1. Chapter 11 – Forecasting and Short-Term Financial Planning  Learning Objectives  Understand how sales forecasts are used to predict cash inflow  Understand how production costs are used to predict cash outflow  Prepare pro forma statements  Calculate a company’s cash conversion cycle  Explain ways to cover cash shortfall  Explain options for investing cash excess

2. Cash Budgets  Periodic analysis of cash flow to analyze shortfall or excess  See Figure 11.1, page 320  All is well at end of period but shortfall during period must be funded (March is cash short)  Sources and Uses  Sources: (1) cash sales, (2) payments received, (3) sale of assets, or (4) borrowing  Uses: (1) cash purchases, (2) payments made, (3) wages, (3) rent, (4) utilities, (5) interest, (6) dividends, (7), retirement of debt, and (8) stock repurchases

3. Sales Forecasting  Two issues  When do sales occur?  When does the firm receive money from sales?  Predicting Sales  External Data  Internal Data  Predicting Cash timing from sales  Table 11.1, timing of sales receipts  January receipts come from three different sales months

4. Production Costs  Cash disbursements closely tied to sales forecasts for firms selling products  Products produced in anticipation of sale  Stored as inventory until sale  Cash outflow occurs before, during, and after production  Before: Purchas of supplies  During: Pay labor  After: Inventory and shipping costs  Individual months production cash outflow associated with several months of production

5. Pro Forma Statements  Pro Forma Statements  Relationship of various accounts to Sales or Assets  Income Statement – Percent of Total Sales  Balance Sheet – Percent of Total Assets  Predicting net income with Pro Forma  Take predicted sales and using percent of sales, fill in accounts on income statement  If relationships remain constant, pro forma income statement predicts net income for the period

6. Cash Conversion Cycle  Cash is an inventory item  Need to know how much you will need to complete daily transactions  Anticipate daily cash inflow  Plan for any short fall between outflow and inflow  Cash Conversion Cycle (CCC)  looks at the timing of cash flow or how long it takes the business to generate cash flow from a sale  Three cycles, (1) production, (2) collection, and (3) payment used to find CCC

7. Short-term Cash Flow Planning  CCC components (Figure 13.3, page 331)  Production cycle – from when product is started until customer “buys” the product  Collection cycle – from time customer “buys” the product until customer makes payment  Payment cycle – from the time company receives materials for production until the company makes payment to supplier  CCC = Production + Collection - Payment

8. Short-term Cash Flow Planning  Estimating production cycle  Find average inventory  Determine inventory turnover using COGS  Calculate production cycle  Example page 332…7.6 Days  Estimate collection cycle  Find average accounts receivable  Determine A/R turnover using credit sales  Calculate collection cycle  Example page 333…13.8 days

9. Short-term Cash Flow Planning  Estimate payment cycle  Find average accounts payable  Determine accounts payable turnover  Calculate payment cycle  Example page 334…7.0 days  CCC = 7.6 + 13.8 – 7.0 = 14.4 days  Must carry (finance) operations 15 days  To reduce CCC, speed up production or collection, or slow down payments…

10. Constructing Cash Budgets  Putting Together the timing of cash inflow and cash outflow  Cash Inflow…mainly sales and borrowing  Cash Outflow…  Accounts payable  Wages, Taxes, and other operating expenses  Capital expenditures  Long-term financing expenses (interest and dividends)  Example Table 11.5  Monthly ups and downs of cash  Now to manage these ups (excess) and downs (shortfalls)

11. Deficits and Excess  Funding Deficits  Savings  Unsecured Loans – Letters of Credit  Prearranged borrowing  Like a credit card  Secured Loans  Other Sources  Commercial Paper (Business IOU)  Trade Credit (Borrow from your suppliers)  Banker’s Acceptance (Post dated check)

12. Deficits and Excess  Investing Excess  Savings Account or Marketable Securities  Short term investing  Repayment to Lenders  Pay down debt  Extra Dividend to Owners  Replace Assets  More maintenance activities  Invest in positive NPV projects – long term investing

13. Managing Accounts Receivable  Aging receivables  Identifies chronic late payers  Assigns late fees to proper accounts  Follow-up with late paying customers  Example 13.2  Follow-up invoice with late fees  Late fees billed by individual invoices

14. Credit Terms, Float & Cash Management  Granting of credit to customers  Policy on qualifying customers for credit  Policy on payment plan  Policy on follow-up for late payments  Qualifying for credit  Credit screening  Increasing cost as more information required  Increasing cost usually match the increase in the size of the credit  Example 13.3 – Inflatable boats

15. Credit Terms, Float & Cash Management  Payment Policy  Methods to speed up receivables  Discount for speedy payment  Lock boxes for faster processing of payments  Wire transfers  Your Payment Policy (Accounts Payable)  Methods to slow down payables  Check payment  Playing the float with remote disbursements

16. Inventory Management  Keeping track of inventory  ABC Method  A goods are critical goods, or high priced goods  B goods are moderately priced or essential goods  C goods are low priced or non-essential goods  Most effort is spent on A goods  Little effort is spent on C goods  Economic Order Quantity – how much inventory to keep on hand

17. Homework  Problem 2 – Predicting Sales  Problem 6 – Sales Receipts  Problem 10 – Pro Forma Statement  Problem 12 – Pro Forma Statement  Problem 14 -- CCC

18. Problems – Second Set  Problem 13 – Credit Screening  Problem 15 – Credit Terms  Problem 17 – Economic Order Quantity