1.  Short Term Financial Planning Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 29 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill

2. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 2 Topics Covered  Working Capital  Links Between Long-Term and Short-Term Financing  Tracing Changes in Cash and Working Capital  Cash Budgeting  A Short-Term Financing Plan

3. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 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.

4. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 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 2Year 1 Dollars Cumulative capital requirement Time

5. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 5 Working Capital Simple Cycle of operations Cash

6. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 6 Working Capital Simple Cycle of operations Cash Raw materials inventory

7. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 7 Working Capital Simple Cycle of operations Cash Finished goods inventory Raw materials inventory

8. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 8 Working Capital Simple Cycle of operations Cash Finished goods inventory Receivables Raw materials inventory

9. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 9 Working Capital Simple Cycle of operations Cash Finished goods inventory Receivables Raw materials inventory

10. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 10 Changes in Cash & W.C. Example - Dynamic Mattress Company

11. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 11 Changes in Cash & W.C. Example - Dynamic Mattress Company Assume dividend = $1 mil R.E.=$11 mil

12. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 12 Changes in Cash & W.C. Example - Dynamic Mattress Company

13. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 13 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.

14. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 14 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.

15. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 15 Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted sources of cash AR ending balance = AR beginning balance + sales - collections

16. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 16 Cash Budgeting Example - Dynamic Mattress Company Dynamic collections on AR

17. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 17 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

18. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 18 Cash Budgeting Example - Dynamic Mattress Company Dynamic cash budget

19. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 19 Cash Budgeting Example - Dynamic Mattress Company Dynamic short term financing requirements

20. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 20 A Short Term Financing Plan Example - Dynamic Mattress Company Dynamic forecasted deferrable expenses

21. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 29- 21 A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan