1. Chapter 30 Short-Term Financial Planning
Principles of Corporate Finance
Seventh Edition
Richard A. Brealey
Stewart C. Myers
Chapter 30
Short-Term Financial Planning
Slides by
Matthew Will
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved

2. Topics Covered The Components of Working Capital
Links Between Long-Term and Short-Term Financing Decisions
Tracing Changes in Cash and Working Capital
Cash Budgeting
A Short-Term Financing Plan

3. Working Capital
Net Working Capital - Current assets minus current liabilities. Often called working capital.
Cash Conversion Cycle - Period between firm’s payment for materials and collection on its sales.
Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital.
Shortage Costs - Costs incurred from shortages in current assets. 3

4. Firm’s Cumulative Capital Requirement
Lines A, B, and C show alternative amounts of long-term finance.
Strategy A: A permanent cash surplus
Strategy B: Short-term lender for part of year and borrower for remainder
Strategy C: A permanent short-term borrower A B C
Year 2
Year 1
Dollars
Cumulative
capital requirement
Time

5. Working Capital Simple Cycle of operations Cash Raw materials
inventory
Receivables
Finished goods
inventory 4

6. Changes in Cash & W.C.
Example - Dynamic Mattress Company 21

7. Changes in Cash & W.C. Example - Dynamic Mattress Company Assume
dividend = $1 mil
R.E.=$11 mil 22

8. Changes in Cash & W.C.
Example -
Dynamic
Mattress
Company 23

9. Changes in Cash & W.C. Example - Dynamic Mattress Company
Dynamic used cash as follows
Paid $1 mil dividend.
Repaid $5 mil short term bank loan
Invested $14 mil
Purchased $5 mil of marketable securities
Accounts receivable expanded by $5 mil 24

10. Cash Budgeting Steps to preparing a cash budget
Step 1 - Forecast the sources of cash.
Step 2 - Forecast uses of cash.
Step 3 - Calculate whether the firm is facing a cash shortage or surplus. 25

11. Cash Budgeting Example - Dynamic Mattress Company
Dynamic forecasted sources of cash
AR ending balance = AR beginning balance + sales collections 26

12. Cash Budgeting Example - Dynamic Mattress Company
Dynamic collections on AR 27

13. Cash Budgeting Example - Dynamic Mattress Company
Dynamic forecasted uses of cash
Payment of accounts payable
Labor, administration, and other expenses
Capital expenditures
Taxes, interest, and dividend payments 28

14. Cash Budgeting Example - Dynamic Mattress Company Dynamic cash budget29

15. Cash Budgeting Example - Dynamic Mattress Company
Dynamic short term financing requirements 30

16. A Short Term Financing Plan
Example - Dynamic Mattress Company
Dynamic forecasted deferrable expenses 31

17. A Short Term Financing Plan
Example -
Dynamic
Mattress
Company-
Financing Plan 32