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Chapter 13 Short-Term Financial Planning

Chapter 13 Short-Term Financial Planning. Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection

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Chapter 13 Short-Term Financial Planning

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  1. Chapter 13Short-Term Financial Planning • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • Accounts Disbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

  2. Learning Objectives • Implement the six steps involved in the modeling process. • Differentiate between a long-term financial planning model and short-term financial planning model. • Develop a short-term financial planning model.

  3. Types of Models • Deterministic • Data inputs are single point estimates • Example – Sales growth is expected to be 5% • Stochastic • Data inputs include probability distributions • Example – Sales growth is normally distributed with an expected value of 5% and a standard deviation of 3%

  4. Steps in Modeling Process • Determine question asked – What is the dependent variable? • Variable specification – What are the independent variables? Generally, the longer the time period, the less detail needed. • Determine relationship between variables • Example – Ct = a1CSt + a2CSt-1 + a3CSt-2 • Where: Ct = Cash flow from sales CSt = Credit sales in month t

  5. Steps in Modeling Process – cont. • Parameter estimation – a1, a2, and a3 in previous slide. Estimates may be simple historical average or may be found by using fancy statistics. • Model validation – Run the model using some real data and check the results. • Model documentation – Write down the logic behind the model.

  6. Percent-of-Sales Model • Needed external funds – NEF (dependent variable) • Driving variable: sales – All independent variables are a function of sales. • (TA/S) x S = new assets (assumes the firm is operating at full capacity.) • (CL/S) x S = new spontaneous financing • [S x m x (1-dpo)] = new internal equityNEF = (TA/S) x S - (CL/S) x S - [S x m x (1-dpo)]

  7. Basics of Model Building • Decide on driving variable • Avoid the temptation to make model too detailed • Build model into electronic worksheet • Use cell references to minimize model changes • Example from Book p. 457

  8. Summary • Basics of financial modeling were discussed. • A percent-of-sales model was developed to illustrate key points. • Logic for a relatively sophisticated short-term financial planning model was developed. • Model optimization was discussed.

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