Question

Business Finance

In Chapter 7 we take up the issue of managing current assets. Discuss one major thing the financial manager can do to assure the highest possible return on investment for each of the following: cash, marketable securities, accounts receivable, and inventory. Be sure to explain your choices.

Answer 1

The return on investment in each of the current asset can be maximized with the use of following approach:

Cash:

A company can invest surplus cash in marketable/short-term securities. This will help the company to earn some money in the form of interest income on its excess cash which is lying idle and serving no purpose at all. This way, the company will be able to maximize its return on investment on its cash component of current assets.

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Marketable Securities

The company can invest in marketable securities which has maturity period similar/close to its short trem obligations/liabilities. This will help the company to reduce the gap between the availability (as marketable securities are highly liquid and can be converted into cash as and when the need arises) and disbursement of cash and earn some money on its extra money.

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Accounts Receivable

The company can change its credit policy and offer discounts to customers/debtors in order to attract early payments from them. This will help the company to quickly convert its sales into cash and use the same for business operations rather than use other means obtaining money (such as loans/borrowings from bank). Another option is to sell the accounts receivables to a factor in exchange for cash. This is particularly true for receivables which are considered to be non-recoverable by the company.

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Inventory

The company can employ a system of just in time inventory wherein the inventory is procured as and when necessary. This approach will help in reducing the cost of ordering, holding and maintaining inventory, thereby resulting in a signficant decline in the cost of managing inventory and increasing the company's return on investment in this form of current asset.