Tài chính doanh nghiệp - Chapter 16: Short - Term financial planning

Short-Term Financial PlanningChapter 160Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerKey Concepts and SkillsBe able to compute the operating and cash cycles and understand why they are importantUnderstand the different types of short-term financial policyUnderstand the essentials of short-term financial planning1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChapter OutlineTracing Cash and Net Working CapitalThe Operating Cycle and the Cash CycleSome Aspects of Short-Term Financial PolicyThe Cash BudgetShort-Term BorrowingA Short-Term Financial Plan2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerSources and Uses of CashSources of CashObtaining financingIncrease in long-term debtIncrease in equityIncrease in current liabilitiesSelling assetsDecrease in current assetsDecrease in fixed assetsUses of CashPaying creditors or shareholdersDecrease in long-term debtDecrease in equityDecrease in current liabilitiesBuying assetsIncrease in current assetsIncrease in fixed assets3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Operating CycleThe time it takes to receive inventory, sell it and collect on the receivables generated from the saleOperating cycle = inventory period + accounts receivable periodInventory period = time inventory sits on the shelfAccounts receivable period = time it takes to collect on receivables4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Cash CycleThe time between payment for inventory and receipt from the sale of inventoryCash cycle = operating cycle – accounts payable periodAccounts payable period = time between receipt of inventory and payment for itThe cash cycle measures how long we need to finance inventory and receivables5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 16.1 Managers who deal with Short Term Financial Problems6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample InformationItemBeginningEndingAverageInventory200,000300,000250,000Accounts Receivable160,000200,000180,000Accounts Payable75,000100,00087,500Net Sales = $1,150,000 Cost of Goods Sold = $820,0007Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample – Operating CycleInventory Period = 365/Inventory TurnoverInventory Turnover = COGS/Average inventoryIT = 820,000 / 250,000 = 3.28 timesInventory Period = 365 / 3.28 = 111 daysAccounts Receivable Period = 365/Receivables TurnoverReceivables Turnover = Credit Sales/Average ARRT = 1,150,000 / 180,000 = 6.4 timesReceivables Period = 365 / 6.4 = 57 daysOperating cycle = 111 + 57 = 168 days8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample – Cash CycleAccounts Payables Period = 365/Payables turnoverPayables turnover = COGS/Average APPT = 820,000 / 87,500 = 9.4 timesAccounts payables period = 365 / 9.4 = 39 daysCash cycle = 168 – 39 = 129 daysSo, we have to finance our inventory and receivables for 129 days9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerShort-Term Financial PolicyFlexible (Conservative) PolicyLarge amounts of cash and marketable securitiesLarge amounts of inventoryLiberal credit policies (large accounts receivable)Relatively low levels of short-term liabilitiesHigh liquidityRestrictive (Aggressive) PolicyLow cash and marketable security balancesLow inventory levelsLittle or no credit sales (low accounts receivable)Relatively high levels of short-term liabilitiesLow liquidity10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCarrying vs Shortage CostsCarrying costsOpportunity cost of owning current assets versus long-term assets that pay higher returnsCost of storing larger amounts of inventoryShortage costsOrder costs – the cost of ordering additional inventory or transferring cashStock-out costs – the cost of lost sales due to lack of inventory, including lost customers11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTemporary vs Permanent AssetsAre 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 salesTemporary current assets refer to the additional current assets that are added when sales are expected to increase on a seasonal basis12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 16.413Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChoosing the Best PolicyBest policy will be a combination of flexible and restrictive policiesThings to considerCash reservesMaturity hedgingRelative interest ratesCompromise policy – borrow short-term to meet peak needs, maintain a cash reserve for emergencies14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 16.515Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCash BudgetPrimary tool in short-run financial planningIdentify short-term needs and potential opportunitiesIdentify when short-term financing may be requiredHow it worksIdentify sales and cash collectionsIdentify various cash outflowsSubtract outflows from inflows and determine investing and financing needs16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Cash Budget InformationExpected Sales for 2000 by quarter (millions)Q1: $57; Q2: $66; Q3: $66; Q4: $90Beginning Accounts Receivable = $30Average collection period = 30 daysPurchases from suppliers = 50% of next quarter’s estimated salesAccounts payable period = 45 daysWages, taxes and other expenses = 25% of salesInterest and dividends = $5 million per quarterMajor expansion planned for quarter 2 costing $35 millionBeginning cash balance = $5 million with minimum cash balance of $2 million17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Cash Budget – Cash CollectionsQ1Q2Q3Q4Beginning Receivables30192222Sales57666690Cash Collections = Beg. Receivables + 2/3(Sales)68636682Ending Receivables = 1/3(Sales)1922223018Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Cash Budget – Cash DisbursementsQ1Q2Q3Q4Payment of A/P = 50% of sales28.5033.0033.0045.00Wages, taxes, other expenses14.2516.5016.5022.50Capital Expenditures35.00Long-term financing (interest and dividends)5.005.005.005.00Total Disbursements47.7589.5054.5072.5019Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: Cash Budget – NetCash Flow and Cash BalanceQ1Q2Q3Q4Total Cash Collections68.0063.0066.0082.00Total Cash Disbursements47.7589.5054.5072.50Net Cash Flow20.25(26.50)11.509.50Beginning Cash Balance5.0025.25(1.25)10.25Net Cash Inflow20.25(26.50)11.509.50Ending Cash Balance25.25(1.25)10.2519.75Minimum Cash Balance-2.00-2.00-2.00-2.00Cumulative surplus (deficit)23.25(3.25)8.2517.7520Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerShort-Term BorrowingUnsecured loansLine of credit – prearranged agreement with a bank that allows the firm to borrow up to a certain amount on a short-term basisCommitted – formal legal arrangement that may require a commitment fee and generally has a floating interest rateNon-committed – informal agreement with a bank that is similar to credit card debt for individualsRevolving credit – non-committed agreement with a longer time between evaluationsSecured loans – loan secured by receivables or inventory or both21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerExample: FactoringSelling receivables to someone else at a discountExample: You have an average of $1 million in receivables and you borrow money by factoring receivables with a discount of 2.5%. The receivables turnover is 12 times per year.What is the APR?Period rate = .025/.975 = 2.564%APR = 12(2.564%) = 30.769%What is the effective rate?EAR = 1.0256412 – 1 = 35.502%22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerShort-Term Financial PlanQ1Q2Q3Q4Beginning Cash5.0025.252.0010.05Net Cash Inflow20.25(26.50)11.509.50New Short-Term Debt0.003.250.000.00Interest on Short-Term Debt0.000.000.200.00Short-Term Debt Repayment0.000.003.250.00Ending Cash Balance25.252.0010.0519.55Minimum Cash Balance-2.00-2.00-2.00-2.00Cumulative Surplus (Deficit)23.250.008.0517.55Beginning Short-Term Debt0.000003.250.00Change in Short-Term Debt0.003.25-3.250.00Ending Short-Term Debt0.003.250.000.0023Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerQuick QuizSuppose your average inventory is $10,000, your average receivables are $9,000 and your average payables are $4,000. Net sales are $100,000 and cost of goods sold is $50,000.What is the operating cycle and the cash cycle?What are the differences between flexible and restrictive short-term financial policies?What factors do we need to consider when choosing a financial policy?What factors go into determining a cash budget and why is it valuable?24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan Trayler