MANAGEMENT OF CURRENT

ASSETS
CONTENT
Introduction – Significance of Current Assets – Meaning of Cash and Cash Management –

Objectives, Motives of Holding Cash – Meaning and Definition of Receivables – Cost of

Maintaining Receivables – Factors influencing the size of Receivables - Objectives of Receivables

Management – Problems on Debtors Turnover Ratio, Average Collection Period, Creditors

Turnover Ratio, Average Payment Period. Inventory Management – Meaning and Definition of

Inventory – Elements of Inventory- Motives of holding the Inventory – Costs associated with

Inventory – Techniques of Inventory Management (Concepts Only)

INTRODUCTION

Capital required for a business can be classified under 2 main categories

Fixed capital

Working capital
MEANING OF WORKING CAPITAL
 Working Capital refers to that part of the firm’s capital which is required for financing, short

term, or current assets such as cash, marketable securities, debtors of inventories, funds thus
invested in current assets keep revolving fast and are being constantly converted into cash and
thus it is known as revolving or circulating capital.
DEFINITION OF WORKING
CAPITAL
 According to ‘Shubin', "Working Capital is the amount of
funds necessary to cover the cost of operating the
enterprises”
CONCEPTS OF WC:

Balance sheet concept: There are 2 interpretation of WC under this concept

 Gross WC : It is the capital invested in total current assets of the enterprise.

 Example of current assets: Cash in hand, bank balance, B/R, Sundry debtors, inventories of
stocks such as raw materials, work in progress finished goods, etc.
Net WC : It is the excess of C.A over C.L .
NWC = CA –CL
 Examples of Current Liabilities: B/P, Sundry creditors, Short term loans, Dividends payable,
BOD, Provision for tax.
Operating Cycle/Circular flow concept – The cycle starts with the purchase of raw materials and
other resources and ends with realisation of cash from the sale of finished goods. It involves
purchases of Raw materials and stores its conversion into finished goods through work-in progress
with progressive of increment of labour and service cost, conversion of finished stock into sale, drs
and receivables and ultimately realisation of cash and this cycle continuous again from cash to
purchase of RM and so on. The speed or time duration required to complete one cycle determines
the requirements of WC. Longer the period of cycle larger is the requirement of WC and vice-
versa.

Gross Operating cycle =Raw Material conversion period + W-I-P conversion Period + finished
goods conversion Period + Receivables conversion Period

Net operating Cycle = GOCP - Payable Deferral period

WHAT ARE CURRENT
ASSETS?
 The Current Assets account is a balance sheet line item listed under the Assets section, which
accounts for all company-owned assets that can be converted to cash within one year. Assets
whose value is recorded in the Current Assets account are considered current assets.
 Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable
securities, pre-paid liabilities, and other liquid assets. Current Assets may also be called
Current Accounts.
 TYPES OF CURRENT ASSETS
 Many assets can be considered current by different businesses throughout all industries. In general,
most industries group their current assets into these sub-accounts; however, you might see others:
• Cash and Cash Equivalents
• Marketable Securities
• Accounts Receivable
• Inventory
• Prepaid Liabilities/Expenses
• Other Short-Term Investments
 On the balance sheet, the Current Asset sub-accounts are normally displayed in order of current
asset liquidity. The assets most easily converted into cash are ranked higher by the finance division
or accounting firm that prepared the report. The order in which these accounts appear might differ
because each business can account for the included assets differently.
1. Cash and Cash Equivalents
 By definition, assets in the Current Assets account are cash or can be quickly converted to cash.
Cash equivalents are certificates of deposit, money market funds, short-term government bonds,
and treasury bills.
 To qualify as current assets, these items must not have any restrictions that inhibit their short-term
liquidity.
2. Marketable Securities
 Marketable Securities is the account where the total value of liquid investments that can be quickly
converted to cash without reducing their market value is entered. For example, if shares of a
company trade in very low volumes, it may not be possible to convert them to cash without
impacting their market value. These shares would not be considered liquid and, therefore, would
not have their value entered into the Current Assets account.
3.Accounts Receivable
 Accounts Receivable—the value of all money due to a company for goods or services delivered or
used but not yet paid for by customers—is entered in Current Assets as long as the accounts can be
expected to be paid within a year. If a business makes sales by offering longer credit terms to its
customers, some of its receivables may not be included in the Current Assets account.
4. Inventory
 Inventory—which represents raw materials, components, and finished products—is
included in the Current Assets account. However, different accounting methods can adjust
inventory; at times, it may not be as liquid as other qualified current assets depending on
the product and the industry sector.
 For example, there is little or no guarantee that a dozen units of high-cost heavy earth-
moving equipment may be sold over the next year, but there is a relatively high chance of a
successful sale of a thousand umbrellas in the coming rainy season.
 Inventory also blocks working capital. If demand shifts unexpectedly—which is more
common in some industries than others—inventory can become backlogged.
5.Prepaid Liabilities
 Prepaid expenses—which represent advance payments made by a company for goods and
services to be received in the future—are considered current assets. Although they cannot
be converted into cash, they are payments already made. These payments free up capital
for other uses. Prepaid expenses might include payments to insurance companies or
contractors.
6.Other Short-Term Investments
 Many companies categorize liquid investments into the Marketable Securities account, but
some can be accounted for in the Other Short-Term Investments account. An example
would be excess funds invested in a short-term security, putting the funds to work but
keeping the option of accessing them if needed.
 FORMULA FOR CURRENT
ASSETS
 The total current assets formulation is a simple summation of all the assets that can be converted to
cash within one year. If a current asset subcategory is not listed in this formula, we can add it to
Other Liquid Assets.
 Current Assets = C + CE + I + AR + MS + PE + OLA
 where:

