MANAGEMENT

OF CURRENT
ASSETS
CASH MANAGEMENT
MARKETABLE SECURITIES
ACCOUNTS RECEIVABLE
INVENTORY
CURRENT ASSETS MANAGEMENT
In managing current assets, the primary concern should be
 for safety and liquidity with secondary attention placed
on maximizing profitability.

Management of liquidity involves two major decisions:

(1)The total amount of liquidity necessary to avoid the risk
of insolvency; and
(2)The amount of cash versus near cash
 Cash Conversion Cycle
Cash conversion cycle is the average length
of time involved -from the payment of raw
materials to the collection of accounts
receivable.

Inventory conversion period + Receivable Collection Period

- Payable Deferral Period = Cash conversion cycle
Formulas
Cash = Inventory + Receivable - Payable Deferral
conversion cycle Conversion Collection Period
period period

• Inventory conversion period = Inventory / Sales per day

• Receivable collection period = Receivables / (Sales/360days)

• Payable Deferral Period = Payables / purchases per day

or Payables / (Cost of Sales/360days)
Cash management
Objective of Cash Management

Cash management involves the maintenance

of a cash and marketable securities
investment level which will enable the
company to meet its cash requirements and at
the same time optimize the income on idle
funds.
Reasons for Holding Cash

1. Transaction Motive
2. Precautionary Motive
3. Speculative Motive
4. Contractual Motive
Managing Cash Flows

The optimal cash balance may be derived with the use of the
following basic approaches, namely:

1. Cash budget
2. Cash break-even chart
3. Optimal cash balance model
 Cash break-even chart
To illustrate, the following data are available for XYZ Company XYZ
Company manufactures plastic which it sells to other industrial users

The monthly production capacity of the company is 1,200,000 kilos.

Selling price is P2 per kilo. Its cash requirements have been
determined as follows:
a) Fixed monthly payments amount to P250,000 while
b) Variable cash payments are 50% of sales.

REQUIRED: Prepare a Cash Break-even Chart to project the

relationship between the company's cash needs and cash sources.
 Optimal Cash Balance
The liquidity managers must utilize some formal models or techniques to
maintain the optimal amount at each moment in time because too much
liquidity brings down the rate of return on total assets employed and too
little liquidity jeopardizes the very existence of the firm itself.

In managing the level of cash (currency plus demand deposits) for

transaction purposes versus near cash (marketable securities), the followin
g costs must be considered:
1. Fixed and variable brokerage fees, and
2. Opportunity costs such as interest foregone by holding cash instead of n
ear cash.
"Baumol model"
"Baumol model"
"Baumol model"
"Baumol model"
 ILLUSTRATION

To illustrate, consider a business with total payment

s of P10 million for one year, cost per transaction of
P100, and the interest rate on marketable securities
is 8 percent. The optimal cash balance is?
 ILLUSTRATION
To illustrate, consider a business with total payments of P10
million for one year, cost per transaction of P100, and the int
erest rate on marketable securities is 8 percent. The optimal
cash balance is?
Macapuno Industries projects that cash outlays of P4.5 million
occur uniformly throughout the year. Macapuno plans to meet its
cash requirements by periodically selling marketable securities
from its portfolio. The firm's marketable securities are invested to
earn 12 percent, and the cost per transaction of converting
securities to cash is P27.
REQUIRED
(1) Use the Baumol model to determine the optimal transaction
size for transfers from marketable securities to cash.
(2) What will be Macapuno's average cash balance?
(3) How many transfers per year will be required?