Slides by Matthew Will

1. Principles of Corporate Finance Brealey and Myers Sixth Edition • Short Term Financial Planning Slides by Matthew Will Chapter 29 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000

2. Topics Covered • Working Capital • Links Between Long-Term and Short-Term Financing • Tracing Changes in Cash and Working Capital • Cash Budgeting • A Short-Term Financing Plan

3. Working Capital Net Working Capital - Current assets minus current liabilities. Often called working capital. Cash Conversion Cycle - Period between firm’s payment for materials and collection on its sales. Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital. Shortage Costs - Costs incurred from shortages in current assets.

4. Dollars A B C Cumulative capital requirement Year 1 Year 2 Time Lines A, B, and C show alternative amounts of long-term finance. Strategy A: A permanent cash surplus Strategy B: Short-term lender for part of year and borrower for remainder Strategy C: A permanent short-term borrower Firm’s Cumulative Capital Requirement

5. Working Capital Simple Cycle of operations Cash

6. Working Capital Simple Cycle of operations Cash Raw materials inventory

7. Working Capital Simple Cycle of operations Cash Raw materials inventory Finished goods inventory

8. Working Capital Simple Cycle of operations Cash Raw materials inventory Receivables Finished goods inventory

9. Working Capital Simple Cycle of operations Cash Raw materials inventory Receivables Finished goods inventory

10. Changes in Cash & W.C. Example - Dynamic Mattress Company

11. Changes in Cash & W.C. Example - Dynamic Mattress Company Assume dividend = $1 mil R.E.=$11 mil

12. Changes in Cash & W.C. Example - Dynamic Mattress Company

13. Changes in Cash & W.C. Example - Dynamic Mattress Company Dynamic used cash as follows: • Paid $1 mil dividend. • Repaid $5 mil short term bank loan. • Invested $14 mil. • Purchased $5 mil of marketable securities. • Accounts receivable expanded by $5 mil.

14. Cash Budgeting Steps to preparing a cash budget Step 1 - Forecast the sources of cash. Step 2 - Forecast uses of cash. Step 3 - Calculate whether the firm is facing a cash shortage or surplus.

15. Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted sources of cash AR ending balance = AR beginning balance + sales - collections

16. Cash Budgeting Example - Dynamic Mattress Company Dynamic collections on AR

17. Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted uses of cash • Payment of accounts payable • Labor, administration, and other expenses • Capital expenditures • Taxes, interest, and dividend payments

18. Cash Budgeting Example - Dynamic Mattress Company Dynamic cash budget

19. Cash Budgeting Example - Dynamic Mattress Company Dynamic short term financing requirements

20. A Short Term Financing Plan Example - Dynamic Mattress Company Dynamic forecasted deferrable expenses

21. A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan