CURRENT ASSET

MANAGEMENT
CHAPTER SEVEN
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INTRODUCTION
Financial manager must carefully allocate
resources among the current assets of the firm,
such as cash, marketable securities, accounts
receivable and inventory.
In managing cash and marketable securities,
the primary concern should be for safety and
liquidity.
While for accounts receivable and inventory,
attention should pay on maximization
profitability.
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CASH MANAGEMENT
Minimizing cash balances as well as having
accurate knowledge of when cash moves into
and out of the company can improve overall
corporate profitability.
There are several reasons for holding cash:
Transaction balances involves the use of cash to
pay for planned corporate expenses such as
supplies, payrolls and taxes.
Compensate bank for services provided.
Precautionary needs it assume management
wants cash for emergency purposes when cash
inflows are less than projected.
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CASH MANAGEMENT:
CASH FLOW CYCLE
The primary consideration in managing cash flow
cycle is to ensure that inflows and outflows of cash
are properly matched for transaction purposes.
A simple cash flow cycle where the sale of finished
goods or services produces either a cash sale or
account receivable for future collection.
The accounts receivable will eventually collected and
become cash which is used to buy and produce
inventory that is then sold.
Therefore, the cash-generating process is continuous
even though the cash flow may be unpredictable and
uneven.
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CASH MANAGEMENT:
CASH FLOW CYCLE
Other activities in the firm also can affect cash
inflows and outflows.
The expanded cash flow cycle in Figure 7.2
(pg.177):
Cash inflows are mainly from sales.
But is influenced by the type of customers,
geographical location, the product sold and the
industry.
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CASH MANAGEMENT:
CASH FLOW CYCLE
The expanded cash flow cycle in Figure 7.2
(cont):
When an account receivable is collected cash
balances increase and the firm uses cash to pay:
Interest to lenders
Dividends to stockholders
Taxes to the government
Accounts payable to suppliers
Wages to workers
Replace inventory
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CASH MANAGEMENT:
CASH FLOW CYCLE
The expanded cash flow cycle in Figure 7.2
(cont):
When the firm have excess cash, it will invest in
marketable securities.
When it need cash for current assets, it will either
sell marketable securities or borrow fund from
short-term lenders.
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COLLECTIONS & DISBURSEMENTS:
FLOAT
Managing the cash inflows and payments is a
function of many variables.
There are actually two cash balances of
importance:
The firms recorded amount
The amount credited to the firm by the bank.
The difference between the two is called float.
Float arises as a result of time delays in
mailing, processing and clearing checks
through the banking system.
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COLLECTIONS & DISBURSEMENTS:
FLOAT
When checks is received in the mail and a
deposit is made, the deposited funds are not
available for use until the check has cleared
the banking system and been credited to the
firm bank account.
This would happened to those checks payment
to suppliers and checks received from
customers.
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COLLECTIONS & DISBURSEMENTS:
FLOAT
Example: A firm has deposited $1,000,000
checks received from customers during the
week, and has issued $900,000 checks to
suppliers.
Assume that $800,000 of checks from
customer have cleared and debited while only
$400,000 of firms checks being claimed. The
initial cash balance is $100,000.
What will the firm and bank records show?
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COLLECTIONS & DISBURSEMENTS:
FLOAT
With the example given, we compute the float:




The above shows that float provide us with
$300,000 extra in available short-term funds.

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Firm books Bank books (amount cleared)
Initial amount 100,000 100,000
Deposits (+) 1,000,000 800,000
Checks issue (-) (900,000) (400,000)
Balance 200,000 500,000
COLLECTIONS & DISBURSEMENTS:
IMPROVING COLLECTIONS
Collection and check-clearing process through
a number of strategies.
First, is to utilize variety of collection centers
through out the marketing area.
E.g. an insurance company with headquarters in
Chicago may have 75 collection offices disbursed
throughout the country with each performing a
billing and collection-deposit function.
The company can use a local bank as the collection
offices thus clearing the checks in shorter time.
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COLLECTIONS & DISBURSEMENTS:
IMPROVING COLLECTIONS
First, is to utilize variety of collection centers
through out the marketing area.
The company also can adopt lockbox system to
replace the collection offices.
Under the lockbox system, customers are requested
to forward their checks to a post office box and a
local bank picks up the checks.
The bank can then process the local checks through
the local clearing house for rapid collection.

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COLLECTIONS & DISBURSEMENTS:
EXTENDING DISBURSEMENT
A slowdown pattern more appropriately to
describe the payment procedures.
For instance, a multimillion-dollar corporation
with its headquarters located in the most
exclusive office space in Manhattan, but with
its primary payment center in North Dakota.
Their objective is to extended disbursement
float so that they hold their cash balances as
long as possible.
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COLLECTIONS & DISBURSEMENTS:
COST-BENEFIT ANALYSIS
An efficiently maintained cash management
program can be expensive operation.
The use of remote collection and disbursement
center discussed earlier involves additional
costs and bank might require the firm maintain
adequate deposit balances or pay sufficient
fees for the services.
Therefore, these expenses must be compared
to the benefits that may accrue through the use
of cost-benefit analysis.
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COLLECTIONS & DISBURSEMENTS:
COST-BENEFIT ANALYSIS
Example, if a firm has an average daily
payment of $2 million, through stretching the
disbursement schedule by one day, the $2
million will become available for alternate
uses.
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COLLECTIONS & DISBURSEMENTS:
ELECTRONIC FUNDS TRANSFER

This is a system in which funds are moved
between the computer terminals without the
use of a check.
E.g. through the use of terminal
communication between the supermarket and
the bank, your payment is automatically
charged against your account before you leave
the supermarket.
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COLLECTIONS & DISBURSEMENTS:
ELECTRONIC FUNDS TRANSFER

Automated clearinghouses (ACH) are an
important element in electronic funds
transfers.
An ACH transfers information between one
financial institution and another and from
account to account via computer tape.
Refer to Figure 7-4 for the ACH network, it
shows the flow of funds.
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COLLECTIONS & DISBURSEMENTS:
ELECTRONIC FUNDS TRANSFER

Figure 7-4:
The originator (individual or corporation) forwards
the credit or debit transaction data to an Originating
Depository Financial Institution (ODFI).
ODFI then sort and transmits the file to an
automated clearinghouse operator.
The ACH then distributes the file to the receiving
depository financial institution (RDFI) which then
makes the funds available receivers account
(individual or corporation).
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THANK YOU
20
TUTORIAL QUESTIONS
1. In the management of cash and marketable
securities, why should the primary concern
be for safely and liquidity rather than
maximization of profit?
2. Briefly explain how a corporation may use
float to its advantage.
3. Why does float exist and what effect do
electronic funds transfer systems have on
float?
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TUTORIAL QUESTIONS
4. Explain the similarities and differences of
lockbox systems and regional collection
offices.
5. Why would a financial manager wan to slow
down disbursement?
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