1 ĐẠI HỌC HOA SEN Khoa Kinh tế Thương mại

2 KHOA KINH TẾ THƯƠNG MẠI FINANCIAL MANAGEMENT ThS. Nguyễn Tường Minh

3 References Foundation of Financial Management, Block & Hirt, McGraw Hill, 13 th edition,USA, Fundamentals of Corporate Finance, Brealey et al., McGraw Hill, 5 th edition, USA, Other relevant materials.

4 Chapter 6: Working Capital and the Financing Decision  Chapter Opening –Rapidly expanding sales may cause intense pressure for inventory and receivables buildup – draining the cash resources of the firm –Some of the increased current assets can be financed through the firm’s retained earnings, and some external sources of funds must be found –Seasonal demand for products makes forecasting cash flows and receivables and inventory management difficult –Working capital management involves the financing and management of the current assets of the firm

5 Chapter 6: Working Capital and the Financing Decision Main Contents: 1.The nature of Asset growth 2.Controlling Assets – matching Sales and Production 3.Patterns of financing 4.The financing decision 5.A decision process 6.Toward an optimal policy

6 I. The Nature of Asset Growth –The key to current assets planning is the ability of management to forecast sales accurately and then to match the production schedules with the sales forecast

7 I. The Nature of Asset Growth Failure to realize the firm’s permanent current assets causes the problems of inadequate financing

8 II. Controlling Assets – Matching Sales and Production  An example of Seasonal sales –The smallest sales are in the first and second quarters of the year –In the first and second quarters of the year, the heavy fixed costs of publishing cause very low EPS

9 II. Controlling Assets – Matching Sales and Production (cont’d)  An example of Seasonal sales (cont’d) –If management has not planned inventory correctly, lost sales due to stock outs could be a serious problem

10 II. Controlling Assets – Matching Sales and Production (cont’d)  An example of Seasonal sales (cont’d) –Two retails companies do not stock a year or more of inventory at one time –Most retail stores are not involved in deciding on level versus seasonal production, but rather in matching sales and inventory as the products are either manufactured for them by either others or their subsidiaries –The forth quarter for retailers is their biggest quarter and accounts for as much as one-half of their earning

11 II. Controlling Assets – Matching Sales and Production (cont’d)  An example of Seasonal sales (cont’d) –Both companies show seasonal peaks and troughs in sales that will also be reflected in their cash balance, account receivables, and inventory –Target is growing much faster than Limited Brands, but its EPS is almost as high as Target’s at the forth quarter as Limited Brands use higher leverage –The financial manager must avoid getting caught short of cash or be unprepared to borrow in relation to the seasonal sales

12 II. Controlling Assets – Matching Sales and Production (cont’d)  Temporary Assets under Level Production: an example of Yawakuzi –Yawakuzi sales forecast (in unit): –Yawakuzi decides to produce 800 motorcycles per month

13 II. Controlling Assets – Matching Sales and Production (cont’d)  Temporary Assets under Level Production: an example of Yawakuzi (cont’d) –Yawakuzi’s production schedule and inventory:

14 II. Controlling Assets – Matching Sales and Production (cont’d)  Temporary Assets under Level Production: an example of Yawakuzi (cont’d) –Sales forecast, cash receipts and payments, and cash budgets:

15 II. Controlling Assets – Matching Sales and Production (cont’d)  Temporary Assets under Level Production: an example of Yawakuzi (cont’d) –Total current assets first year ($ million)

16 II. Controlling Assets – Matching Sales and Production (cont’d)  Temporary Assets under Level Production: an example of Yawakuzi (cont’d) –Cash budget and assets for second year with no growth in sales ($ million) –Assumptions in second year: No-growth The monthly cash flow is the same as that of the first year

17 II. Controlling Assets – Matching Sales and Production (cont’d)  Temporary Assets under Level Production: an example of Yawakuzi (cont’d) –The nature of asset growth

18 III. Patterns of Financing –Is it always the axiom that all current assets should be financed by current liabilities ? –The most appropriate financing pattern is that asset buildup and length of financing terms are perfectly matched –The difficulty is in determining precisely what part of current asset is temporary and what part is permanent –The exact timing of asset liquidation is a difficult matter

19 III. Patterns of Financing (cont’d) –To protect against the danger of not being able to provide adequate short-term financing in tight money periods, the financial manager may rely on long-term funds to cover some short-term needs 1.Long-term financing

20 III. Patterns of Financing (cont’d) –Many small businesses find it hard to access to long-term capital, what should they do ? 2.Short-term financing –What are the advantages of the short-term financing ?

21 IV. The Financing Decision –In making the financing decision, the financial manager have to solve a timing problem, as well as select the right type of financing

22 IV. The Financing Decision (cont’d) –Corporations are more flexible than others in finding the sources of funds and minimize their cost of funds –From the forecasted asset needs, the firms often minimize their financing cost by raising funds in advance

23 IV. The Financing Decision (cont’d)  Term structure of interest rates (Yield curve): –Yield curve – is the relative level of short-term and long-term interest rates at a point in time –Yield curve is valuable for decision of how to time and structure the borrowing between short- and long-term

24 IV. The Financing Decision (cont’d)  Term structure of interest rates (Yield curve): –Yield curves are constructed by the US government securities –Yield on corporate debt securities move in the same direction as government securities, but have higher interest rate –Yield curves change daily to reflect the macroeconomic conditions or the competitive environment of the money and capital markets –Long-term rates should be higher than short-term rates –Long-term rates reflect the average of short-term expected rates over the time period

25 IV. The Financing Decision (cont’d)  Term structure of interest rates (Yield curve): –Yield curves help the financial manager to expect the cost of financing over time: The higher interest rate in the long term reflects the higher anticipated one-year rate in the future As long-term rates are much higher than short-term rates, the short-term rates are expected to rise As long-term rates are lower than short-term rates, the short-term rates are expected to fall As interest rates are high and expected to decline, the financial manager will try to borrow short term As the interest rates decline, the CFO will try to lock in the lower rates with heavy long-term borrowing

26 IV. The Financing Decision (cont’d)  Term structure of interest rates (Yield curve): The financial manager try to forecast the inflation to trace out the expected interest rate

27 V. A Decision Process

28 V. A Decision Process (cont’d)

29 VI. Toward an Optimal Working Capital Policy 1Most aggressive asset – financing mix plan 4Most conservative asset – financing mix plan 2, 3Moderate approach

30 Chapter 6: Working Capital and the Financing Decision  Chapter concepts –Working capital management involves financing and controlling the current assets of the firm –Management must distinguish between those current assets that are easily converted to cash and those that are more permanent –The financing of an asset should be tied to how long the asset is likely to be on the balance sheet –Long-term financing is usually more expensive than short-term financing based on the theory of the term structure of interest rate –Risk, as well as profitability, determines the financing plan for current assets

31 Thank you for your attention !