1. C = Cash
2. CE = Cash Equivalents
3. I = Inventory
4. AR = Accounts Receivable
5. MS = Marketable Securities
6. PE = Prepaid Expenses
7. OLA = Other Liquid Assets​
 FINANCIAL RATIOS THAT USE CURRENT
ASSETS
 The following ratios are commonly used to measure a company’s liquidity position. Each ratio uses different
Current Assets sub-accounts compared against the value of a company's Current Liabilities account:
• The current ratio measures a company's ability to pay short-term obligations and considers a company's Total
Current Assets relative to the Current Liabilities account—the value of debts that come due within one year.
• The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. It
divides the value of the Cash and Cash Equivalents account, the Marketable Securities account, and the
Accounts Receivable account by the value of the Current Liabilities account. Inventory is excluded from this
calculation because inventory liquidity can vary.
• The cash ratio measures the ability of a company to pay off all of its short-term liabilities immediately—
using cash—and is calculated by dividing the value of the Cash and Cash Equivalents account by the value
of the Current Liabilities account.
 The cash ratio is the most conservative as it considers only cash and cash equivalents. The current ratio is the
most accommodating and includes various assets from the Current Assets account. These multiple measures
assess the company’s ability to pay outstanding debts and cover liabilities and expenses without liquidating
its fixed assets.
 SIGNIFICANCE OF CURRENT ASSETS

1. Helps a business perform its daily operations

 Current assets like cash, accounts receivable, and inventory ensure the business runs smoothly on a
daily basis. All businesses need cash to pay for immediate expenses.
 Still, accounts receivable gives you an idea of the amount of money you'll have in the near future,
allowing you to plan ahead. Meanwhile, inventory ensures you have enough products to meet
customer demand and generate cash flow.
2. Ensures you can cover routine expenses
 All businesses have routine expenses like rent, payroll, tools, inventory, machinery, and so forth.
Current assets ensure you have the cash flow to cover these expenses on time. The cash generated
from current assets allows you to maintain good financial health and relationships with suppliers
while avoiding disruptions in operations.
 For example, if you run out of inventory, you can't sell products, meaning you won't generate cash.
At the same time, your operations can come to a standstill because your employees won't have
anything to do if they're not filling orders and communicating with customers.
3. Helps with capital management
 Working capital is the money available to fund your day-to-day operations and is the difference between
a company's current assets and liabilities. By managing accounts receivable, cash, and other current
assets, your business can avoid cash flow problems while maximizing profitability.
4. Contributes to a company's financial stability
 Current assets contribute to your business's financial stability because they represent your liquidity and
how much money you have available to use. Having enough current assets ensures you can meet your
financial obligations while maintaining a positive cash flow and sustainable growth.
 Good financial stability is key if you want to maintain a good reputation and attract investors or take out
a business loan. In addition, knowing your business is financially healthy can reduce your stress,
allowing you to focus less on worrying about money and more on growing your business.
5. Plays a crucial role in decision-making
 Making data-driven decisions is crucial if you want your business to grow. Current assets can help you
monitor your liquidity to assess the overall financial health of your company, identify trends, and make
better decisions about pricing, production, marketing, and allocating resources.
 In addition, understanding your current assets can free up more cash for growth opportunities to take your
business to the next level, such as entering new markets, expanding across borders, or acquiring new
businesses.
Cash MANAGEMENT
 In the narrow aspect cash management cash only includes currency notes and coins whereas
in a broader aspect it includes its equivalents like marketable securities, bank deposits or
other instruments that are highly liquid.

