Short-Term Finance and

Planning
EXECUTIVE SUMMARY

One of the great question of corporate finance.

 How much short-term cash flow does a company need to pay its bills?

This chapter introduces the basic elements of short-term financial

decisions:
 It describes the short-term operating activities of the firm
 It identifies alternative short-term financial policies
 It outlines the basic elements in a short-term financial plan
 It describes short-term financing instruments
THE BALANCE-SHEET MODEL OF THE FIRM
The Capital Budgeting Decision
Current
Liabilities
Current Assets
Long-Term
Debt

Fixed Assets What long-

term
1 Tangible investments Shareholders’
2 Intangible should the Equity
firm engage
in?
THE BALANCE-SHEET MODEL OF THE FIRM
The Capital Structure Decision
Current
Liabilities
Current Assets
Long-Term
How can the firm Debt
raise the money
for the required
Fixed Assets investments?
1 Tangible Shareholders’
2 Intangible Equity
THE BALANCE-SHEET MODEL OF THE FIRM
The Net Working Capital Investment Decision

Current
Liabilities
Current Assets
Net
Working
Long-Term
Capital Debt

How much short-

Fixed Assets
term cash flow
1 Tangible does a company
Shareholders’
need to pay its
2 Intangible bills? Equity
TRACING CASH AND NET WORKING CAPITAL
Current Assets are cash and other assets that are expected to be
converted to cash with the year.
 Cash
 Marketable securities
 Accounts receivable
 Inventory

Current Liabilities are obligations that are expected to require cash

payment within the year.
 Accounts payable
 Accrued wages
 Taxes
DEFINING CASH IN TERMS OF OTHER ELEMENTS

Long-
Net Working Fixed
+ = Term + Equity
Capital Assets
Debt

Long- Net Working

Fixed
Cash = Term + Equity – Capital –
Assets
Debt (excluding cash)

An increase in long-term debt and or equity leads to an increase in

cash—as does a decrease in fixed assets or a decrease in the non-cash
components of net working capital.
The Sources and Uses of Cash Statement follows from this reasoning.
THE OPERATING CYCLE AND THE CASH CYCLE

Raw material
Cash
purchased Finished goods sold
received
Order Stock
Placed Arrives

Inventory period Accounts receivable period

Time
Accounts payable period

Firm receives invoice Cash paid for materials

Operating cycle

Cash cycle
THE OPERATING CYCLE AND THE CASH CYCLE

Accounts
Cash cycle = Operating cycle – payable
period

In practice, the inventory period, the accounts receivable period, and the
accounts payable period are measured by days in inventory, days in
receivables, and days in payables.
Table 1. Tradewinds Manufacturing

information such as the following (in thousands):

Item Beginning Ending Average
Inventory $2,000 $3,000 $2,500
Accounts receivable 1,600 2,000 1,800
Accounts payable 750 1,000 875
Also, from the most recent income statement, we might have the
following figures (in thousands):
Net sales $11,500
Cost of goods sold 8,200
THE OPERATING CYCLE AND THE CASH CYCLE: AN EXAMPLE

Consider the balance sheet and income statement for

Tradewinds Manufacturing shown in Table 1.
The operating cycle and the cash cycle can be
determined for Tradewinds after calculating the
appropriate ratios for inventory, receivables, and
payables.

Cost of goods sold $8.2 million

Inventory turnover ratio    3.3.
Average inventory $2.5 million

365
Days in inventory   110.6 days.
3.3
THE OPERATING CYCLE AND THE CASH CYCLE: AN EXAMPLE (CONTINUED)

Credit sales $11.5 million

Receivable s turnover    6.4.
Average receivable s $1.8 million

365
Days in receivable s   57 days.
6.4

Cost of goods sold $8.2 million

Accounts payable deferral period    9.4.
Average payables $0.875 million

365
Days in payables   38.8 days.
9.4
THE OPERATING CYCLE AND THE CASH CYCLE: AN EXAMPLE (CONTINUED)

Operating cycle = Days in inventory + Days in receivables

= 110.6 days + 57 days = 167.6 days.

Cash cycle = Operating cycle – Days in payable

= 167.6 days – 38.8 days.

INTERPRETING THE CASH CYCLE

The cash cycle increases as the inventory and receivables periods get
longer.
The cash cycle decreases if the company is able to stall payment of
payables by lengthening the payables period.
The cash cycle is related to profitability and sustainable growth.
 Increased inventories and receivables that may cause a cash cycle problem will also
reduce total asset turnover and result in lower profitability.
 The total asset turnover is directly linked to sustainable growth (Ch.26): reducing
total asset turnover lowers sustainable growth.
SOME ASPECTS OF SHORT-TERM FINANCIAL POLICY

There are two elements of the policy that a firm adopts for short-term
finance.
 The Size of the Firm’s Investment in Current Assets
 Usually measured relative to the firm’s level of total operating revenues.
 Flexible
 Restrictive
 Alternative Financing Policies for Current Assets
 Usually measured as the proportion of short-term debt to long-term debt.
 Flexible
 Restrictive
Carrying costs : Costs that rise with increases in the level
of investment in current assets.
Shortage costs Costs that fall with increases in the level
of investment in current assets.

