CURRENT ASSET

MANAGEMENT
CHAPTER SEVEN (II)
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MARKETABLE SECURITIES
Cash not needed for transactions should be held in
interest-earning marketable securities.
The choice of security should depend on yield,
maturity, investment size, safety, and marketability.
The relation between yield to maturity and time to
maturity is normally positive and is represented by
the yield curve:
i.e. the longer the maturity period of the security, the higher
the yield.
Because the risk is greater as the maturity date is extended.
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COMMON MARKETABLE
SECURITIES
1. Treasury bills:
Short-term obligations of the federal government.
Usually issued with maturities of 91 days and 182
days.
Trade on a discount bases, where the yield you receive
occurs as a result of the difference between the price
you pay and the maturity value.
2. Treasury notes:
Government obligations with a maturity of 1 to 10
years.

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COMMON MARKETABLE
SECURITIES
3. Treasury inflation protection securities (TIPS):
Pays interest semiannually that equals a real rate of return
specified by the U.S. Treasury.
Plus principal at maturity that is adjusted annually to
reflect inflations impact on purchasing power.
4. Federal agency securities:
Guarantee by the issuing agency and provide all the safety.
There is an secondary market for agency securities that
allows investor to sell and outstanding issue in an active
and liquid market before the maturity date.
Pay slightly higher yields than direct Treasury issues.

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COMMON MARKETABLE
SECURITIES
5. Certificate of deposit (CD):
Offered by commercial banks, savings and loans and other
financial institutions.
The investor place funds on deposit at a specified rate over
a given period as evidenced b the certificate received.
Consists of small CDs from $500 to $10,000 with lower
interest rate, and larger CDs from $100,000 and more with
higher interest.
6. Commercial paper:
Unsecured promissory notes issued to the public by large
business corporations.
Commercial paper usually held to maturity by original
investor with no active secondary market.
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COMMON MARKETABLE
SECURITIES
7. Bankers acceptance:
Short-term securities that generally arise from foreign
trade.
A draft drawn on a bank for payment when presented
to the bank.
Difference from a check is that a company does not
have to deposit fund at the bank to cover the draft
until the bank has accepted the draft for payment and
presented it to the company.
8. Eurodollar certificate of deposit:
U.S. dollars held on deposit by foreign banks and in
turn lent by banks to anyone seeking dollars.
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COMMON MARKETABLE
SECURITIES
9. Passbook savings account:
The lowest yielding investment at a bank.
10. Money market fund:
An investment fund that holds the objective to earn
interest for shareholders while maintaining a net asset
value (NAV) of $1 per share.
Mutual funds, brokerage firms and banks offer these
funds.
Portfolios are comprised of short-term (less than one
year) securities representing high-quality, liquid debt
and monetary instruments.

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MANAGEMENT OF ACCOUNTS
RECEIVABLE
As sales expanding, the portion of investment
in corporate assets (accounts receivable)
increase.
There are three primary policy variables to
consider in conjunction with our profit
objective:
1. Credit standards
2. Terms of trade
3. Collection policy
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MANAGEMENT OF ACCOUNTS
RECEIVABLE
1. Credit policy:
The firm must determine the nature of the credit risk
on the basis of prior records of payment, financial
stability, current net worth and other factors.
Account receivable is created when credit extended to
the customer who is expected to repay according to
the terms of trade.
Bankers sometimes refer to the 5Cs of credit
character, capital, capacity, conditions and collateral,
as an indication of loan repaid possibility.

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MANAGEMENT OF ACCOUNTS
RECEIVABLE
1. Credit policy (cont):
Character moral and ethical quality of the individual who
is responsible for repaying the loan.
Capital is the level of financial resources available to the
company seeking the loan and involves an analysis of debt
to equity and the firms capital structure.
Capacity refers to the availability and sustainability of
the firms cash flow at a level high enough to pay off the
loan.
Conditions refers to the sensitivity of the operating
income and cash flows to the economy.
Collateral is determined by assets that can be pledged
against the loan. Where companies can pledge assets that
are available to be sold by the lender if the loan is not
repaid.