Meaning cash management: -

 Cash management deals with the following:
Cash inflows and outflows
Cash flows within the firm
Cash balances held by the firm at a point of time

Cash management needs strategies to deal with various aspects facts of cash. Following are
some of the facts: -
Cash planning
Cash forecasts and budgeting
Factors determining cash needs: -
Cash requirements depends upon multiple factors which are as follows: -
Credit position of the firm
Status of firm’s receivables
Status of firm’s inventory a/c
Nature of business enterprise
Management’s attitude towards risk
Amount of sales in relation to assets
Cash inflows and cash outflows
Cost of cash balance
MOTIVES OF HOLDING CASH:-

1.Transaction motive

Business firm as well as individuals keep cash because they require it for meeting demand for cash flow arising out of day to

day transactions. In order t meet the obligations for cash flows arising in the normal course of business , every firm has to

maintain adequate cash balance. A firm may require cash for making for purchase of goods & services.

These cash outflows are met out of cash inflows arising out of cash sales or recovery from the debtors. Further, the cash inflows

& outflows are not fully and exactly synchronized, a firm is always required to maintain a minimum cash balance with it. The

necessity of keeping a minimum cash balance to meet payment obligations arising out of expected transactions, is known as

Transactions motive for holding cash.

2.Precautionary motive

The precautionary motive for holding cash is based on the need to maintain sufficient cash to act as a cushion or buffer against unexpected

events. A firm should maintain larger cash balance than required for day to day transactions in order to avoid any unforeseen situation

arising because of insufficient cash. The necessity of keeping a cash balance to meet any emergency situation or unpredictable obligation,

is known as precautionary motive for holding cash.

The amount of cash, a firm must hold for transaction & precautionary depends upon;

a) Degree of predictability of its cash flows

b) Its willingness and capacity to take risk of running hot of cash, and

c) Available immediate borrowing powers.

3.Speculative motive

 Cash may be held for speculative purpose in order to take advantage of potential profit making situations.

A firm may come across an unexpected opportunity to make profit, which is not possible in normal
business routine. The motive to keep balance for these purpose is obviously speculative in nature. The
firm’s desire to keep some cash balance to capitalize an opportunity of making an unexpected profit is
known as speculative motive. The speculative motive provide a firm with sufficient liquidity to take
advantage of unexpected profitable opportunity that may suddenly appear ( and just suddenly disappear if
not capitalize immediately.)
 4.Compensation motive:

 Commercial banks require that in every current account , there should always be a minimum

cash balance. This minimum cash balance is generally not allowed by the bank to used for
transaction purpose and therefore , it becomes a sort of investment by the firm in the bank. In
order to avail the convenience of holding a current account , the minimum cash balance must be
maintained by the firm and this provides the compensation motive for holding cash.
 OBJECTIVES OF CASH MANAGEMENT: -
1. Cash Flow Management
 The primary objective of cash management is controlling cash inflows and outflows. Most importantly, this approach
ensures a lower fund outflow and enhances inflow, promoting an optimistic financial position of a company. Cash
management identifies all the sources of cash outflows and adopts measures to restrict them; thereby reducing
operational expenses.
2. Effective Planning of Future Funds
 It optimizes cash in a way that makes future cash reserves meet short-term obligations. This also assists in planning
better capital expenditure and assessing financial ratios of debt and equity. In other words, with effective planning the
company will also have sufficient reserves of liquid cash for catering to any unforeseen expenses.
3. Meet the Requirement of Unexpected Expenses
 One of the primary objectives of keeping enough liquid cash through effective cash management is catering to
unexpected expenses. This may include the breakdown of machinery or any other uncalled occurrence for which the
company should not fall out of surplus cash.
4.Avoid Insolvency
 Ineffective cash management may result in a shortage of funds which may result in failure in bill payment. This, in
turn, may lead to insolvency and demolish the goodwill of that organisation.
CASH BUDGET

