ch 7 current asset management

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current asset management
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companies that manage their current assets well establish a competitive advantage – helps increase their market share -creates an increase in shareholder value through a rising stock price -requires a careful allocation of resources amoung the current assets of the firm – cash -marketable securities -accounts receivable – Inventory
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current asset management (con’t)
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– in managing cash and marketable securities – primary concern should be for safety and liquidity – secondary attention should be placed on maximizing profitability
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cash management
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financial managers actively attempt to keep cash (non-earning asset) to a minimum – it is critical to have sufficient cash to assuage emergencies – to improve overall profitability of a firm – minimize cash balances – have accurate knowledge of when cash moves in and out of the firm
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reasons for holding cash balances
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transaction motives (payments towards planned expenses) Precautionary needs (emergency purposes)
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cash flow cycle
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inflow and outflow need to be synchronized cash flow relies on: – payment pattern of customers – speed at which suppliers and creditors process checks – efficiency of the banking system
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cash flow (con’t)
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financial managers must pay close attention to the percentage of sales generated by: – cash – outside credit cards – company’s own credit cards
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improving collections and extending disbursements
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– improving collection – extending disbursements
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improving collections
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setting up multiple collection centers at different locations adopt lockbox system for expeditious check clearence at lower costs
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extending disbursements
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general trend – speedup processing of incoming checks – slowdown payment procedures extended disbursement float-allows companies to hold onto their cash balances for as long as possible
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automated clearinghouses
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(ACH) transfers information between financial institutions and between accounts using computer tape
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marketable securities
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funds held for other than immediate transaction purposes should be invested in the interest-earning securities
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describe characteristics for marketable securities
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maturities of less than 1 year liquid: safe, short term, big $ transactions
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examples of marketable securities
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– treasury bills (borrowing of fed gov) – federal agency securities – CD’s (interests bearing time deposits) – commercial paper (short-term unsecured borrowings of large corporations) (100k or more)
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money market funds
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people pool their money together to where they can get better bonds with better rates
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accounts receivable as an investment
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should be based on whether the level of return earned on such investment equals or excedes the potential gain from other investments
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credit policy administration
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credit standards terms of trade collection policy
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credit standard
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determine the nature of credit risk based prior records of payment and financial stability, current net worth, and other related factors
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terms of trade
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– stated term of credit extension – has a strong impact on eventual size of accounts receivable balance – creates needs for firms to consider the use of cash discounts
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collection policy
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number of quantitative measures are applied to assess credit policy
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avg collection period
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increase would indicate poor credit admin
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Avg collection period=
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A/R —– avg daily credit sales
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ratio of bad debts for credit sales
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increasing ratio may indicate too many accounts
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inventory management
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– raw materials – work in progress – finished goods
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amount of inv is affected by
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– sales – production – and economic conditions
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inv is the ___ liquid of current assets
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least
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carrying costs
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interest of funds tied up in inventory – cos of wharehouse space, insurance premium expenses – implicit cost associated with risk of obsolescence and perishiability
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ordering costs
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– cost of ordering – cost of processing
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rapid price movements would
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would have a major impact on the profitability of the firm
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nature of of receivables and inv management
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prior records of payment and financial stability – current net worth – and other factors

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