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• Module overview
• 1. Introduction to budgets
  • 1.1 Introduction to the Budget Process
  • 1.2 Budget types
    • 1.2.1 The Budget Guidelines
    • 1.2.2 The Sales Budget
    • 1.2.3 Budget for Operating Expenses
    • 1.2.4 Profit Budget
    • 1.2.5 Cash-Flow Budget
    • 1.2.6 The Financial Position Budget
    • 1.2.7 Additional Types of Budgets
    • 1.2.8 Additional Budgeting Techniques
  • 1.3 The budget process and its objectives
  • 1.4 Budgets for performance management
    • 1.4.1 Master budget

• 2. Planning the budget

  • 2.1 Planning the Budget
    • 2.1.1 Business income
    • 2.1.2 Visual representation of sales and budgets
    • 2.1.3 The break-even point
    • 2.1.4 Contribution margin

• 3. Controlling the budget

  • 3.1 Controlling budgets
    • 3.1.1 Variance analysis
    • 3.1.2 Taking action to achieve the objectives of the budget
    • 3.1.3 Resource acquisition and usage

• 4. Introduction to Financial Management

  • 4.1 Business Objectives
    • 4.1.1 Maximising profit
    • 4.1.2 Maximising wealth
  • 4.2 Ethics and conflicts in business
    • 4.2.1 The dilemma of ethics in finance, investment and accounting
  • 4.3 Financial Managers
    • 4.3.1 Financial information and objectives
    • 4.3.2 Accounting, the financial information system
  • 4.4 The finance function
    • 4.4.1 Business and financial calculations

• 5. Elements of Business and Financial Management

  • 5.1 Business Structures
    • 5.1.1 Sole proprietors
    • 5.1.2 Partnerships
    • 5.1.3 Corporations and companies
  • 5.2 Reporting financial data and information
  • 5.3 Financial reports
    • 5.3.1 Statement of financial performance (profit and loss statement)
  • 5.4 Capital Markets
    • 5.4.1 Capital Markets
  • 5.5 Regulation and financial institutions
    • 5.5.1 Interest rates, supply and demand and market efficiency
  • 5.6 An overview of taxation implications

• 6. Obtaining Funds: Sources of Long Term and Short Term Finance

  • 6.1 Finance from external sources
    • 6.1.1 Equity finance
  • 6.2 Debt
  • 6.3 Long-term debt
    • 6.3.1 Debentures and unsecured notes (bonds)
    • 6.3.2 Mortgage loans
  • 6.4 Hybrids of debt and equity
  • 6.5 Leasing
    • 6.5.1 Operating Lease
    • 6.5.2 Financial Lease
    • 6.5.3 Distinguishing between an operating lease and a financial lease
    • 6.5.4 Sale and Leaseback
    • 6.5.5 The issue of gearing
  • 6.6 Short-term debt
    • 6.6.1 Bank Overdrafts
    • 6.6.2 Fully drawn advance
  • 6.7 Retained Earnings, internal funds and depreciation

• 7. Managing Working Capital

  • 7.1 Managing current assets and current liabilities
    • 7.1.1 Appropriate level of working capital
  • 7.2 Managing inventories
    • 7.2.1 Reasons for holding inventories
    • 7.2.2 The economic order quantity (EOQ)
    • 7.2.3 Re-order point (ROP)
    • 7.3.4 Safety stock (SS)
    • 7.2.5 Quantity discounts
  • 7.3 Managing trade debtors (accounts receivable)
    • 7.3.1 Credit policies
    • 7.3.2 Collection period
    • 7.3.3 Managing cash and near-cash assets
    • 7.3.4 Managing trade creditors (accounts payable)

• 8. Job Costing

  • 8.1 Accounting information about product, service and project costs
    • 8.1.1 Full costing
    • 8.1.2 Single product/service line
    • 8.1.3 Multi product/service
    • 8.1.4 Direct and indirect costs
  • 8.2 How costs behave
    • 8.2.1 Allocating Overheads
  • 8.4 Cost drivers
    • 8.4.1 ABC and the service industry
  • 8.5 Conclusion

7.1 Managing current assets and current liabilities

Liquidity, you will recall, is a firm's ability to meet its short-term debts, and cash is the most liquid asset, because it can be spent immediately. Non-cash current assets, mainly receivables and inventory, are less liquid because it may take time to turn them into cash. For example, ratios measuring receivables collection periods and inventory turnover rates, estimate how long it is taking to convert receivables and inventory into cash. In general the more current assets a firm holds the greater its liquidity (measured by the current ratio). If liquidity is, or becomes, very important managers may decide to hold proportionately more cash and/or marketable securities (measured by the quick ratio) than non-cash assets, receivables and inventory.

There is always a trade-off in holding high levels of cash assets because they earn very little return. In general, managers can only reduce the risk of becoming less liquid by reducing the overall return on current assets, and on total assets (the ROA measure).

Text reading

Atrill, Mclaney, Harvey & Jenner, pages 410-411

Note Figure 12.1 The working capital cycle

Another factor affecting net working capital is the firm's use of current versus long-term debt. Again, this poses the risk-return trade-off. All else being constant, the more that managers rely on short-term debt or current liabilities to finance investment in assets the lower will be the firm's liquidity. Think about this!

However, using current liabilities costs less (in interest) than long-term debt and is a flexible means of funding fluctuating needs for assets.

The major disadvantage of short-term debt is that it must be repaid or 'rolled over' more often, and any deterioration in the firm's overall financial condition may be made worse if the firm can't refinance the short-term debt. So liquidity and longer-term solvency are linked.

Another risk is linked to the interest rates. Every time funding arrangements are renewed the interest rates will also be reviewed. Any change in the lender's perception of the firm's riskiness will lead to higher interest being charged. So short-term interest rates are likely to change more often than interest on long-term loans.

Where possible cash should be held in interest bearing accounts and drawn on only when actually needed to pay accounts, otherwise there is an unnecessary opportunity cost in terms of lost interest.

The following reading explains the management function of cash and marketable securities. Note the formula for calculating optimum cash withdrawal amounts. You don't need to learn the formula! Make brief notes of the main points.

Reading 1

Meredith, GG., 1994. Extract from topic 11, 'Management of working capital'. In Accounting and Financial Management for Business Decisions . McGraw-Hill Book Company Pty Ltd., Roseville , NSW. Pages 378-380.

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