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1、Chapter Outline,27.1 Tracing Cash and Net Working Capital 27.2 Defining Cash in Terms of Other Elements 27.3 The Operating Cycle and the Cash Cycle 27.4 Some Aspects of Short-Term Financial Policy 27.5 Cash Budgeting 27.6 The Short-Term Financial Plan 27.7 Summary & Conclusions,Executive Summary,We
2、are solidly in to the third great question of corporate finance.,The Balance-Sheet Model of the Firm,Current Assets,Fixed Assets 1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,What long-term investments should the firm engage in?,The Capital Budgeting Decision,The Bal
3、ance-Sheet Model of the Firm,How can the firm raise the money for the required investments?,The Capital Structure Decision,Current Assets,Fixed Assets 1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,The Balance-Sheet Model of the Firm,How much short-term cash flow does
4、 a company need to pay its bills?,The Net Working Capital Investment Decision,Net Working Capital,Current Assets,Fixed Assets 1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,27.1 Tracing Cash and Net Working Capital,Current Assets are cash and other assets that are exp
5、ected to be converted to cash with the year. Cash Marketable securities Accounts receivable Inventory Current Liabilities are obligations that are expected to require cash payment within the year. Accounts payable Accrued wages Taxes,27.2 Defining Cash in Terms of Other Elements,27.2 Defining Cash i
6、n Terms of Other Elements,An increase in long-term debt and or equity leads to an increase in cashas does a decrease in fixed assets or a decrease in the non-cash components of net working capital. The Sources and Uses of Cash Statement follows from this reasoning.,27.3 The Operating Cycle and the C
7、ash Cycle,Time,Accounts payable period,Cash cycle,Operating cycle,Cash received,Accounts receivable period,Inventory period,Finished goods sold,Firm receives invoice,Cash paid for materials,27.3 The Operating Cycle and the Cash Cycle,In practice, the inventory period, the accounts receivable period,
8、 and the accounts payable period are measured by days in inventory, days in receivables and days in payables.,27.4 Some Aspects of Short-Term Financial Policy,There are two elements of the policy that a firm adopts for short-term finance. The Size of the Firms Investment in Current Assets Usually me
9、asured relative to the firms level of total operating revenues. Flexible Restrictive Alternative Financing Policies for Current Assets Usually measured as the proportion of short-term debt to long-term debt. Flexible Restrictive,The Size of the Investment in Current Assets,A flexible policy short-te
10、rm finance policy would maintain a high ratio of current assets to sales. Keeping large cash balances and investments in marketable securities. Large investments in inventory. Liberal credit terms. A restrictive short-term finance policy would maintain a low ratio of current assets to sales. Keeping
11、 low cash balances, no investment in marketable securities. Making small investments in inventory. Allowing no credit sales (thus no accounts receivable).,Carrying Costs and Shortage Costs,$,Investment in Current Assets ($),Shortage costs,Carrying costs,Total costs of holding current assets.,CA*,Min
12、imum point,Appropriate Flexible Policy,$,Investment in Current Assets ($),Shortage costs,Carrying costs,Total costs of holding current assets.,CA*,Minimum point,When a Restrictive Policy is Appropriate,$,Investment in Current Assets ($),Shortage costs,Carrying costs,Total costs of holding current as
13、sets.,CA*,Minimum point,Alternative Financing Policies for Current Assets,A flexible short-term finance policy means low proportion of short-term debt relative to long-term financing. A restrictive short-term finance policy means high proportion of short-term debt relative to long-term financing.,Al
14、ternative Financing Policies for Current Assets,In an ideal world, short-term assets are always financed with short-term debt and long-term assets are always financed with long-term debt. In this world, net working capital is always zero.,Financing Policy for an Idealized Economy,Long-term debt plus
15、 common stock,$,Current assets = Short-term debt,Fixed assets: a growing firm,Grain elevator operators buy crops after harvest, store them, and sell them during the year. Inventory is financed with short-term debt. Net working capital is always zero.,27.5 Cash Budgeting,A cash budget is a primary to
16、ol of short-tun financial planning. The idea is simple: Record the estimates of cash receipts and disbursements. Cash Receipts Arise from sales, but we need to estimate when we actually collect. Cash Outflow Payments of Accounts Payable Wages, Taxes, and other Expenses Capital Expenditures Long-Term Financial Planning,27.5 Cash Budgeting,The cash balance tells the manager what borrowing is required or what lending will be possible in the short run.,27.6 The Short-Term Financial Plan,
