1. MANAJEMEN KEUANGAN - Kuliah IV 27.04.2009 SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26 CASH MANAGEMENT RWJJ CH. 26 FEUI Program Studi Maksi – PPAK Sugeng Purwanto Ph.D, FRM Tugas: Kumpulkan Ringkasan, Kesimpulan dan Komentar RWJJ Ch. 26 & Ch. 27 1

2. SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26 2

3. DEFINING CASH IN TERMS OF OTHER ELEMENTS CURRENT ASSETS + FIXED ASSETS = CURRENT LIABILITIES + LONG TERM DEBT + EQUITY NET WORKING CAPITAL + FIXED ASSETS = LONG TERM DEBT + EQUITY Substitute: NET WORKING CAPITAL = CASH + NET WORKING CAPITAL EXCLUDING CASH CASH = LONG TERM DEBT + EQUITY – NWC EXCL. CASH – FIXED ASSETS 3

4. THE SOURCES AND USES OF CASH SOURCE OF CASH Cash flow from operations: Net income$740 Depreciation300 Total cash flow from operations1,040 Decrease in net working capital: Increase in account payable250 Increase in notes payable1,000 Increase in accrued expenses25 Increase in taxes payable25 Total source of cash$2,340 USES OF CASH Increase in fixed assets$700 Increase in prepayments100 Dividends90 Increase in net working capital: Investment in inventory1,000 Increase in accounts receivable400 Increase in marketable securities50 Total uses of cash$2,340 CHANGE IN CASH BALANCE$0 4

5. THE OPERATING CYCLE AND THE CASH CYCLE 5 Raw Material purchased Order placed Stock arrives Inventory periodAccounts receivable period Accounts payable period Finished good sold time Cash received Firm receives invoice Cash paid for materials Operating cycle Cash cycle

6. 6 Class Exercise: Example 26.1

7. SHORT - TERM FINANCIAL POLICY The size of the firm’s investment in current assets Flexible short-term financial policies: 1.Keeping large balances of cash and marketable securities 2.Making large investments in inventory 3.Granting liberal credit terms. High level of accounts receivable Restrictive short-term financial policies: 1.Keeping low cash balances and no investment in marketable securities 2.Making small investments in inventory 3.Allowing no credit sales and no accounts receivable 7

8. 8 CARRYING COSTS AND SHORTAGE COSTS Dollar Amount of current assets Shortage costs Carrying costs Total costs of holding current assets Minimum costs CA* Optimal amount of CA Restrictive policyFlexible policy

9. 9 FINANCING POLICY FOR AN IDEALIZED ECONOMY Dollar Time Long-term debt plus common stock Fixed assets Current assets = short-term debt 0 1 2 3 4

10. ALTERNATIVE FINANCING POLICIES FOR CURRENT ASSETS A growing firm can be thought of as having permanent requirement for both current assets and long-term assets. This total assets requirement will exhibit balances over Time reflecting: 1.Secular growth trend 2.Seasonal variation around the trend 3.Unpredictable day-to-day and month-to-month fluctuations. 10

11. SHORT-TERM BORROWING What is the appropriate amount of short-term borrowing ? Considerations: 1.Cash reserves Flexible financing strategy vs restrictive financing strategy 2.Maturity hedging Short-term/long-term assets vs short-term/long-term loan 3.Term structure Short-term interest rate are normally lower than long- term interest rates. 11

12. CASH MANAGEMENT RWJJ CH. 27 12

13. 13 REASONS FOR HOLDING CASH 1. TRANSACTIONS MOTIVE 2. COMPENSATING BALANCES

14. 14 DETERMINING THE TARGET CASH BALANCE The target cash balance involves a trade-off between the opportunity costs of holding cash too much cash and the trading costs of holding too little.

15. 15 Cost in Dollars Of Holding cash Size of cash balance C Trading costs Opportunity costs Total costs of holding cash Minimum costs C* Optimal size of cash balance TARGET CASH BALANCE

16. 16 Starting cash C = $ 1,200,000 Weeks Average cash EXAMPLE Figure 27.2 $600,000 = C/2 Ending cash 0 0 1 23 4

17. 17 THE BAUMOL MODEL C* = [2 TF/ R] 1/2 CCash balance TTotal amount new cash needed for period FFixed cost of selling securities ROpportunity cost of holding cash

18. 18 THE MILLER - ORR MODEL Z* = [3 Fσ 2 / (4R)] 1/3 + L U*= 3 Z* - 2 L Average cash balance = (4Z – L)/3 Z*Target cash balance LLower control limit UUpper control limit FFixed cost of selling securities σ 2 Variance ROpportunity cost of holding cash

19. 19 EXERCISE: DISCUSS THE IMPLICATIONS OF THE MILLER - ORR MODEL !!

20. END 20