1. SHORT-TERM FINANCIAL PLANNING

2. Scope of Short-Term Planning Focus on current assets and liabilities- items that within a year translate into cash Net Working Capital = Current Assets – Current Liabilities so also management of Net Working Capital Typical issues How much cash to keep in bank to pay bills? How much to borrow short term? How much credit extend to customers? ……

3. Cash & Net Working Capital Components of cash and net working capital Current assets are presented in order of liquidity Cash and Cash Equivalent Receivables Inventory Prepaid accounts Current liabilities require payments in a year Taxes Accounts payable Notes payable Accrued Expenses (wages,..)

4. Some Identities To track cash, let us find components that contribute to it. Total Assets = Total Liabilities Current Assets + Fixed Assets = Current Liabilities + Long-term Debt + Shareholder Equity Current Assets - Current Liabilities = Long-term Debt + Shareholder Equity- Fixed Assets Net Working Capital = Long-term Debt + Shareholder Equity- Fixed Assets

5. Components of Cash Net Working Capital = Current Assets – Current Liabilities = Cash + Current Assets other than cash – Current Liabilities Cash = Long-term Debt + Shareholder Equity + Current Liabilities - Fixed Asset - Current Assets other than cash Above formula can be used to determine activities that increase or decrease cash

6. Activities Increasing Cash– Sources of cash Cash = Long-term Debt + Shareholder Equity + Current Liabilities - Fixed Asset - Current Assets other than cash Increase long term debt (borrowing long term) Increase shareholder equity (issue stocks) Increase current liabilities (borrow for 90 days) Decrease current assets (selling some receivables) Decrease fixed assets (selling some property)

7. Activities decreasing Cash- Uses of Cash Cash = Long-term Debt + Shareholder Equity + Current Liabilities - Fixed Asset - Current Assets other than cash Decrease long term debt (pay off long term debt) Decrease shareholder equity (stock buyback) Decrease current liabilities (pay off 90 loans) Increase current assets (buy inventory for cash) Increase fixed assets (buying some property)

8. Operating & Cash Cycles Consider a company’s short-term operation and financial activities DayActivityCash Effect 0Acquire InventoryNone 30Pay for Inventory-$1,000 60Sell Inventory on CreditNone 105Collect on Sale+$1,000

9. Operating Cycle Inventory Period Account Receivable Period Accounts Payable Period Cash Cycle

10. Operating Cycle Operating Cycle = Inventory Period + Accounts Receivable Period Operating Cycle = Accounts Payable Period + Cash Cycle Cash Cycle = Operating Cycle - Accounts Payable Period Cash Cycle = gap between short-term cash outflow and cash inflow should be financed either through short-term borrowing or increased liquidity in the form of cash and cash equivalents. Inventory Turnover = Cost of Goods Sold/Average Inventory Inventory Period = 365/ Inventory Turnover

11. Account Receivable Period Receivable Turnover = Sales/Average Accounts Receivable Receivable Period = 365/Receivable Turnover Payables Turnover = Cost of Goods Sold/Average Payable Payable Period = 365/Payable Turnover Cash Cycle = Operating Cycle – Payable period = Inventory Period + Receivable Period - Payable period

12. Short-Term Financial Policy

13. Question of