1. Copyright  1998 by Harcourt Brace &Company SHORT-TERM FINANCIAL MANAGEMENT Terry S. Maness and John T. Zietlow Copyright  1998 by Harcourt Brace & Company All rights reserved. No part of the computer program embodied in this diskette may be reproduced or transmitted in any form or by any means, electronic or mechanical, including input into or storage in any information system, without permission in writing from the publisher. Lecture slides may be displayed and may be reproduced in print form for instruc- tional purposes only, provided a proper copyright notice appears on each slide. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Produced in the United States of America ISBN: 0-03-019127-0

2. Copyright  1998 by Harcourt Brace &Company Chapter 1 The Role of Working Capital Sales A /R Cash Inv

3. Copyright  1998 by Harcourt Brace &Company Objectives v View firm as a system of cash flows v How WC and depreciation create disparities between profit and cash flow v Management aspects of various WC accounts v Discussion of appropriate level of WC

4. Copyright  1998 by Harcourt Brace &Company The Cash Flow Timeline Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Invoice Payment Cash Invoice Payment Cash Received Sent Paid Received Sent Paid Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Invoice Payment Cash Invoice Payment Cash Received Sent Paid Received Sent Paid

5. Copyright  1998 by Harcourt Brace &Company...in the beginning Balance Sheet - June 1 Balance Sheet - June 1 Cash$1,000Debt$ 500 Common Stock 500 Common Stock 500 Total $1,000 Total $1,000 Balance Sheet - June 1 Balance Sheet - June 1 Cash$1,000Debt$ 500 Common Stock 500 Common Stock 500 Total $1,000 Total $1,000

6. Copyright  1998 by Harcourt Brace &Company The Next Day, June 2 Balance Sheet - June 2 Balance Sheet - June 2 Purchase Fixed Assets and Inventory Cash$ 400A/P$ 300 Inventory 300Debt 500 Fixed Assets 600 Common Stock 500 Total$1,300Total$1,300 Balance Sheet - June 2 Balance Sheet - June 2 Purchase Fixed Assets and Inventory Cash$ 400A/P$ 300 Inventory 300Debt 500 Fixed Assets 600 Common Stock 500 Total$1,300Total$1,300

7. Copyright  1998 by Harcourt Brace &Company End of June Balance Sheet - June 30 Balance Sheet - June 30 Sale of product, incur operating expenses, incur depreciation, and generate profit incur depreciation, and generate profit Cash$ 325A/P$ 300 A/R 700Accruals 200 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,525Total$1,525 Balance Sheet - June 30 Balance Sheet - June 30 Sale of product, incur operating expenses, incur depreciation, and generate profit incur depreciation, and generate profit Cash$ 325A/P$ 300 A/R 700Accruals 200 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,525Total$1,525

8. Copyright  1998 by Harcourt Brace &Company July 1 Balance Sheet - July 1 Balance Sheet - July 1 Pay operating accruals with cash Pay operating accruals with cash Cash$ 125A/P$ 300 A/R 700Accruals 0 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,325Total$1,325 Balance Sheet - July 1 Balance Sheet - July 1 Pay operating accruals with cash Pay operating accruals with cash Cash$ 125A/P$ 300 A/R 700Accruals 0 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,325Total$1,325

9. Copyright  1998 by Harcourt Brace &Company July 15 Balance Sheet - July 15 Balance Sheet - July 15 Pay payables with cash Pay payables with cash Cash$ ( 175)A/P$ 0 A/R 700Accruals 0 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,025Total$1,025 Balance Sheet - July 15 Balance Sheet - July 15 Pay payables with cash Pay payables with cash Cash$ ( 175)A/P$ 0 A/R 700Accruals 0 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,025Total$1,025

10. Copyright  1998 by Harcourt Brace &Company July 31 Balance Sheet - July 31 Balance Sheet - July 31 Collect accounts receivable Collect accounts receivable Cash$ 525A/P$ 0 A/R 0Accruals 0 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,025Total$1,025 Balance Sheet - July 31 Balance Sheet - July 31 Collect accounts receivable Collect accounts receivable Cash$ 525A/P$ 0 A/R 0Accruals 0 Inventory 0Debt 500 Fixed Assets 600 Common Stock 500 (Accum Depr) (100)Retained Earnings 25 Total$1,025Total$1,025

11. Copyright  1998 by Harcourt Brace &Company Profit versus Cash Flow v Question: Why did the firm end up with $125 in additional cash while earning a profit of $25? v Answer: Some expenses are not cash expenses. Question: Why did the firm run out of cash during its operating cycle? v Answer: The cash deficit was due to the differences between the timing of cash disbursements and cash receipts.

12. Copyright  1998 by Harcourt Brace &Company Important Points v The firm must manage its cost structure to generate a profit. v WC accounts must be managed so that liquidity is maintained.

13. Copyright  1998 by Harcourt Brace &Company Relationship Between Accrual Income and Cash Flow Income StatementAdjustment Account Cash Flow Account Sales- Change in accounts receivable= Cash collected Cost of goods sold- Change in accounts payable + Change in inventory= Cash paid to suppliers Operating expenses- Change in operating accruals - Depreciation= Cash paid for operating expenses operating expenses Interest- Change in accrued interest= Cash paid to creditors Taxes- Change in accrued taxes - Change in deferred taxes= Cash paid for taxes ____________________________________ Net ProfitOperating Cash Flow

14. Copyright  1998 by Harcourt Brace &Company Managing the Cash Cycle v Managing Inventory v Managing Receivables v Managing Payables v Electronic Commerce

15. Copyright  1998 by Harcourt Brace &Company Managing Inventory v JIT v Trade-offs between: –stock out costs –cost of excess inventory –ordering costs

16. Copyright  1998 by Harcourt Brace &Company Managing Receivables v Who should receive credit and how much? (5 C’s) v Credit terms v Monitoring the outstanding balance v Speeding up the receipt of payments through lockboxes

17. Copyright  1998 by Harcourt Brace &Company Managing Payables v Search for terms that match with cash receipts v Timing of payment v Controlled disbursement

18. Copyright  1998 by Harcourt Brace &Company Electronic Commerce v Revolutionizing management of cash cycle v Proprietary systems v Impact of Internet

19. Copyright  1998 by Harcourt Brace &Company How Much WC is Enough v One view –optimal level is zero –WC is an idle resource –Provides little value v How much in resources to commit? –Why inventory? –Why receivables and payables? –Why short-term investments? u Chrysler’s $5 billion cushion of investments

20. Copyright  1998 by Harcourt Brace &Company Summary v Firm must operate at a profitable level v A profitable firm may still struggle financially v Working capital soaks up cash flow and may cause an otherwise profitable firm to fail v A successful firm’s operation is managed from a profit and a cash flow perspective