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1、McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinShort-Term Financial PlanningChapter 16McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinKey Concepts and SkillsnBe able to compute the operating and cash cycles and understand w
2、hy they are importantnUnderstand the different types of short-term financial policynUnderstand the essentials of short-term financial planning1McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChapter OutlinenTracing Cash and Net Working CapitalnThe Operating Cycl
3、e and the Cash CyclenSome Aspects of Short-Term Financial PolicynThe Cash BudgetnShort-Term BorrowingnA Short-Term Financial Plan2McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinSources and Uses of CashnSources of CashnObtaining financing:nIncrease in long-term
4、debtnIncrease in equitynIncrease in current liabilitiesnSelling assetsnDecrease in current assetsnDecrease in fixed assetsnUses of CashnPaying creditors or stockholdersnDecrease in long-term debtnDecrease in equitynDecrease in current liabilitiesnBuying assetsnIncrease in current assetsnIncrease in
5、fixed assets3McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinThe Operating CyclenThe time it takes to receive inventory, sell it and collect on the receivables generated from the salenOperating cycle = inventory period + accounts receivable periodnInventory peri
6、od = time inventory sits on the shelfnAccounts receivable period = time it takes to collect on receivables4McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinThe Cash CyclenThe time between payment for inventory and receipt from the sale of inventorynCash cycle = o
7、perating cycle accounts payable periodnAccounts payable period = time between receipt of inventory and payment for itnThe cash cycle measures how long we need to finance inventory and receivables5McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinTable 16.16McGraw-
8、Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinExample InformationItemBeginningEndingAverageInventory200,000300,000250,000Accounts Receivable160,000200,000180,000Accounts Payable75,000100,00087,500Net Sales = $1,150,000Cost of Goods Sold = $820,0007McGraw-Hill 2004 Th
9、e McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinExample - Operating CyclenInventory Period = 365 / Inventory TurnovernInventory Turnover = COGS / Average inventorynIT = 820,000 / 250,000 = 3.28 timesnInventory Period = 365 / 3.28 = 111 daysnAccounts Receivable Period = 365 / Recei
10、vables TurnovernReceivables Turnover = Credit Sales / Average ARnRT = 1,150,000 / 180,000 = 6.4 timesnReceivables Period = 365 / 6.4 = 57 daysnOperating cycle = 111 + 57 = 168 days8McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinExample - Cash CyclenAccounts Pay
11、ables Period = 365 / payables turnovernPayables turnover = COGS / Average APnPT = 820,000 / 87,500 = 9.4 timesnAccounts payables period = 365 / 9.4 = 39 daysnCash cycle = 168 39 = 129 daysnSo, we have to finance our inventory and receivables for 129 days9McGraw-Hill 2004 The McGraw-Hill Companies, I
12、nc. All rights reserved.McGraw-Hill/IrwinShort-Term Financial PolicynFlexible (Conservative) PolicynLarge amounts of cash and marketable securitiesnLarge amounts of inventorynLiberal credit policies (large accounts receivable)nRelatively low levels of short-term liabilitiesnHigh liquiditynRestrictiv
13、e (Aggressive) PolicynLow cash and marketable security balancesnLow inventory levelsnLittle or no credit sales (low accounts receivable)nRelatively high levels of short-term liabilitiesnLow liquidity10McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinCarrying vers
14、us Shortage CostsnCarrying costsnOpportunity cost of owning current assets versus long-term assets that pay higher returnsnCost of storing larger amounts of inventorynShortage costsnOrder costs the cost of ordering additional inventory or transferring cashnStock-out costs the cost of lost sales due
15、to lack of inventory, including lost customers11McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinTemporary versus Permanent AssetsnAre current assets temporary or permanent?nBoth!nPermanent current assets refer to the level of current assets that the company reta
16、ins regardless of any seasonality in salesnTemporary current assets refer to the additional current assets that are added when sales are expected to increase on a seasonal basis12McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinFigure 16.413McGraw-Hill 2004 The M
