Current Asset Management

Current Asset management


   Control receipt and payment of cash

      Marketable securities

   Selecting between various short term investments

      Accounts receivable Inventory

   Credit and inventory decisions made with view to profit.

      The less liquid an asset is the higher the required rate of return.


Current Asset Management

      Keeping cash reduces risk but it also reduces profitability because less assets are being used for productive purposes.

Reasons to hold cash


      Compensating bank

      Precautionary balances

  Can use untapped forms of credit

Cash Flow Cycle

      Synchronize inflows and outflows.


      Cash inventory- sales - accounts receivable cash

      Excess cash to marketable securities


      2 cash balances

  On corporate books

  At the bank

  The difference is float

      So you have playing the float

Improving collections

      Delaying disbursements

      Cost benefit analysis


      International transactions

Marketable securities

      Park funds

      Treasury bills



  Certificates of deposit from financial institutions

Marketable securities contd.

      Commercial Paper

   Unsecured promissory notes.

      Banker Acceptances

   Short term come from foreign trade for future payment.

    May be sold at discount.

      Saving accounts.

   Rates are too low.

      Money market funds

   Give small investors access to larger CDs etc.

Management of Accounts Receivable

      Acc Rec are an investment

  So what is the return?

      Extending Credit will increase Acc Rec and decrease marketable securities and inventory.


  Credit Standards

  Terms of trade

  Collection Policy.

Credit Standards

      5 Cs of credit



   Debt to equity


   Cash flows


   Sensitivity to markets


Credit Analysis


      Dun and Bradstreet reports

Terms of Trade

      The longer you carry customers the more you may have to borrow.

      Cash discount may help.

Collection Policy

      Average collection period


Credit decision

      What is the impact on profits

Inventory Management

      Inventory is least liquid of current assets so should provide the highest yield.

      Share this responsibility with production manager.

Level vs Seasonal Production

      Level production

  Efficient use of manpower and equipment

  High inventory buildup in off season.

      Seasonal production.

  Inventory problem gone but have increased production costs

      Need to balance production vs inventory costs.

Inflation (deflation) and inventory

      Hedges (future contracts)

      FIFO may give swings in profits and losses.

      Deflation can kill profits from inventory.


Inventory Decision Model

      Carrying costs

      Ordering costs

      Economic Order Quantity

  = sqrt((2*Sales*order cost)/carrying cost)

      Carrying costs increase with order size

      Order costs decrease with order size.

Safety Stock and stock outs

      Stock out, lose sale due to not having item.

      Need safety stock to avoid missing orders

      Avg Inv. = EOQ/2 + safety stock

Just in time

      Part of total production concept

      E-commerce essential to this.