1. Chapter 7 Current Asset Management

2. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-1 FIGURE 7-2 Expanded cash flow cycle

3. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-2 TABLE 7-1 The use of float to provide funds

4. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-2 TABLE 7-2 Playing the float

5. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-3 FIGURE 7-3 Cash management network

6. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-4 FIGURE 7-6 An examination of yield and maturity characteristics

7. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-5 TABLE 7-3 Types of short-term investments

8. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-6 TABLE 7-4 Dun & Bradstreet report

9. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 7-7 FIGURE 7-9 Determining the optimum inventory level

10. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

11. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

12. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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”

13. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

14. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Marketable Securities Treasury Bills (T-Bills) and Notes Certificates of Deposit (CDs) Banker’s Acceptances Eurodollar Certificates of Deposit Passbook Savings Accounts Money Market Funds LT 7-5

15. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

16. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

17. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

18. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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