I.
Current
Asset Management
Indeed, the objective of managing the current assets is
to ascertain the suitable arrangement of current asset components (i.e. cash,
marketable securities, short-term receivables, and inventories) taking into
account the safety, liquidity, and profitability of the operations of an
entity. As we see, this objective is
broken down into different ideas as it goes through specific sectors in current
asset management.
First to note is cash and marketable securities management
that involves the holding of right level of cash and marketable securities to
meet the entity’s needed cash with an objective of investing these extra cash
for a return, while holding enough funds to reassure future needs. In addition, entities hold cash for not a
single reason. The reasons may be to use
of cash to pay planned expenses (transaction); to keep cash for emergency
purposes for some anticipated and unanticipated contingencies
(precautionary);having excess funds for some investment opportunities
(speculative); or keeping a certain percentage of borrowed funds (e.g.
compensating balance) as required by the lending institutions (contractual). Same with cash, there are also reasons why an
entity is maintaining marketable securities such as, they serve as a substitute
for cash, they are held as temporary investments, and they are built up to meet
some other requirements such as tax payments or a maturing bond issues. As much for the reason, there are also
factors considered in choosing marketable securities which are the risks,
maturity, and yield. Some types of marketable
securities would be money market instruments, treasury bills, commercial
papers, and the like.
Second is accounts receivable management where there are
plans and policies related to transactions on account and covering the
maintenance of receivables at a certain forecasted level and
collectability. Its objective is to find
the best level of outstanding receivable and its desirable level of bad debts.A
large influence for this management is the credit policy of an entity. These guidelines cover credit standards which
refer to the minimum financial strength of acceptable credit customer and the
amount available to different customer.
In other words, it measures credit quality and credit worthiness for
some factors like character, capacity, capital, collateral, and conditions. Moreover, credit policy also influences
credit terms or the length credit period, collection period which refers to the
procedure of the entity to collect past-due accounts, and delinquency/default.
Last given is the inventory management which aims to
settle the level of inventory (i.e. raw materials, goods-in-process, finished
goods, factory supplies, and merchandise) that balances the budgets of savings,
carrying costs, and inventory control.
This comprises of planning and monitoring strategies and policies to
satisfactorily meet production and merchandising requirements and minimize
related inventory cost.Of course, it is the responsibility of the management to
monitor and maintain sufficient amount of inventory to insure a smooth
operation and avoid excessive and slow-moving inventory. Inventory techniques involve inventory
planning where there is a determination of quality, quantity, location, and
time of ordering. Another inventory
technique is the inventory control or the regulations of inventory within a
budgeted level.
Now we consider thinking that there are no exact,
standard, and common plans for all entities.
All depends on the different nature of operations as well as to consider
the fluctuations of the entities inflows and outflows.
II.
Financing
Current Asset
There are two major
challenges faced in financing the entity’s current assets. These are (1) determining the level of
short-term financing the entity should use and (2) selecting the source of short-term
financing.
Indeed, the basic
factors why these arguments arise and the basic issue to be considered in
choosing alternative short-term financing opportunities are
a) The
effective cost of credit (i.e. short-term debt is less expensive, short-term rates
are usually lower than long-term debt),
b) The
availability in the amount needed and for the period of time.
c) Risk
(i.e. short-term debts are riskier because short-term interest rates may
fluctuate and more frequent debts servicing is required),
d) Flexibility
for short-term credit is usually more flexible than long-term debt. Short-term loans can be arrange quickly
e) Restrictions:
some lenders may execute restrictions, such as requiring a minimum level of net
working capital.
In connection to
these, short-term funds are acquired through either unsecured credit or secured
loans. Unsecured credit comprise of
accruals, trade credit, bank loans, and commercial papers. Secured loans consist of the pledge of
specific assets as collateral in the event the borrower defaults in payment of
principal and interest.
In addition, the inherent
policies in which must be strategize by the management are the maturity
matching that aims to match maturity of assets and liabilities; the aggressive
approach which denotes that permanent assets must be financed short-term debt ;
and the conservative approach saying that permanent assets must be financed by
permanent capital.
Sources: Fundamentals of Financial Management by Brigham
Financial Management 1 by Ma. Elenita Balatbat Cabrera
Management Advisory Services Reviewer by Ma. Elenita Balatbat Cabrera
Management Advisory Services Reviewer by Rodelio S. Roque
