Chapter 13 Short-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 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 Stochastic

Steps in Modeling Process Determine question asked Variable specification Determine relationship between variables Parameter estimation Model validation Model documentation

Percent-of-Sales Model Needed external funds Driving variable: sales (TA/S) x S = new assets (CL/S) x S = new spontaneous financing [S x m x (1-dpo)] = new internal equity NEF = (TA/S) x S - (CL/S) x S - [S x m x (1-dpo)]

Basics of Model Building Decide on driving variable Temptation to make model too detailed Build model into electronic worksheet Use cell references to minimize model changes

Short-Term Financial Planning Model

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.