1. ©2012 McGraw-Hill Ryerson Limited 1 of 39 ©2012 McGraw-Hill Ryerson Limited 1.Extend Chapter 6 concepts of liquidity and risk to current asset management recognizing that a firm’s investment in current assets should achieve an adequate return for its liquidity and risk. (LO1) 2.Examine cash management as the control of receipts and disbursements to minimize nonearning cash balances while providing liquidity and describe techniques to make cash management more efficient. (LO2) Learning Objectives

2. ©2012 McGraw-Hill Ryerson Limited 2 of 39 ©2012 McGraw-Hill Ryerson Limited Current Asset Management Current asset management is controlling and managing the current assets of a firm Most time-consuming job of a financial manager Deals with allocating resources among the current assets – cash, marketable securities, accounts receivable, and inventory Crucial to long-term success or failure of a business LO1

3. ©2012 McGraw-Hill Ryerson Limited 3 of 39 ©2012 McGraw-Hill Ryerson Limited Cost-Benefit Analysis Cost-benefit analysis provides a framework to identify all the resultant changes arising from a decision. It must consider explicit and implicit costs and benefits. Opportunity costs are implicit costs and are forgone benefits from next best alternatives. -- e.g. opportunity costs of having capital tied up in current assets are the lost benefits from investing capital in other profitable investments. LO1

4. ©2012 McGraw-Hill Ryerson Limited 4 of 39 Cost-Benefit Analysis Good value-adding decisions will ensue when the benefits exceed the costs. In general, the return (on investment, ROI) is In addition to safety and liquidity, the financial manager must also make sure that the return on current assets (r) must exceed the cost of borrowing and/or the opportunity cost. LO1