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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
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
learning objectives
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
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
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
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
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
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
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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