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7/28/2019 133 Chapter 072002gfhfg
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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
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Need for the study: It has great significance & provides
benefits to various parties who directlyor indirectly interact with the firm.
Beneficial to mgt for crystal clear pictureregarding liquidity & profitability.
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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, itsfunding & key strategies to manage it.
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Working Capital Management:
An Overview
Gross Working Capital -(Current Assets)
New Working Capital - (Current Assets - CurrentLiabilities)
Working Capital Management Involves investing in current assets and financing
of current assets:
Current
Liabilities
Long-Term
Financing
Current AssetInvestment
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Current Asset Investment Policy
Everything else remaining the same, higher levelsof current assets mean lower risk and lowerexpected return
Lower Risk
Greater ability to meet short-run obligations. Lower Return
Cash and marketable securities typically yieldlow returns. Furthermore, when current assets
are increased, additional financing costs will beincurred thereby lowering returns.
Lower levels of current assets result in oppositeeffects.
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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, theinventory should be low.
Permanent Investment - Firms always have someminimum level of investment in current assets (i.e., apermanent investment). As a firm grows over time,
the level of permanent current assets also grows(e.g., a supermarket chain with 70 stores will havemore permanent inventory than a chain with 4stores).
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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 marketablesecurities
If Shortage: Short-term borrowing or sell marketablesecurities
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Desired Cash Balance:
Precautionary Demand - Satisfy possible, butas yet indefinite cash needs.
Speculative Demand - Build up current cashbalances in anticipation of future businesscosts being lower.
Risk Preferences
Compensating Balances
Transactions Demand - Cash needs arising inthe ordinary course of doing business.
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Marketable Securities
The marketable securities portfolio is typically usedfor temporary investments of excess cash, or as asubstitute for cash (i.e., near cash). Therefore,securities in the portfolio are generally safe, short-term, and highly liquid.
Treasury Bills Short-term obligations of the federal government
with maturities of 91 days to a year. They aretraded on a discount basis in bearer form. Nottaxable at state and local levels, but taxable at the
federal level. Commercial Paper
Unsecured promissory notes issued by largecorporations in amounts of $25,000 or more (No
active secondary market).
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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 foreigntrade.
Importer (buyer) issues a promise to pay a certainamount 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 lessthan the promised amount).
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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
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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 SalesRatio, Aging Accounts Receivable, Receivablesto Assets Ratio, Credit Sales to ReceivablesRatio.
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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.