Model 2 Assignment 1 Discussion Financial Management at Argosy University

M2A1: Discussion Question:

The management of current assets and current liabilities in the short run can lead to several challenges for the financial manager. What are some of the more common challenges or problems encountered by the firm in this regard, and what are the possible solutions? Explain your answers.

Financial Managers experience short-term financial issues which revolve around two primary areas; the management of current assets and current liabilities. Together, they constitute the overall management of cash flow for the firm. The cash flow of the firm is critical to the firm’s survival. It doesn’t matter if the firm shows a profit on its income statement, it must still have adequate cash flow to remain solvent, pay its financial obligation, and not go bankrupt. To that end the financial manager must properly manage the firm’s current assets which begins with the management of cash. The liquidity or availability of cash is necessary to meet the firm’s everyday obligations owed to creditors and suppliers and provides the flexibility to invest in new opportunities that may arise. The downside of cash or working capital is that it is a non-earning asset. Dollars tied up in cash (checking accounts) could be earning higher rates of return if invested in other areas. Any cash that is not needed for immediate disbursement can be invested in short-term marketable securities such as treasury bills, short-term certificates of deposit, Eurodollar deposits, and etc. Obviously, you don’t want to have too much cash on hand that isn’t earning any interest but you need to have easy access to any cash in short-term investments should you need it. The other problem that can arise is if the company is running short on cash due to declining sales, seasonal peaks and valleys, etc. Then the company may have to take out a short- term loan or sell additional stock/bonds to raise capital and bring in additional cash to run the business.

Another critical...