Financial Mgmt

The actions the firm can take to maintain a short-term financial policy that is flexible with current assets are keeping large balances of cash and marketable securities, large investments in inventory, and granting liberal credit terms to clients which would result in a high level of accounts receivable.

If the firm where to be interested in maintaining a financial policy that is restrictive with it current assets, it might choose to; keep less cash on hand, not make any large investments in marketable securities, keep investments in inventory small, and minimizing credit sales, reducing accounts receivable.

Carrying costs are the opportunity costs that are associated with the current assets. Carrying costs rise as the level of investment in current assets increases. The rate of return on carrying costs is very low, when compared to other assets. Carrying costs can include interest lost on money invested in inventory, storage cost, taxes, insurance, and any other expense incurred from maintaining inventory. A reduction of current assets (or inventory) would typically decrease a firm's carrying costs.

Shortage costs occur when investments in current assets is low.

Shortage costs fall as the level of investment in current assets increases. The two types of shortage costs are trading