Multi-Period Cash Flow Problems • The amount of money invested and tied up today affects the amount of money available in subsequent time periods for future decisions • What are the consequences of today’s decision on future decisions? What is the optimal decision for today and tomorrow?
Examples • How to invest current given amount of money over a specified planning horizon so as to have necessary cash flow available in certain periods and maximize the return on the initial investment? (Highint case) • How to invest money over a specified planning horizon so as to have necessary cash flow available in certain periods and minimize the initial investment? (Taco-Viva case)
Cash Budgeting 1. Beginning cash balance 2. Cash receipts a. Collection of accounts receivable b. Investment income 3. Cash disbursements a. Payment of accounts payable b. Payment of accrued expenses
Cash Budgeting (continued) 4. Ending cash balance 5. Required cash balance (minimum cash balance) 6. Investing surplus cash 7. Covering cash shortage
Cash Management Strategies • Accelerating collections • Stretching payables • Tightening credit terms
Trade Credit Terms • CIA (cash in advance) • CBD (cash before delivery) 3. COD (cash on delivery) 4. Cash 5. Standard terms, e.g., 2/10, net 30
Sources of Short-term Financing 1. Trade credit • Line of credit - an informal agreement between a bank and a borrower indicating the maximum credit the bank will extend to the borrower 3. Revolving credit agreement - a formal line of credit often used by large firms (commitment fee)
4. Pledging accounts receivable - the use of accounts receivable as collateral against a loan 5. Factoring accounts receivable - the sale of accounts receivable 6. New note from owner/corporate officer