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Short-Term Financial Planning FIL 341 Prepared by Keldon Bauer Sources of Cash Obtaining financing: Increase in long-term debt Increase in equity Increase in current liabilities Selling assets Decrease in current assets Decrease in fixed assets Uses of Cash

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Short-Term Financial Planning

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short term financial planning

Short-Term Financial Planning

FIL 341

Prepared by Keldon Bauer

sources and uses of cash
Sources of Cash

Obtaining financing:

Increase in long-term debt

Increase in equity

Increase in current liabilities

Selling assets

Decrease in current assets

Decrease in fixed assets

Uses of Cash

Paying creditors or stockholders

Decrease in long-term debt

Decrease in equity

Decrease in current liabilities

Buying assets

Increase in current assets

Increase in fixed assets

Sources and Uses of Cash
working capital
Working Capital

Simple Cycle of operations


Raw materials



Finished goods


the operating cycle
The Operating Cycle
  • The time it takes to receive inventory, sell it and collect on the receivables generated from the sale
  • Operating cycle = inventory period + accounts receivable period
    • Inventory period = time inventory sits on the shelf
    • Accounts receivable period = time it takes to collect on receivables
the cash cycle
The Cash Cycle
  • The time between payment for inventory and receipt from the sale of inventory
  • Cash cycle = operating cycle – accounts payable period
    • Accounts payable period = time between receipt of inventory and payment for it
  • The cash cycle measures how long we need to finance inventory and receivables
short term financial policy
Flexible (Conservative) Policy

Large amounts of cash and marketable securities

Large amounts of inventory

Liberal credit policies (large accounts receivable)

Relatively low levels of short-term liabilities

High liquidity

Restrictive (Aggressive) Policy

Low cash and marketable security balances

Low inventory levels

Little or no credit sales (low accounts receivable)

Relatively high levels of short-term liabilities

Low liquidity

Short-Term Financial Policy
carrying versus shortage costs
Carrying versus Shortage Costs
  • Carrying costs
    • Opportunity cost of owning current assets versus long-term assets that pay higher returns
    • Cost of storing larger amounts of inventory
  • Shortage costs
    • Order costs – the cost of ordering additional inventory or transferring cash
    • Stock-out costs – the cost of lost sales due to lack of inventory, including lost customers
temporary versus permanent assets
Temporary versus Permanent Assets
  • Are current assets temporary or permanent?
    • Both!
  • Permanent current assets refer to the level of current assets that the company retains regardless of any seasonality in sales
  • Temporary current assets refer to the additional current assets that are added when sales are expected to increase on a seasonal basis
choosing the best policy
Choosing the Best Policy
  • Best policy will be a combination of flexible and restrictive policies
  • Things to consider
    • Cash reserves
    • Maturity hedging
    • Relative interest rates
  • Compromise policy – borrow short-term to meet peak needs, maintain a cash reserve for emergencies
modeling the policy
Modeling the Policy
  • To model this policy, we must add lines on the balance sheet (if they aren’t there already).
    • Marketable securities.
    • Short-term borrowings.
  • Add a way of checking for balance at the bottom of the balance sheet.
    • Balance check.
    • Absolute difference.
    • Check figure.
modeling the policy13
Modeling the Policy
  • Add a line that shows the balances of all accounts on both sides of the balance sheet except for the marketable securities and liabilities/equity.
    • One for each side of the balance sheet.
    • These are there to use in bringing the whole thing iteratively into balance.
modeling the policy14
Modeling the Policy
  • Using the All-But lines, balance by bringing the lower one up by the amount needed to balance.
    • This is done on Excel with if statements.
  • Then we will add lines that add the interest income and expense to the income statement.
    • Which means that new lines are also added to the income statement to ease our modeling.
modeling the policy15
Modeling the Policy
  • Finally, a macro is written to copy and paste the necessary lines into the balance sheet and income statement respectively.
    • Then an iteration is added to have it continue until the balance sheet balances.
    • See the example we did in class.
sources of short term borrowing
Sources of Short Term Borrowing
  • Bank loans
    • Commitment
    • Maturity
    • Rate of interest
  • Syndicated loans
  • Loan sales
    • Security
  • Commercial paper
  • Medium term notes