Chapter 13 Short-Term Financial Planning

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# Chapter 13 Short-Term Financial Planning - PowerPoint PPT Presentation

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

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

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.
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)]
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
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.