Most firms have four major categories of current assets to manage: cash, marketable securities, accounts receivable, and inventory. On the current liabilities side of the balance sheet, most firms use two major sources of short-term financing: trade credit (accounts payable) and short-term bank loans. A third major source of short-term financing, commercial paper, is available to large firms with highquality credit ratings. Commercial paper is a short-term corporate IOU sold through commercial-paper dealers to other corporations, banks, money market funds, and individuals. In recent years, the use of commercial paper has become much more common, and commercial paper has replaced short-term bank financing to a great extent for large corporations. This chapter deals with the management of these major components of net working capital.
Firms generally hold cash balances in checking accounts for four major reasons. The first three of these reasons are commonly identified by economists as the transactions motive, the precautionary motive, and the speculative motive. The transactions motive simply means that firms must hold cash in order to conduct normal business transactions. The payroll has to be met, supplies and inventory purchases must be paid, trade discounts should be taken if financially attractive, and so forth. The firm must have enough money available in its checking account to meet the day-to-day expenses of being in business.