1. Copyright  2005 by Thomson Learning, Inc. Chapter 16 Short-Term Financing Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Cash Cash Invoice Received Payment Sent Disbursed Invoice Received Payment Sent Disbursed Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Cash Cash Invoice Received Payment Sent Disbursed Invoice Received Payment Sent Disbursed

2. Copyright  2005 by Thomson Learning, Inc. Learning Objectives v Formulate a short-term financing strategy. v Choose the appropriate financing instrument. v Compute the effective cost of financing.

3. Copyright  2005 by Thomson Learning, Inc. Financing and the Cash Flow Timeline v A deficit cash position may result from the interaction of inefficient or inappropriate working capital policies v Management should first evaluate its working capital policies to ensure the most efficient stream of cash flow from operations v Once this is done, then a short-term financing strategy should be developed

4. Copyright  2005 by Thomson Learning, Inc. Financing Strategies v Aggressive strategy v Conservative strategy v Moderate strategy

5. Copyright  2005 by Thomson Learning, Inc. Financing Strategies: Aggressive Fixed Assets Permanent Current Assets Temporary Current Assets Time $ Short-Term Financing Long-Term Financing

6. Copyright  2005 by Thomson Learning, Inc. Financing Strategies:Conservative Fixed Assets Permanent Current Assets Temporary Current Assets Time $ Long-Term Financing Excess Liquidity

7. Copyright  2005 by Thomson Learning, Inc. Financing Strategies: Moderate Fixed Assets Permanent Current Assets Temporary Current Assets Time $ Long-Term Financing Short-Term Financing Excess Liquidity

8. Copyright  2005 by Thomson Learning, Inc. Financing Alternatives v Role of the Internet v Credit lines v Letter of credit v Banker’s acceptance v Reverse repurchase agreement v Commercial paper

9. Copyright  2005 by Thomson Learning, Inc. Asset Based Loans v Receivable financing –Pledging –Factoring v Inventory financing –Floating lien –Trust receipts –Warehouse receipts

10. Copyright  2005 by Thomson Learning, Inc. Effective Cost v Equation 16.1 v Commercial paper v Credit Line

11. Copyright  2005 by Thomson Learning, Inc. Exhibit 16-4 Average Weekly Short- Term Financing Yields for 1999- 2003

12. Copyright  2005 by Thomson Learning, Inc. Equation 16.1 Out of pocket Out of pocket Expenses 365 Expenses 365 Effective rate = -------------------- x ------- (16.1) Usable funds M Usable funds M

13. Copyright  2005 by Thomson Learning, Inc. Commercial Paper v Out of pocket costs –Interest expense –Commitment fee –Dealer fee v Usable funds –Discounted price (Face value less interest)

14. Copyright  2005 by Thomson Learning, Inc. Credit Line v Out of pocket costs –Interest expense –Commitment fee v Usable funds –Compensating balance

15. Copyright  2005 by Thomson Learning, Inc. Summary v Short-term financing alternatives in this chapter differ from spontaneous financing sources such as payables and accruals. v The chapter began with a discussion of financing three financing strategies. v Then discussion focused on the major forms of short-term financing available. v The chapter concluded with a discussion of calculating the effective cost of financing with commercial paper and credit lines.