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1. Introduction to Current Asset Management
   1. Current Asset Management and Working Capital. In Chapter 6, we looked at managing working capital in general. In Chapter 7, we're going to look at specifically managing the current asset accounts, particularly cash, marketable securities, accounts receivable and inventory. When managing current assets, ________( Critical Concept ). The financial manager should also strive to find the optimal levels of the current asset accounts for the firm in order to maximize shareholder wealth while providing sufficient liquidity and safety.
   2. Cash Management. With new technologies such as electronic funds transfer, cash management has become more important than ever. The financial manager should strive to ____ because it is a non-earning asset( Critical Concept ). Most financial managers hold only enough cash to meet immediate needs. There are three primary motives for holding cash:
      1. _____ Motive ( Key Term). Managers hold cash for daily operations or day-to-day transactions, such as payments to suppliers, taxes and payroll.
      2. Precautionary Motive. Managers hold cash for ____ when cash flows are lower than projected( Critical Concept ).
      3. Compensating Balance Motive. Banks often require that firms hold money on deposit with them before they will make a loan. This money is called the compensating balance. Cash management and forecasting is difficult for most corporations.
   3. Receiving Cash Payments. The Internet and electronic commerce helps a company's cash receipts. Since customers use a credit card when shopping on the Internet, cash for purchases get to the firm much sooner. One new development that can be useful in speeding up a company's cash receipts is electronic bill presentment and payment. See this EBPP website. Electronic bill presentment and payment is ____( Key Term ). Other ways that firms' can speed up their collections are the use of lockboxes and electronic funds transfer which is ____( Key Term ).
   4. Cash Disbursements. While firms want to speed up their cash receipts, they want to slow down or extend their cash disbursements. One way to do this is through the use of float. Float is ____( Key Term ). A firm's customers can also use float to their advantage. See Slide 5 (32.0K) for an example of float . The advent of electronic funds transfer and electronic bill presentment and payment has reduced the use of float by corporations. Take a look at this article (7011) on extending cash disbursements.
   5. International Cash Management. If managing cash domestically is problematic, managing cash internationally is even more difficult. International funds transfer is usually carried out by SWIFT, the Society of Worldwide Interbank Financial Telecommunications. Multinational corporations move cash between countries much as domestic companies do between banks. Firms may want to take advantage of holding cash in a particular currency where they can earn higher interest rates on short-term investments.
2. Managing Marketable Securities
   1. Excess Cash. Firms who have excess cash during any given time period usually choose to invest that cash in marketable securities in order that they may earn a return but still have quick access to their cash. Marketable securities are ____ with a maturity of ____( Critical Concept ). See Slide 7 (72.0K) for a table showing the types and characteristics of marketable securities.
   2. Treasury Securities. One of the most-often used marketable securities is Treasury bills. They are short-term obligations of the U.S. government. A wide range of maturities is available so that firms do not have to tie up their excess cash for long periods of time. Occasionally, firms will also use Treasury notes, with maturities of 1-10 years for short or intermediate term investments. Take a look at this article for a good discussion of Treasury securities. A fairly new type of Treasury security called TIPS, or Treasury Inflation Protection Securities. If interest rates were to quickly rise due to inflation, TIPS are not really affected because ____( Critical Concept ). Here is an informative article on TIPS .
   3. Federal Agency Securities. This type of security is guaranteed by governmental organizations such as the Federal Home Loan Bank. They are almost, but not quite, as safe and liquid as U.S. Treasury securities. The major difference is that federal agency securities have more default risk, though not much more, because they aren't directly backed by the U.S. Treasury. As a result, they pay slightly higher yields than Treasury securities.
   4. Certificates of Deposit. Certificates of deposit are bank securities that are insured by the federal government up to $100,000. As a result, they are very safe but they tie up a firm's money for a specified period of time.
   5. Commercial Paper. Commercial paper represents unsecured (no collateral) promissory notes (debt) issued by major corporations. The market for commercial paper is fairly thin and may not be suitable for excess cash if liquidity is the primary firm motive.
   6. Other Marketable Securities. Other types of marketable securities include banker's acceptances, Eurodollar certificates of deposit and money market funds.
3. Managing Accounts Receivable
   1. Importance of Accounts Receivable. Since1990, accounts receivable, as a percentage of total assets, has almost doubled and represents around 20% of a firm's total assets. It has, as a result, taken on increasing importance. The accounts receivable balance is the firm's investment in the credit of its customers. The firm's credit and collections policies have become increasingly important.
   2. Credit Policy. Three variables help the firm decide whether or not to extend credit to a customer. See Slide 21 3 Primary Variables of Credit Policy (47.0K) .
      1. Credit Standards. Credit standards are based on the 5 C's of credit: character, capital, capacity, conditions and collateral.
      2. Terms of Trade. Some firms establish a cash discount policy to reward customers who pay their bill before the due date. A firm, for example, could offer a 2% discount to firm's who pay within 10 days.
      3. Collection Policy. Three quantitative measures can help a firm set its collection policy. First, calculate the average collection period. The average collection period is ____( Key Term ). The ratio of bad debts to credit sales is also an important measure. Preparing an aging schedule of accounts receivable is the third measure that can help a firm set its collection policy.
4. Inventory Management
   1. Importance of Inventory. Inventory is the least liquid of all the current assets because the business firm has to find a buyer for its inventory. As a result, proper firm management of inventory is crucial and getting the highest possible rate of return on inventory is important. Firm management has to determine whether or not they should produce inventory on a level or a seasonal basis. See Level vs Seasonal Production (53.0K) . Inventory policy during either inflation or deflation is also a concern. Whether the firm reports inventory on a FIFO (first in, first out) or LIFO (last in, first out).
   2. Economic Order Quantity Inventory Model. When developing a model to determine how much inventory should be ordered at any one time, two types of costs, ordering costs and carrying costs, must be considered. Ordering costs are the fixed costs of placing an order and carrying costs are the costs of storage and handling. See Slide 11 (59.0K) for an example of calculating the costs of ordering and the costs of carrying inventory. The lowest cost point for both ordering and carrying costs is the optimum inventory level. See Slide 14 (32.0K) . The EOQ or Economic Order Quantity model calculates the optimal amount of inventory to order each time an order is placed. This amount minimizes both total carrying and ordering costs.
   3. Safety Stock. Holding a minimum amount of safety stock will minimize a firm's chances of stockouts. However, holding safety stock will cause the firm's inventory costs to rise because it will hold more than the EOQ in inventory. See Slide 15 (60.0K)
   4. Just In Time Inventory Management. An alternative method of managing inventory, just in time inventory management (JIT) was developed for Toyota Motor Company. JIT relies on ____ and ____( Critical Concept ). It results in cost savings from lower inventory. If firms get caught with too little inventory during times of high consumer demand, JIT can quickly result in loss of customer goodwill.