It is an estimate of cash receipts and disbursements of cash during a

future period of time. According to Guthman & Dougall “Cash is an estimate
of cash receipts and disbursements for a future period of time “.
RECEIVABLES MANAGEMENT
 MEANING AND DEFINITION OF RECEIVABLES

 A receivable is created any time money is owed to a firm for services rendered or products

provided that have not yet been paid. This can be from a sale to a customer on store credit, or
a subscription or installment payment that is due after goods or services have been received.

 The amount which is receivable by the firm for the goods sold or services rendered during the

course of business. They are also called as a/c receivable, trade receivables or book debts.

 According to Hampton, “Receivables are asset account representing amount owned to firm

as a result of sales of goods or services in ordinary course of business”.

Receivables Management

The process of taking decision regarding the investment in trade

debtors is known as receivables management. It is a series of steps and
procedures which review the cost and benefit analysis, during the
formulation of credit policy.
 Cost of Maintaining Receivables:

This is the cost incurred for operating and managing the collection and credit department of a
firm. This includes the administrative cost of the credit department, salary and commission paid to
collection staff, the cost paid for telephone and communication, and so on.

 Cost of maintaining receivables Examples:

Cost of financing
Administrative cost
Delinquency cost
Cost of default by customers
Provision for bad debts
 TYPES OF ACCOUNTS RECEIVABLES

 1. Trade receivables
 Trade receivables are amounts customers owe for selling goods or services as part of the normal
course of business.
 2. Non-trade receivables
 Non-trade receivables encompass amounts owed to the business that are not directly related to its core
operations. Examples include tax refunds, interest receivables, or reimbursements from third parties.
 3. Secured receivables
 Secured receivables are backed by collateral, meaning that the business holds long and short-term
assets or guarantees as security if the customer fails to pay.
 4. Unsecured receivables
 Unsecured receivables do not have any specific collateral attached to them, making them riskier for
the business in case of non-payment.
COMPONENTS OF ACCOUNTS RECEIVABLE
 1. Invoicing

 Invoicing is the process of generating bills or invoices for the goods or services provided to customers. It includes details
such as the amount due, payment terms, due date, and other relevant information.
 2. Payment terms

 Payment terms define the period within which customers are expected to settle their outstanding balances. Common payment
terms include Net 30, Net 60, and Net 90, indicating the number of days within which the payment should be made.
 3. Aging of receivables

 The aging of receivables refers to categorizing outstanding invoices based on the number of days they have been overdue. It
helps identify which payments are pending for extended periods and need immediate attention.
 4. Collections

 Collections involve the process of following up with customers to ensure timely payment. It may include sending reminders,
making phone calls, or employing collection agencies for more severe delinquency cases.
 5. Bad debt provision

 Bad debt provision is an allowance set aside by the business to account for the likelihood of some customers defaulting on
their payments. It helps in estimating the potential losses due to uncollectible accounts.
FACTORS AFFECTING THE SIZE OF RECEIVABLES

Size of credit sales

Credit policies
Terms of trade
Expansion plans
Relation with profits
Credit collection effort
Habits of customer
Stability of sales
Size and policy of cash discount
Bill discounting and endorsement
OBJECTIVES :-

Book debts are used as marketing tool for improvement of business

To maintain optimum level of investment in receivables
To have effective financial planning
To have proper co-ordination with respect to production sales, profit and cost function of
the firm
 STEPS IN RECEIVABLES MANAGEMENT. :-
 Determining credit policy
 Determining credit terms
 Evaluating the credit appliance
 Gathering of credit information about customers
 Investigating their credibility
 Credit analysis
 Fixing credit limits
 Deciding collection procedure
 Determining collection policies and method
 Control and analysis of receivables
 Debtors turnover ratio
 Ageing schedule of Debtors
PROBLEMS
1) Calculate DTR and average debt collection period for the year 2015-16 from the following info
 Particulars 2015(Rs) 2016(Rs)
 Sundry Debtors 15,000 45,000
 B/R 5000 15000
 Provision for Doubtful Debts 1500 4500
 Total sales = 2,20,000
 Sales return = 20,000
 Cash sales = 40,000
INVENTORY MANAGEMENT