There are two kinds of shortage costs:

1. Trading, or order, costs : Order costs are the costs of
placing an order for more cash (brokerage costs, for
example) or more inventory (production setup costs, for
example).
2. Costs related to lack of safety reserves : These are
costs of lost sales, lost customer goodwill, and disruption
of production schedules.
CARRYING COSTS AND SHORTAGE COSTS
$ Total costs of holding current
Minimum
assets.
point
Carrying costs

Shortage costs

CA* Investment in
Current Assets ($)
THE SIZE OF THE INVESTMENT IN CURRENT ASSETS

A flexible policy short-term finance policy would maintain a high

ratio of current assets to sales.
 Keeping large cash balances and investments in marketable securities.
 Large investments in inventory.
 Liberal credit terms.

A restrictive short-term finance policy would maintain a low ratio of

current assets to sales.
 Keeping low cash balances, no investment in marketable securities.
 Making small investments in inventory.
 Allowing no credit sales (thus no accounts receivable).
APPROPRIATE FLEXIBLE POLICY
$ Total costs of holding current
assets.
Carrying costs
Minimum
point

Shortage costs

CA* Investment in
Current Assets ($)
WHEN A RESTRICTIVE POLICY IS APPROPRIATE

$ Minimum Total costs of holding current assets.

point

Carrying costs

Shortage
costs

CA* Investment in
Current Assets ($)
ALTERNATIVE FINANCING POLICIES FOR
CURRENT ASSETS
A flexible short-term finance policy means low proportion of short-
term debt relative to long-term financing.
A restrictive short-term finance policy means high proportion of short-
term debt relative to long-term financing.
ALTERNATIVE FINANCING POLICIES FOR
CURRENT ASSETS
In an ideal world, short-term assets are always financed with short-
term debt and long-term assets are always financed with long-term
debt.
In this world, net working capital is always zero.
THE BALANCE-SHEET MODEL OF THE FIRM
The Net Working Capital Investment Decision

Current
Liabilities
Current Assets
Net
Working
Long-Term
Capital Debt

How much short-

Fixed Assets
term cash flow
1 Tangible does a company
Shareholders’
need to pay its
2 Intangible bills? Equity
FINANCING POLICY FOR AN IDEALIZED ECONOMY

Current assets =
$
Short-term debt

Long-term
debt plus
common
Fixed assets: stock
a growing firm

0 1 2 3 4 5 Time
Grain elevator operators buy crops after harvest, store them,
and sell them during the year. Inventory is financed with short-
term debt. Net working capital is always zero.
 PENGARUH MODAL KERJA TERHADAP PROFITABILITAS
(Studi pada Perusahaan Manufaktur Indonesia yang terdaftar di BEI tahun 2013-2015)

Nuraeni

Penelitian ini bertujuan untuk mengetahui pengaruh modal kerja terhadap profitabilitas perusahaan
manufaktur di Indonesia.Penelitian ini menggunakan data sekunder perusahaan yang terdaftar di Bursa
Efek Indonesia periode 2013-2015. Sampel yang digunakan dalam penelitian ini adalah purposive
sampling ,meliputi perusahaan yang terdaftar dalam Bursa Efek Indonesia (BEI) yang berjumlah 81
perusahaan manufaktur. Penelitian menggunakan teknik analisis regresi, modal kerja diukur melalui
siklus konversi kas,receivables conversion period, inventory conversion period, payables deferral
period.Hasil penelitian menunjukkan bahwa siklus konversi kas memiliki pengaruh negatif signifikan
terhadap profitabilitas. Komponen dari siklus konversi kas yakni lamanya rata-rata pengumpulan piutang
dan konversi inventori memiliki pengaruh negatif signifikan terhadap profitabilitas , sedangkan
komponen dari siklus konversi kas lainnya yaitu rata-rata lamanya pembayaran utang tidak berpengaruh
terhadap profitabilitas. Dari hasil penelitian diperoleh hasil bahwa siklus konversi kas yang lebih pendek
berarti perusahaan yang mengelola modal kerjanya lebih efisien karena memiliki lebih sedikit investasi
dalam modal kerjanya dan akibatnya biaya pendanaan berkurang.

Kata Kunci : Profitabilitas, Siklus Konversi kas, receivables conversion period, inventory conversion
period, payables deferral period.
PENGARUH MODAL KERJA TERHADAP PROFITABILITAS
(Studi pada Perusahaan Manufaktur Indonesia yang terdaftar di BEI tahun 2013-2015)

81 perusahaan merupakan jumlah dari keseluruhan perusahaan industri

manufaktur :
Table Jumlah sektor industri

No Sektor industry Jumlah

1. Aneka Industri 18

2. Industri Dasar dan Kimia 33

3. Industri Barang Konsumsi 30

Table 4.4 Hasil subsektor

Sumber : Laporan keuangan yang telah diolah, 2016

SUMMARY & CONCLUSIONS

The financial manager can use the cash budget to identify short-term
financial needs.
The cash budget tells the manager what borrowing is required or
what lending will be possible in the short run.
The firm has available to it a number of possible ways of acquiring
funds to meet short-term shortfalls, including unsecured and secured
loans.