- ACP = 30 days, this implies that 2/3 of sales are collected in the quarter made and the remaining 1/3 are collected the following quarter
- Beginning receivables of $250 will be collected in the first quarter
Example: Cash Budget – Cash Disbursements - Payables period is 45 days, so half of the purchases will be paid for each quarter and the remaining will be paid the following quarter
- Beginning payables = $125
| | | | | | | | | | | | - Wages, taxes and other expenses
| | | | | | | | | | | - Interest and dividend payments
| | | | | | | | | | | Example: Cash Budget – Net Cash Flow and Cash Balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - Cumulative surplus (deficit)
| | | | | Short-Term Financial Plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - Short-term borrowing repaid
| | | | | | | | | | | | | | | | | - Cumulative surplus (deficit)
| | | | | - Beginning short-term debt
| | | | | | | | | | | | | | | | | Short-Term Borrowing - Operating Loans
- Committed vs. non-committed
- Letter of credit
- Accounts receivable financing
- Factoring
- Securitizing Receivables
- Inventory Loans
- Trade Credit
- Money Market Financing
Example: Compensating Balance - We have a $500,000 operating loan with a 15% compensating balance requirement. The quoted interest rate is 9%. We need to borrow $150,000 for inventory for one year.
- How much do we need to borrow?
- 150,000/(1-.15) = 176,471
- What interest rate are we effectively paying?
- Interest paid = 176,471(.09) = 15,882
- Effective rate = 15,882/150,000 = .1059 or 10.59%
Example: Factoring - Last year your company had average accounts receivable of $2 million. Credit sales were $24 million. You factor receivables by discounting them 2%. What is the effective rate of interest?
- Receivables turnover = 24/2 = 12 times
- Average collection period = 365/12 = 30.4 days
- APR = 12(.02/.98) = .2449 or 24.49%
- EAR = (1+.02/.98)12 – 1 = .2743 or 27.43%
Quick Quiz - How do you compute the operating cycle and the cash cycle?
- What are the differences between a flexible short-term financing policy and a restrictive one? What are the pros and cons of each?
- What are the key components of a cash budget?
- What are the major forms of short-term borrowing?
Summary - Short-term finance involves short-lived assets and liabilities.
- Current assets and current liabilities arise in the short-term operating activities and the cash cycle of the firm
- Managing short-term cash flows finding the optimal trade-off between carrying costs and shortage costs
- Cash budgets are used to identify short-term financial needs in advance
- The firm can then finance the shortfall
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