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Chapter 7
Current Asset
Management
PPT 7-1
FIGURE 7-2
Expanded
cash flow
cycle
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PPT 7-2
TABLE 7-1
The use of float to
provide funds
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PPT 7-2
TABLE 7-2
Playing the float
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PPT 7-3
FIGURE 7-3
Cash
management
network
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PPT 7-4
FIGURE 7-6
An examination of
yield and maturity
characteristics
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TABLE 7-3
Types of short-term investments
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PPT 7-5
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PPT 7-6
TABLE 7-4
Dun & Bradstreet
report
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PPT 7-7
FIGURE 7-9
Determining the
optimum
inventory level
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Chapter 7 - Outline
LT 7-1
What is Current Asset Management?
 Cash Management
 Ways to Improve Collections
 Marketable Securities
 3 Primary Variables of Credit Policy
 Inventory Management
 Level vs. Seasonal Production
 Economic Ordering Quantity

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What is Current Asset
Management?
LT 7-2
 Current Asset
Management is essentially an
extension of working capital management
 It is concerned with the current assets of a firm
(cash, A/R, marketable securities, and inventory)
 A financial manager needs to remember that the
less liquid an asset is, the higher the required
return
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Cash Management
LT 7-3
Financial manager wants to keep cash balances to a
minimum
 There are 2 reasons for holding cash:

– for everyday transactions (main reason)
– for precautionary needs (emergencies)
Goals are to speed up the inflow of cash (or improve
collections) and slow down the outflow of cash (or extend
disbursements)
 Also will attempt to “play the float”

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Ways to Improve Collections

LT 7-4
Collection Center
– speeds up collection of A/R and reduces mailing time

Electronic Funds Transfer (or Wire Transfer of Funds)
– a system where payments are automatically deducted from a
bank account

Lockbox System
– when customers mail payment to a local post office box
instead of to the firm
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Marketable Securities
LT 7-5
 Treasury
Bills (T-Bills) and Notes
 Certificates of Deposit (CDs)
 Banker’s Acceptances
 Eurodollar Certificates of Deposit
 Passbook Savings Accounts
 Money Market Funds
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3 Primary Variables of
Credit Policy
LT 7-6
There are 3 things to consider in deciding whether
to extend credit:
– Credit Standards
– Terms of Trade
– Collection Policy
 Average Collection Period
 Ratio of Bad Debts to Credit Sales
 Aging of Accounts Receivable
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Inventory Management
LT 7-7
Inventory is divided into 3 categories:
– Raw Materials
– Work in Progress (WIP) or Unfinished Goods
– Finished Goods
There are 2 basic costs associated with inventory:
– Carrying Costs
– Ordering Costs
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Level vs. Seasonal Production
LT 7-8
Level Production:
– producing the same (equal) amount each month
– inventory costs are higher
– operating costs are lower
Seasonal Production:
– producing a different amount each month (based on the
season)
– inventory costs are lower
– operating costs are higher
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Economic Ordering Quantity
LT 7-9
Economic Ordering Quantity (EOQ):
– the optimal (best) amount for the firm to order each time
– occurs at the low point on the total cost curve
– the order size where total carrying costs equal total ordering
costs (assuming no safety stock)
Safety Stock:
–“extra” inventory the firm keeps in stock in case of
unforeseen problems
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