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

Need for the study:

It has great significance & provides

benefits to various parties who directly or indirectly interact with the firm.
Beneficial to mgt for crystal clear picture

regarding liquidity & profitability.

Objective:
To enable an agency to meet its product

delivery objectives efficiently & effectively. To understand short term financial mgt, net working capital, etc To discuss inventory mgt techniques. To describe cash conversion cycle, its funding & key strategies to manage it.

Working Capital Management: An Overview

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 Asset Investment

Current Liabilities

Long-Term Financing

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.

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).

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

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.

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, shortterm, 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).

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. Bankers 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).

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

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.

Inventory 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.