1. Copyright  2002 by South-Western, a division of Thomson Learning TM SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow SHORT-TERM FINANCIAL MANAGEMENT, 2e Terry S. Maness and John T. Zietlow Copyright  2002 by South-Western, a division of Thomson Learning. Thomson Learning TM is a trademark used herein under license. All rights reserved. No part of this PowerPoint TM presentation 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 instructional purposes only, provided a proper copyright notice appears on each slide. For permission to use material from this text or product, contact us by TEL (800) 730-2214, FAX (800) 730-2215 or at http://www.thomsonrights.com Produced in the United States of America ISBN: 0-030-31517-4

2. Copyright  2002 by South-Western, a division of Thomson Learning TM Chapter 1 The Role of Working Capital Sales A /R Cash Inv

3. Copyright  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM...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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM Profit versus Cash Flow 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. v 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  2002 by South-Western, a division of Thomson Learning TM Two Important Points to Remember Two Important Points to Remember v (1) The firm must manage its cost structure to generate a profit v (2) Working Capital accounts must be managed so that liquidity is maintained. v Example: Dell and its “Golden Triangle”

13. Copyright  2002 by South-Western, a division of Thomson Learning TM Relationship Between Accrual Income and Cash Flow Income StatementAdjustment AccountCash 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  2002 by South-Western, a division of Thomson Learning TM Managing the Cash Cycle Managing the Cash Cycle v Managing Inventory v Managing Receivables v Managing Payables v Electronic Commerce

15. Copyright  2002 by South-Western, a division of Thomson Learning TM Managing Inventory v Just-In-Time (JIT) v Trade-offs between: –stock out costs –cost of excess inventory –ordering costs

16. Copyright  2002 by South-Western, a division of Thomson Learning TM Managing Receivables v Who should receive credit and how much? v Credit terms v Monitoring the outstanding balance v Speeding up the receipt of payments through lockboxes

17. Copyright  2002 by South-Western, a division of Thomson Learning TM Managing Payables v Search for terms that match with cash receipts v Timing of payment v Controlled disbursement

18. Copyright  2002 by South-Western, a division of Thomson Learning TM Electronic Commerce v Revolutionizing management of cash cycle v Proprietary systems v Impact of Internet

19. Copyright  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM Summary 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 –cash flow perspective