Ecom410

Current Asset Management

Current Asset management

• Cash

– 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

• Transactions

• Compensating bank

• Precautionary balances

– Can use untapped forms of credit

Cash Flow Cycle

• Synchronize inflows and outflows.

• Continuous

• Cash – inventory- sales - accounts receivable – cash

• Excess cash to marketable securities

Float

• 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

• E-payments

• International transactions

Marketable securities

• Park funds

• Treasury bills

• Bonds

• CDs

– 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.

• Consider

– Credit Standards

– Terms of trade

– Collection Policy.

Credit Standards

• 5 Cs of credit

– Character

– Capital

• Debt to equity

– Capacity

• Cash flows

– Conditions

• Sensitivity to markets

– Collateral

Credit Analysis

• Ratings

• 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

• Aging

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.

• Obsolescence

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.