. Credit Standards
• Determine the nature of credit risk based on:
– Prior records of payment and financial stability,
current net worth, and other related factors
• 5 Cs of credit:
– Character
– Capital
– Capacity
– Conditions
– Collateral
7-20

21. Credit Standards (cont’d)
• Dun & Bradstreet Information Services
(DBIS):
– Produces business information analysis tools
– Publishes reference books
– Provides computer access to information
– The Data Universal Number System (D-U-N-S)
is a unique nine-digit code assigned by DBIS to
each business in its information base
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22. Dun & Bradstreet Report – An
Example
7-22

23. Terms of Trade
• Stated term of credit extension:
– Has a strong impact on the eventual size of
accounts receivable balance
– Creates a need for firms to consider the use of
cash discounts
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24. Collection Policy
• A number if quantitative measures applied
to asses credit policy
– Average collection period
– Ratio of bad debts to credit sales
– Aging of accounts receivable
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25. An Actual Credit Decision
• Brings together various elements of
accounts receivable management
Accounts receivable = Sales = $10,000 = $1,667
Turnover 6
7-25

26. Inventory Management
• Inventory has three basic categories:
– Raw materials
– Work in progress
– Finished goods
• Amount of inventory is affected by sales,
production, and economic conditions
• Inventory is the least of liquid assets –
should provide the highest yield
7-26

27. Level versus Seasonal Production
• Level production
– Maximum efficiency in manpower and
machinery usage
– May result in high inventory buildup
• Seasonal production
– Eliminates inventory buildup problems
– May result in unused capacity during slack
periods
– May result in overtime labor charges and
overused equipment repair charges
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28. Inventory Policy in Inflation (and
Deflation)
• Inventory position can be protected in an
environment of price instability by:
– Taking moderate inventory positions
– Hedging with a futures contract to sell at a
stipulated price some months from now
• Rapid price movements in inventory may
also have a major impact on the reported
income of the firm
7-28

29. The Inventory Decision Model
• Carrying costs
– Interest on funds tied up in inventory
– Cost of warehouse space, insurance premiums,
and material handling expenses
– Implicit cost associated with the risk of
obsolescence and perish-ability
• Ordering costs
– Cost of ordering
– Cost of processing inventory into stock
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30. Determining the Optimum Inventory
Level
7-30

31. Economic Ordering Quantity
EOQ = 2SO ;
C
Where,
S = Total sales in units
O = Ordering cost for each order
C = Carrying cost per unit in dollars
Assuming:
EOQ = 2SO = 2 X 2,000 X $8U = $32,000 = 160,000
C $0.20 $0.20
= 400 units
7-31

32. Safety Stocks and Stock Outs
• Stock out occurs when a firm is:
– Out of a specific inventory item
– Unable to sell or deliver the product
• Safety stock reduces such risks
– Increases cost of inventory due to a rise in
carrying costs
– This cost should be offset by:
• Eliminating lost profits due to stockouts
• Increased profits from unexpected orders
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33. Safety Stocks and Stock Outs
(cont’d)
• Assuming that;
Average inventory = EOQ + Safety stock
2
Average inventory = 400 + 50
2
The inventory carrying costs will now increase by $50
Carrying costs = Average inventory in units × Carrying cost
per unit
= 250 × $0.20 = $50
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34. Just-in-Time Inventory Management
• Basic requirements for JIT:
– Quality production that continually satisfies
customer requirements
– Close ties between suppliers, manufactures, and
customers
– Minimization of the level of inventory
• Cost Savings from lower inventory:
– On average, JIT has reduced inventory to sales
ratio by 10% over the last decade
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35. Advantages of JIT
• Reduction in space due to reduced
warehouse space requirement
• Reduced construction and overhead
expenses for utilities and manpower
• Better technology with the development of
electronic data interchange systems (EDI)
– EDI reduces re-keying errors and duplication of
forms
• Reduction in costs from quality control
• Elimination of waste
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36. Areas of Concern for JIT
• Integration costs
• Parts shortages could lead to lost sales and
slow growth
– Un-forecasted increase in sales:
• Inability to keep up with demand
– Un-forecasted decrease in sales:
• Inventory can pile up
• A revaluation may be needed in high-growth
industries fostering dynamic technologies
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37. End
Q
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38. Q&A
7-38

39. Thank You.
7-39