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MANAGEMENT OF ACCOUNTS
RECEIVABLE
2. Terms of trade:
The stated terms of credit extension will have a
strong impact on the eventual size of the accounts
receivable balance.
In establishing credit terms, the firm should also
consider the use of cash discount.
Offering the terms 2/10, net 30 meaning allows
deduction of 2 percent to customer from the face
amount of the bill when paying within the first 10
days, but if the discount is not taken, the customer
must pay the full amount within 30 days.
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MANAGEMENT OF ACCOUNTS
RECEIVABLE
3. Collection policy:
In assessing collection policy, a number of
quantitative measures may be applied to the credit
department of the firm:
Average collection period taking accounts
receivable divided by average daily credit sales.
Ratio of bad debts to credit sales an increasing
ratio may indicate too many weak accounts or an
aggressive market expansion policy.
Aging of accounts receivables one way of finding
out if customers are paying their bills within the
time prescribed in the credit terms.

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INVENTORY MANAGEMENT
For manufacturer, inventory are divided into
three basic categories:
Raw materials used in product
Work in progress, partially finished goods
Finished or completed goods
All these forms of inventory need to be
financed and their efficient management can
increase a firms profitability.
The amount of inventory is affected by sales,
production and economic conditions.
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INVENTORY MANAGEMENT:
LEVEL VS SEASONAL PRODUCTION
A manufacturer must determine whether a
plan of level or seasonal production should be
followed.
Level production is proportionally produce in
all year long.
Adopting level production for seasonal
businesses result high inventory buildups.
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INVENTORY MANAGEMENT:
INVENTORY POLICY IN INFLATION
For instable material price, firm can be
partially controlled by taking moderate
inventory position, i.e. do not fully commit at
one price.
Or, by hedging with a futures contract to sell
at a stipulated price some months from now.
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INVENTORY MANAGEMENT:
INVENTORY DECISION MODEL
In developing an inventory model, two basic
costs associated with inventory:
Carrying cost include interest on funds ties up in
inventory and the costs of warehouse space,
insurance premiums and material handling
expenses. Also, implicit cost associated with the
dangers of obsolescence or perishability.
Ordering cost cost of ordering and processing
inventory into stock. If average inventory is low,
orders must ne many times and causes ordering
cost higher.
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INVENTORY MANAGEMENT:
INVENTORY DECISION MODEL
Economic ordering quantity (EOQ) = 2SO/C
S total sales in units
O ordering cost for each order
C carrying cost per unit in dollars
It refers to the most advantageous amount for
the firm to order each time.

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INVENTORY MANAGEMENT:
SAFETY STOCK AND STOCK OUTS
A stock outs occurs when a firm is out of a
specific inventory item and is unable to sell or
deliver the product.
The risk of losing sales to a competitor may cause
a firm to hold a safety stock to reduce this risk.
A safety stock will guard against late deliveries
due to weather, production delays, equipment
breakdowns and the many other things that can go
wrong between the placement of an order and its
delivery.
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INVENTORY MANAGEMENT:
SAFETY STOCK AND STOCK OUTS
A minimum safety stock will increase the cost
of inventory because the carrying cost will
rise.
This cost should be offset by eliminating lost
profits on sales due to stock outs and also by
increased profits from unexpected orders that
can now be filled.

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INVENTORY MANAGEMENT:
JUST-IN-TIME INVENTORY

Just-in-time management (JIT) was designed
for Toyota by Japanese firm Shigeo Shingo.
Several basic requirement:
Quality production that continually satisfies
customer requirements.
Close ties between suppliers, manufacturer and
customers.
Minimization of the level of inventory.

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INVENTORY MANAGEMENT:
JUST-IN-TIME INVENTORY

Usually supplier are located near
manufacturers and are able to make orders in
small lot sizes because of short delivery times.
Computerized ordering/inventory tracking
systems both on the assembly line and in
suppliers production facility are necessary for
JIT to work.
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THANK YOU
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TUTORIAL QUESTIONS
1. Explain each type of common marketable
securities.
2. What are the three quantitative measures that can
be applied to the collection policy?
3. What are the 5Cs of credit that are sometimes
used by bankers and others to determine whether
a potential loan will be repaid?
4. Why might a firm keep a safety stock and what
effects is it likely to have on carrying cost of
inventory?
5. Explain the just-in-time management.
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