Fundamentals of Financial Management, Third Edition

8.2 SIZE OF CURRENT ASSETS

The issue of the size of the current assets primarily involves two questions. First, how the size can be assessed? Second, whether the size is optimal in relation to the fixed assets? These two questions need some explanation here.

8.2.1 Assessment of the Size: The Concept of Operating Cycle

The desired size of the current assets is assessed on the basis of the length of the operating cycle. Besides the use of cash for routine expenses, it is also used to acquire raw material. Once the raw material is converted into the finished product it is sold on credit creating accounts receivable. Accounts receivables are collected after a specific period of time thus again taking the form of cash. The movement of cash into different ...