Without effective management of assets, liabilities, and owners' equity, all businesses are doomed
to fail. Financial management addresses issues pertaining to obtaining and managing funds and
resources necessary to run a business successfully. All organizations must manage their resources
effectively and efficiently if they are to achieve their objectives.
MANAGING CURRENT ASSETS AND LIABILITIES
Managing short-term assets and liabilities involves managing the current assets and liabilities on
the balance sheet.
are short-term resources such as cash, investments, accounts
receivable, and inventory.
are short-term debts such as accounts payable,
accrued salaries, accrued taxes, and short-term bank loans. The terms
used interchangeably because short-term assets and liabilities are usually replaced by new ones
within three or four months and always within a year. Managing current assets and liabilities is
working capital management
because short-term assets and liabilities
continually flow through an organization and are thus said to be "working." The chief goal of
financial managers who focus on current assets and liabilities is to maximize the return to the
business on cash, temporary investments of idle cash, accounts receivable, and inventory.
A crucial element in financial management is effectively managing the firm's cash flow, the
movement of money through the organization on a daily, weekly, monthly, or yearly basis. Astute
money managers try to keep just enough cash on hand, called
to pay bills,
such as employee wages, supplies, and utilities as they fall due. To ensure that enough cash flows
through the organization quickly, companies try to speed up cash collections from customers.
One way to do this is to have customers send their payments to a
receiving payments, instead of directly to the company's main address. Large firms with many
stores or offices around the country can also use electronic funds transfer to speed up collections.
If cash comes in faster than it is needed to pay bills, businesses can invest the cash surplus for
periods as short as one day or for as long as one year, until it is needed. Such temporary
investments of cash are known as
Many large companies invest idle cash
, which are shortterm debt obligations the U.S. government sells
to raise money.
Commercial certificates of deposit (CDs)
are issued by commercial banks and
brokerage companies. Unlike consumer CDs, which must be held until maturity, commercial CDs
may be traded prior to maturity. A popular short-term investment for larger organizations is
--a written promise from one company to another to pay a specific amount of
money. Some companies invest idle cash in international markets such as the
a market for trading U.S. dollars in foreign countries.