CHAPTER 4: MANAGEMENT OF CURRENT ASSETS
EOQ = √2 X S X O / H
S = no of usage per period
Ordering Cost Admin cost to place
O = cost per order
and receive order
H = cost of holding the
Holding Cost Variable cost/unit to
stocks per period
hold the stocks
EOQ =number of unit to order per
THC = O X (S/EOQ) + H X
ROP = level of stock (in unit) to
reach before reorder the stocks.
ROP = Lead time (in days) X
Lead time = no of days it takes from
Usage per day
the day we place the order to the
day the stocks arrive
Classifying the inventory into 3
A: Highest value, verified daily
and closely monitored
C: Large no. of stocks but requires
low investment; 2-bin technique is
The objective is to minimize the
inventory – order the inventory
when they are needed.
Need to have good suppliercustomer relationship for this to
Determine what type to order and
(MRP) when to order them.
Who does something, then he or she must do it precisely!
~Nabi Muhammad S.A.W~
MANAGING ACCOUNT RECEIVABLE
High debts or low
Can they survive if
Do they have cash
Do they have
assets for security?
• Relaxation of credit selection standards may lead
to higher sales, higher debtors and higher
• Term of sales: for credit to be extended to buyers.
• Stated as a/n, net c
• Annualized Opp. Cost = [a/(1-a)] x [360/(c-b)]
• An incentive for customer to pay earlier.
• Help to reduce bad debts and may increase sales.
• Do CBA to know if cash discount is profitable.
Credit Monitoring and
Size of Debtors
• Send letter to remind, then call if no response
• Personal visit by salesperson --> attorney if fails
• Legal action if all else fails.
• Nature of business: Sell on cash basis or credit?
• Level of Sales: Higher of sales, higher the debtors.
• Credit and Collection Policies
transaction of business
(emergency cash) is the
Eg: Salary, utilities & etc.
For profit-making purpose
Eg: To buy in bulk when
the price reduces.
We need to plan our cash
prepare cash budget (the forecast of cash inflows and cash
Cash budget usually covers the forecast of cash for period of one year breaks down to
monthly budget in the event the cash flow is uncertain or seasonal. Cash budget enables the company whether to expect cash surplus or cash deficit.
Management of Cash Receipts and Cash Payments.
We need to manage cash float
The period between
we mail the payment
and its receipt
it refers to the money that we have paid but cannot be used.
The period between
receipt of payment to
the deposit of the
The time taken for the
deposited cheque to
be cleared by bank.
So, how to manage these floats?
o Manage our debtors’ collections time using lockbox system. A system where we rent a post office box where customers can mail their payments
our bank will regularly empty the box and make immediate
We can increase out PDP (payment deferral period) by increasing the floats when we make payments.
We need to concentrate our cash into one bank to create large pool of funds for...
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