1. Understand that companies hold liquid asset balances for several reasons, including
a. To conduct transactions
b. For precautionary reasons
c. To meet future requirements
d. For speculative reasons
2. Understand that the optimal liquid asset balance reflects risk and return trade-offs and is a function of the following:
a. Holding costs, which are the opportunity returns the company could earn on these funds in their next best alternative use
b. Shortage costs, which include possible lost cash discounts, deterioration of the company’s credit rating, higher interest expenses, and financial insolvency
3. Understand that the primary objective in controlling cash collections is to reduce the delay between when the customer mails the payment and when it becomes a collected balance in the firm’s bank account
a. Higher levels of working capital generally reduce profitability
b. Higher levels of working capital reduce the risk of financial difficulties
4. Understand that the major methods for reducing collection time include
a. Decentralized collection centres and concentration banking
b. Special handling of large remittances
5. Understand that the primary objective in controlling cash disbursements is to slow payments and keep the firm’s funds in the bank as long as possible
6. Understand that the major methods of slowing disbursements include
a. Scheduling and centralizing payments (zero-balance systems)
b. Maximizing cheque-clearing float
c. Stretching payables
d. Use of drafts rather than cheques
7. Understand that electronic funds transfer systems, including customer-directed computer movements of funds from one account to another, have the potential to greatly reduce the float in financial transactions
8. Understand that financial managers need to avoid overstepping the bounds of legal and ethical behaviour in making cash collection and disbursement decisions
9. Understand that the primary criteria the firm should use in selecting marketable securities include default risk, marketability (or liquidity), maturity date, and rate of return
10.Understand that accounts receivable management refers to the decisions
