5-Working Capital Management Current Assets

5-Working Capital Management Current Assets - Working...

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1 Working Capital Management Current Assets
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2 of 30 Current Asset Management Current asset management is controlling and managing the current assets of a firm Most time-consuming job of a financial manager Deals with allocating resources among the current assets cash, marketable securities, accounts receivable, and inventory Crucial to long-term success or failure of a business
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3 of 30 Cost-Benefit Analysis Cost-benefit analysis provides a framework to identify all the resultant changes arising from a decision. It must consider explicit and implicit costs and benefits. Opportunity costs are implicit costs and are forgone benefits from next best alternatives. -- e.g. opportunity costs of having capital tied up in current assets are the lost benefits from investing capital in other profitable investments.
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4 Cost-Benefit Analysis Good value-adding decisions will ensue when the benefits exceed the costs. In general, the return (on investment, ROI) is In addition to safety and liquidity, the financial manager must also make sure that the return on current assets ( r ) must exceed the cost of borrowing and/or the opportunity cost . monies received net capital tied up r =
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5 Maintain optimum level of cash Use the float Speed up collections Extend disbursements Use cash budgets Cash Management
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6 of 30 Cash Management Financial managers want to keep cash balances to a minimum There are 2 reasons for holding cash 1. for everyday transactions (main reason) 2. for precautionary needs (emergencies) Goals are to speed up the inflow of cash (or improve collections) and slow down the outflow of cash (or extend disbursements) Also will attempt to “play the float”
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7 Optimum Level of Cash How much to keep in cash? Transaction needs? Cash flows predictable? Borrowing arrangements? Interest rates? Keep safety level in cash, invest the excess Low-risk, liquid investments Savings accounts Money market funds Term deposits Treasury bills US $ deposits Earn small return on excess funds
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8 of 30 Table 7-1 The use of float to provide funds Bank Books (usable funds) Corporate Books (amounts actually cleared ) Initial amount $ 100,000 $ 100,000 Deposits + 1,000,000 + 800,000 Cheques 900,000 – 400,000 Balance + $ 200,000 + $ 500,000 + $300,000 float
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9 of 30 Ways to Improve Collections Timely processing and deposit of cheques received Regional Collection Centres
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