Inventory denotes stock of goods International accounting standard committee (IASC) defines
inventory as Tangible property: -
Held for sale in the ordinary course of business
In the process of production.
To be consumed in the process of production of goods or services for sale
 MEANING :-

Inventory management implies proper planning relating to purchasing, handling and storing
and accounting of goods. It decides what to purchase, how to purchase and where to purchase
from, where to store, etc.
It ensures that the firm maintain optimum level of inventory, minimising the chances of over
and under stocking which may cause interruption in production process.
ELEMENTS OF INVENTORY :- (NATURE)

 Raw Materials (Direct and Indirect material)

 WIP

 Consumables

 Finished goods

 Stores and spares

MOTIVES OF HOLDING INVENTORIES

Transaction motive

Precautionary motive

Speculative motive
TYPES OF INVENTORY

Movement inventories

Buffer inventories

Anticipation inventories

Decoupling inventories(For supporting other industries)

Cycle inventories(Finding the different time required for calculation)

Independent demand inventory (finished goods)

Dependent demand inventory

COST ASSOCIATED WITH INVENTORY :-

Purchasing cost

Ordering/setup/procurement cost

Carrying and holding cost

Stock out cost

NEED OF INVENTORY MANAGEMENT :-

To improve customer service

To achieve or attain economies of scale
Permits purchase and transportation economies
Hedge against price changes
Protects against demand and lead time uncertainties
Hedge against contingencies
Minimising the wages
Optimum Investment and efficient use of capital
Promotion of manufacturing efficiency
Control of production level
INVENTORY MANAGEMENT TECHNIQUES :-

Just in time (JIT)

Vital Essential Desirable analysis(VED)
ABC Analysis – Always Better Control
Re-order levels
Economic order quantity(EOQ)
ECONOMIC ORDER QUANTITY(EOQ)-

Economic order quantity(EOQ)- It is the point at which the inventory carrying cost is equal to
order cost. In determining EOQ is assumed that cost of managing inventory is solely made up of 2
types
Ordering cost and
Carrying cost
Assumptions :-
The supply of goods is satisfactory, the goods can be purchase whenever they are needed.
The quantity to be purchased by concerned is certain
The prices of goods are stable it results to stabilize carrying cost.
EOQ = square root of ( 2AS / I) A=Annual consumption/in units
S=Cost of placing order
I= Inventory carrying cost of one unit
 PROBLEMS
1)From the following Info. Find out EOQ
 Annual usage = 10,000 units
 Cost of placing and receiving one order = Rs 50
 Cost of materials/units = Rs 25
 Annual carrying cost of one unit = 10% of inventory value

2)From the following Info about materials calculate EOQ

 Annual usage=2,00,000Rs
 Cost of placing and receiving an order =Rs 80
 Annual carrying cost = 10% of inventory value (0.1)

 3)The annual demand for product 6400 units the cost of procurement is Rs 75 the unit cost is Rs 6 and inventory carrying
cost/unit/annum is 25% of the inventory cost.
 4) XYZ ltd produces the product which has a monthly demand of 4000 units. The product requires component X which is
purchased at Rs 20. For every finished product, one unit of the component is required, the ordering cost is Rs 120/ order the
holding cost is 10% p.a. Calculate EOQ
 ASSIGNMENT QUESTIONS
SECTION A
1. What is cash budget?
2. Differentiate Gross working capital and Net working capital.
3. Mention motives of holding cash
4. Write important dimensions of a firm’s credit policy
5. What do you mean by transaction motive for holding cash?
6. What do you mean by lock box system of decentralized collection policy of cash management?
7. Expand FSN and SDE
8. What is ageing schedule?
9. What is factoring?
10. What do you mean by EOQ?
11. Which is most commonly used tools of inventory management.
a). ABC b).FSN c) Inventory turnover analysis d) All of the above
SECTION B
1. Write a note on working capital?
THANK YOU