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1、16.0,Short-Term Financial Planning,Chapter 16,16.1,Key Concepts and Skills,Be able to compute the operating and cash cycles and understand why they are importantUnderstand the different types of short-term financial policyUnderstand the essentials of short-term financial planning,16.2,Chapter Outlin
2、e,Tracing Cash and Net Working CapitalThe Operating Cycle and the Cash CycleSome Aspects of Short-Term Financial PolicyThe Cash BudgetShort-Term BorrowingA Short-Term Financial Plan,16.3,Sources and Uses of Cash,Sources of CashObtaining financing:Increase in long-term debtIncrease in equityIncrease
3、in current liabilitiesSelling assetsDecrease in current assetsDecrease in fixed assets,Uses of CashPaying creditors or stockholdersDecrease in long-term debtDecrease in equityDecrease in current liabilitiesBuying assetsIncrease in current assetsIncrease in fixed assets,16.4,The Operating Cycle,The t
4、ime it takes to receive inventory,sell it and collect on the receivables generated from the saleOperating cycle=inventory period+accounts receivable periodInventory period=time inventory sits on the shelfAccounts receivable period=time it takes to collect on receivables,16.5,The Cash Cycle,The time
5、between payment for inventory and receipt from the sale of inventoryCash cycle=operating cycle accounts payable periodAccounts payable period=time between receipt of inventory and payment for itThe cash cycle measures how long we need to finance inventory and receivables,16.6,Table 16.1,16.7,Example
6、 Information,Net Sales=$1,150,000Cost of Goods Sold=$820,000,16.8,Example-Operating Cycle,Inventory Period=365/Inventory TurnoverInventory Turnover=COGS/Average inventoryIT=820,000/250,000=3.28 timesInventory Period=365/3.28=111 daysAccounts Receivable Period=365/Receivables TurnoverReceivables Turn
7、over=Credit Sales/Average ARRT=1,150,000/180,000=6.4 timesReceivables Period=365/6.4=57 daysOperating cycle=111+57=168 days,16.9,Example-Cash Cycle,Accounts Payables Period=365/payables turnoverPayables turnover=COGS/Average APPT=820,000/87,500=9.4 timesAccounts payables period=365/9.4=39 daysCash c
8、ycle=168 39=129 daysSo,we have to finance our inventory and receivables for 129 days,16.10,Short-Term Financial Policy,Flexible(Conservative)PolicyLarge amounts of cash and marketable securitiesLarge amounts of inventoryLiberal credit policies(large accounts receivable)Relatively low levels of short
9、-term liabilitiesHigh liquidity,Restrictive(Aggressive)PolicyLow cash and marketable security balancesLow inventory levelsLittle or no credit sales(low accounts receivable)Relatively high levels of short-term liabilitiesLow liquidity,16.11,Carrying versus Shortage Costs,Carrying costsOpportunity cos
10、t of owning current assets versus long-term assets that pay higher returnsCost of storing larger amounts of inventoryShortage costsOrder costs the cost of ordering additional inventory or transferring cashStock-out costs the cost of lost sales due to lack of inventory,including lost customers,16.12,
11、Temporary versus Permanent Assets,Are current assets temporary or permanent?Both!Permanent current assets refer to the level of current assets that the company retains regardless of any seasonality in salesTemporary current assets refer to the additional current assets that are added when sales are
12、expected to increase on a seasonal basis,16.13,Figure 16.4,16.14,Choosing the Best Policy,Best policy will be a combination of flexible and restrictive policiesThings to considerCash reservesMaturity hedgingRelative interest ratesCompromise policy borrow short-term to meet peak needs,maintain a cash
13、 reserve for emergencies,16.15,Figure 16.5,16.16,Cash Budget,Primary tool in short-run financial planningIdentify short-term needs and potential opportunitiesIdentify when short-term financing may be requiredHow it worksIdentify sales and cash collectionsIdentify various cash outflowsSubtract outflo
14、ws from inflows and determine investing and financing needs,16.17,Example:Cash Budget Information,Expected Sales for 2000 by quarter(millions)Q1:$57;Q2:$66;Q3:$66;Q4:$90Beginning Accounts Receivable=$30Average collection period=30 daysPurchases from suppliers=50%of next quarters estimated salesAccou
15、nts payable period=45 daysWages,taxes and other expenses=25%of salesInterest and dividends=$5 million per quarterMajor expansion planned for quarter 2 costing$35 millionBeginning cash balance=$5 million with minimum cash balance of$2 million,16.18,Example:Cash Budget Cash Collections,16.19,Example:C
16、ash Budget Cash Disbursements,16.20,Example:Cash Budget NetCash Flow and Cash Balance,16.21,Short-Term Borrowing,Unsecured loansLine of credit prearranged agreement with a bank that allows the firm to borrow up to a certain amount on a short-term basisCommitted formal legal arrangement that may requ
17、ire a commitment fee and generally has a floating interest rateNon-committed informal agreement with a bank that is similar to credit card debt for individualsRevolving credit non-committed agreement with a longer time between evaluationsSecured loans loan secured by receivables or inventory or both
18、,16.22,Example:Factoring,Selling receivables to someone else at a discountExample:You have an average of$1 million in receivables and you borrow money by factoring receivables with a discount of 2.5%.The receivables turnover is 12 times per year.What is the APR?Period rate=.025/.975=2.564%APR=12(2.5
19、64%)=30.769%What is the effective rate?EAR=1.0256412 1=35.502%,16.23,Short-Term Financial Plan,16.24,Quick Quiz,Suppose your average inventory is$10,000,your average receivables is$9,000 and your average payables is$4,000.Net sales are$100,000 and cost of goods sold is$50,000.What is the operating cycle and the cash cycle?What are the differences between flexible and restrictive short-term financial policies?What factors do we need to consider when choosing a financial policy?What factors go into determining a cash budget and why is it valuable?,