17、cGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChoosing the Best PolicynBest policy will be a combination of flexible and restrictive policiesnThings to considernCash reservesnMaturity hedgingnRelative interest ratesnCompromise policy borrow short-term to meet peak needs, maintain a
18、 cash reserve for emergencies14McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinFigure 16.515McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinCash BudgetnPrimary tool in short-run financial planningnIdentify short-term needs a
19、nd potential opportunitiesnIdentify when short-term financing may be requirednHow it worksnIdentify sales and cash collectionsnIdentify various cash outflowsnSubtract outflows from inflows and determine investing and financing needs16McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserv
20、ed.McGraw-Hill/IrwinExample: Cash Budget InformationnExpected Sales for 2000 by quarter (millions)nQ1: $57; Q2: $66; Q3: $66; Q4: $90nBeginning Accounts Receivable = $30nAverage collection period = 30 daysnPurchases from suppliers = 50% of next quarters estimated salesnAccounts payable period = 45 d
21、aysnWages, taxes and other expenses = 25% of salesnInterest and dividends = $5 million per quarternMajor expansion planned for quarter 2 costing $35 millionnBeginning cash balance = $5 million with minimum cash balance of $2 million17McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserv
22、ed.McGraw-Hill/IrwinExample: Cash Budget Cash CollectionsQ1Q2Q3Q4Beginning Receivables30192222Sales57666690Cash Collections = Beg. Receivables + 2/3(Sales)68636682Ending Receivables = 1/3(Sales)1922223018McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinExample: C
23、ash Budget Cash DisbursementsQ1Q2Q3Q4Payment of A/P = 50% of sales28.5033.0033.0045.00Wages, taxes, other expenses14.2516.5016.5022.50Capital Expenditures35.00Long-term financing (interest and dividends)5.005.005.005.00Total Disbursements47.7589.5054.5072.5019McGraw-Hill 2004 The McGraw-Hill Compani
24、es, Inc. All rights reserved.McGraw-Hill/IrwinExample: Cash Budget NetCash Flow and Cash BalanceQ1Q2Q3Q4Total Cash Collections68.0063.0066.0082.00Total Cash Disbursements47.7589.5054.5072.50Net Cash Flow20.25(26.50)11.509.5Beginning Cash Balance5.0025.25(1.25)10.25Net Cash Inflow20.25(26.50)11.509.5
25、0Ending Cash Balance25.25(1.25)10.2519.75Minimum Cash Balance-2.00-2.00-2.00-2.00Cumulative surplus (deficit)23.25(3.25)8.2517.7520McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinShort-Term BorrowingnUnsecured loansnLine of credit prearranged agreement with a ba
26、nk that allows the firm to borrow up to a certain amount on a short-term basisnCommitted formal legal arrangement that may require a commitment fee and generally has a floating interest ratenNon-committed informal agreement with a bank that is similar to credit card debt for individualsnRevolving cr
27、edit non-committed agreement with a longer time between evaluationsnSecured loans loan secured by receivables or inventory or both21McGraw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinExample: FactoringnSelling receivables to someone else at a discountnExample: You
28、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.nWhat is the APR?nPeriod rate = .025/.975 = 2.564%nAPR = 12(2.564%) = 30.769%nWhat is the effective rate?nEAR = 1.0256412 1 = 35.502%22McG
29、raw-Hill 2004 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinShort-Term Financial PlanQ1Q2Q3Q4Beginning Cash5.0025.252.0010.05Net Cash Inflow20.25(26.50)11.509.50New Short-Term Debt0.003.250.000.00Interest on Short-Term Debt0.000.000.200.00Short-Term Debt Repayment0.000.003.250
30、.00Ending Cash Balance25.252.0010.0519.55Minimum Cash Balance-2.00-2.00-2.00-2.00Cumulative Surplus (Deficit)23.250.008.0517.55Beginning Short-Term Debt0.000003.250.00Change in Short-Term Debt0.003.25-3.250.00Ending Short-Term Debt0.003.250.000.0023McGraw-Hill 2004 The McGraw-Hill Companies, Inc. Al
31、l rights reserved.McGraw-Hill/IrwinQuick QuiznSuppose 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.nWhat is the operating cycle and the cash cycle?nWhat are the differences between flexible and restrictive short-term financial policies?nWhat factors do we need to consider when choosing a financial policy?nWhat factors go into determining a cash budget and why is it valuable?24
