CHAPTER 16

MANAGEMENT OF CURRENT ASSETS

Objective of Current Assets Management

Normally, current assets of a firm are cash, marketable securities, accounts receivable and
inventory. The primary concern in managing current assets should be for safety and liquidity – with
secondary attention placed on maximizing profitability.
Cash Conversion Cycle
Another consideration in managing current assets is the cash conversion cycle. It is the average
length of time involved – from payment of raw materials to the collection of accounts receivable. This is
determined using the following equation:

Cash Management
a. Objective of Cash Management
Cash management involves the maintenance of a cash and marketable securities
investment level which will enable the company to meet its cash requirements and at
the same time optimize the income on idle funds
Objectives:
1. To meet the cash disbursement needs
2. To minimize the funds committed to transactions and precautionary cash balances;
and
3. To avoid misappropriation and handling losses in the normal course of business
b. Reasons for Holding Cash
Even though cash is non-interest bearing, firms still holds cash for the following reasons:
1. Transaction Motive –cash is needed for the operation of a business which regards
purchases and sales activities
2. Precautionary Motive – cash is held beyond the normal operating requirement level
in order to provide safety against contingencies such as unexpected slow-down in
accounts receivable collections.
3. Speculative Motive – cash is held ready for profit making or investment
opportunities such as block of raw materials inventory offered at discounted prices.
4. Contractual Motive – a company may be required by bank to maintain a
compensating balance in its account as a condition of loan extended to it
c. Managing Cash Flows
Determining the Cash need
1. Cash budget
2. Cash Break-even Chart
It shows the relationship between the company’s cash needs and cash
sources. It indicates the minimum amount of cash that should be
maintained to enable the company to meet its obligations.
3. Optimal Cash Balance
d. Techniques for Lessening Cash Needs
 One of the reasons why management uses cash management is to lessen the use of cash
needs while maintaining the same level of activity and profitability in a business. This
may be accomplished by:
1. Accelerating collections
a. Accelerating collections

b. Slowing disbursements
c. Reducing the transactions and precautionary idle cash
2. Slowing disbursement
a.
3. Reducing the transactions and precautionary idle cash
Marketable Securities Management
a. Objective of Marketable Securities Management
b. Reasons for Holding Marketable Securities
c. Factors Influencing the Choice of Marketable Securities