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Chapter
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
What is current asset management Cash management and its importance Management of marketable securities Accounts receivable and inventory management Inventory management and policy decisions required Liquidity vis--vis returns
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Cash Management
Financial managers actively attempt to keep cash (non-earning asset) to a minimum
It is critical to have sufficient cash to for emergencies Steps 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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Precautionary needs
Emergency purposes
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Financial managers must pay close attention to the percentage of sales generated:
By cash By outside credit cards By the companys own credit cards
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Float
Difference between firms recorded amount and amount credited to the firm by a bank Two types of float:
Mail float: Arises duet to the time it takes to deliver a check. Clearing float: Arises due to the time it takes to clear a check once the payment is made
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Extending disbursement:
General trend:
Speedup processing of incoming checks Slow down payment procedures
Extended disbursement float allows companies to hold onto their cash balances for as long as possible
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Cost-Benefit Analysis
Allows companies to analyze the benefits, received by investing on an efficiently maintained cash management program
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International fund transfer is carried out through SWIFT (Society for Worldwide Interbank Financial Telecommunications)
Uses a proprietary secure messaging system Each message is encrypted Every money transaction is authenticated by a code, using smart card technology Assumes financial liability for the accuracy, completeness, and confidentiality of transaction
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Marketable Securities
When a firm has excess funds, it should be converted from cash into interest-earning securities Types of securities:
Treasury bills: Short-term obligations of the government Treasury notes: Government obligations with a maturity of 1-10 years Federal agency securities: Offerings of government organizations Certificate of deposit: Offered by commercial banks, savings, and other financial institutions Commercial paper: Represents unsecured promissory notes issued by large business organizations Bankers acceptances: Short-term securities that arise from foreign trade
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Credit Standards
Determine the nature of credit risk based on:
Prior records of payment and financial stability, current net worth, and other related factors
5 Cs of credit:
Character Capital Capacity Conditions Collateral
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Terms of Trade
Stated term of credit extension:
Has a strong impact on the eventual size of accounts receivable balance Creates a need for firms to consider the use of cash discounts
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Collection Policy
A number if quantitative measures applied to asses credit policy
Average collection period
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Accounts receivable =
Inventory Management
Inventory has three basic categories:
Raw materials Work in progress Finished goods
Amount of inventory is affected by sales, production, and economic conditions Inventory is the least of liquid assets should provide the highest yield
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Seasonal production
Eliminates inventory buildup problems May result in unused capacity during slack periods May result in overtime labor charges and overused equipment repair charges
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Rapid price movements in inventory may also have a major impact on the reported income of the firm
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Ordering costs
Cost of ordering Cost of processing inventory into stock
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Advantages of JIT
Reduction in space due to reduced warehouse space requirement Reduced construction and overhead expenses for utilities and manpower Better technology with the development of electronic data interchange systems (EDI)
EDI reduces re-keying errors and duplication of forms
Exercises
11th and 13th edition: Problems 10, 14, 17
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