Sld07 Current Asset Mgmt
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Transcript of Sld07 Current Asset Mgmt
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Current AssetManagement
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Table 7-1The use of float to provide funds
Bank Books (usable funds)Corporate Books (amounts actually cleared)
Initial amount $ 100,000 $ 100,000Deposits + 1,000,000 + 800,000Cheques 900,000 400,000
Balance + $ 200,000 + $ 500,000
+ $300,000 float
PPT 7-1
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Table 7-2Playing the float
PPT 7-1
Bank Books (usable funds)Corporate Books (amounts actually cleared)
Initial amount $ 100,000 $ 100,000Deposits + 1,000,000 + 800,000Cheques 1,200,000 800,000
Balance $ 100,000 + $ 100,000
+ $200,000 float
* Assumed to remain the same as in Table 7-1.
* *
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Figure 7-1Cash management network
LocalOffice
LocalOffice
LocalOffice
LocalOffice
Local Office
Local Office
LocalOffice
LocalOffice
Local Office
Local Office
Local bank branch
Local bank branch
Local bank branch
Local bank branch
Local bank branch
Central bank account
Corporate headquarters
Central bank account
Corporate headquarters
Reduce remittancetime 1.5 days
Increase disbursementtime 1 day
2.5 days freed-upcash balance
2.5 days freed-up cash balance$2 million average cash movement per day$5 million available funds
Distantdisbursement centre
PPT 7-2
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Federal government securities:Treasury bills 91days $1,000 Excellent Excellent 13.13% 4.86%Treasury bills 182 1,000 Excellent Excellent 13.25 4.95
Provincial government securitiesTreasury bills 91 25,000 Excellent Excellent 13.18 4.92
Nongovernment securities:Term deposits (large) 90 100,000 Good None 12.75 4.60Term deposits (small) 90 5,000 Good None 10.00 4.00Commercial paper 90 100,000 Good Fair 13.33 5.16Bankers acceptances 90 None Good Good 13.27 5.10Eurodollar deposits (bid) 90 25,000 Good Excellent 12.81 5.12LIBOR (London Interbank Offered Rate) 90 100,000 Good Excellent 12.94 5.30Savings accounts Open None Excellent None 8.75 .25-1.00Bank swap deposits 90 100,000 Excellent None 13.23 5.03Money market deposits (financial institutions) Open 500 Excellent None 10.15 3.20-4.40Overnight (call) money 1 day 100,000 Excellent Excellent 5.00
* Many of these securities can be purchased with different maturities than those indicated. Though not marketable, these investments are highly liquid and can often be withdrawn without penalty.Quoted yields are often for wholesale amounts above $1 million
Table 7-3Types of short-term investments
Yield YieldMinimum Mar. 22, Mar. 22,
Maturity* Amount Safety Marketability 1990 1999
PPT 7-3
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Figure 7-3Financing growth in accounts receivable
Marketable securities
Inventory
Accounts receivable
Bank loan
Accounts payable
Forgo8%return
Forgo10%return
Buildup12%return
7.5%cost 7%
cost
PPT 7-4
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Table 7-4Dun & Bradstreet credit rating system
Key to RatingsComposite Credit Appraisal
Estimated Financial Strength High Good Fair Limited
5A . . . Over $50,000,000 1 2 3 44A . . . $10,000,000 to 50,000,000 1 2 3 43A . . . 1,000,000 to 10,000,000 1 2 3 42A . . . 750,000 to 1,000,000 1 2 3 41a . . . 500,000 to 750,000 1 2 3 4BA . . . 300,000 to 500,000 1 2 3 4BB . . . 200,000 to 300,000 1 2 3 4CB . . . 125,000 to 200,000 1 2 3 4CC . . 75,000 to 125,000 1 2 3 4DC . . 50,000 to 75,000 1 2 3 4DD . . 35,000 to 50,000 1 2 3 4EE . . 20,000 to 35,000 1 2 3 4FF . . 10,000 to 20,000 1 2 3 4GG . . 5,000 to 10,000 1 2 3 4HH . . Up to 5,000 1 2 3 4
PPT 7-5
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Figure 7-4Determining the optimum inventory level
Cost of ordering and carrying inventory ($)
40
80
400
M
Carrying costs
Order size (units)
Ordering costs
Total costs
PPT 7-6
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Chapter 7 - Outline LT 7-1
What is Current Asset Management?
Cash Management
Optimum Level of Cash
Ways to Improve Collections
Ways to Extend Disbursements
Marketable Securities
Types of Securities
Yield Calculation
3 Primary Variables of Credit Policy
Credit Policy Decision
Inventory Management
Economic Ordering Quantity
Just-In-Time Inventory Systems
Level vs. Seasonal Production
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What is Current Asset Management? LT 7-2
Current asset management is essentially an extension ofworking 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 liquidan asset is, the higher the required return
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Cash Management
Use cash budgets
Speed up collections
Extend disbursements
Maintain optimum level of cash
Invest excess cash
LT 7-3
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Optimum Level of Cash
How much to keep incash? transaction needs?
cash flows predictable?
borrowingarrangements?
interest rates?
Keep safety level in cash,invest excess
Low-risk, liquidinvestments
Savings accounts
Money market funds
Term deposits
Treasury bills
US $ deposits
Earn small return onexcess funds
LT 7-4
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Ways to Improve Collections LT 7-5
Timely processing and deposit of cheques received
Regional Collection Centres
speeds up collection of A/R and reduces mailing time
Lockbox System
when customers mail payment to a local post office boxinstead of to the company headquarters
Electronic Funds Transfer / Electronic Data Interchange
exchange of payments and information betweencompanies computers
Use of debit cards (Interac) and preauthorized cheques
a system where payments are automatically deductedfrom a bank account
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Ways to Extend Disbursements
Mail cheques from remote locations
Play the Float
Electronic Funds Transfer
LT 7-6
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3 Primary Variables of Credit Policy LT 7-7
3 things to consider in deciding whether to extend credit:
Credit Standards
determine credit rating of customers
4 Cs of credit
credit agencies, bureaus
Terms of Trade
ex.; 2% / 10days / net 30 days
Collection Policy
Average Collection Period
Ratio of Bad Debts to Credit Sales
Aging of Accounts Receivable
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Inventory Management LT 7-8
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:
Ordering Costs
Carrying Costs
Optimum level of inventory will satisfy customer demand /production requirements while minimizing ordering andcarrying costs
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Economic Ordering Quantity LT 7-9
Economic Ordering Quantity (EOQ):
the optimal (best) amount for the firm to order eachtime
occurs at the low point on the total cost curve
the order size where total carrying costs equal totalordering costs (assuming no safety stock)
Safety Stock:
extra inventory the firm keeps in stock in case ofunforeseen problems
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Just-In- Time Inventory Systems
FeaturesMinimum levels of inventory
Orders in small lot sizes
Computerized order andinventory systems
Electronic data interchange
Short delivery times
Small number of suppliers
Quality control programs
BenefitsLower carrying costs
Automatic ordering
Fewer accounting errors
Lower quality control costs
Elimination of waste
LT 7-10
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Level vs. Seasonal Production LT 7-11
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 theseason)
inventory costs are lower
operating costs are higher